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6 White Paper on the Business Environment in China
For SOE reform to make significant progress, much will de- strategic mandate for state-owned enterprises, or SOEs, has a
pend on specific implementation. SOE executives and their gov- curious history. According to some, it also has a grim outlook if
ernment patrons wield significant political clout and are likely substantive changes are not made.
to resist efforts to loosen government controls. The guidelines
already cautioned that state capital should maintain the “abso- In the mid-to-late1990s, former President “Jiang Zemin and
lute controlling position” in national security sectors, as well as then-Premier Zhu Rongji took a knife to China’s bloated and
natural resources including water, grain, forests, oil and gas. 38 unprofitable state sector, closing thousands of unproductive en-
terprises. That opened up space for private sector firms to flour-
Even if partial privatization is widely used, experts question ish, underwriting the growth of the last decade [2000-2010].”24
whether it can succeed in fundamentally reshaping the state sector.
Since that time, however, “some of those gains have been re-
Some analysts warn that as long as the party maintains ulti- versed, as the government has thrown its weight behind state
mate control, SOEs will never act as purely profit-seeking entities. champions. The number of state-owned enterprises as a share of
The issue has never been an easy one for the Party leadership to the total has continued to fall, dropping to 5 percent in 2011.
pursue, given powerful vested interests in the existing SOE struc- But with SOEs still dominant in the commanding heights of
ture. So instead of unveiling something too radical, what they’ve the economy, their share of total output has remained relatively
outlined instead is a five-year road map for modest reform. 39 buoyant at 26 percent.”24
“The guidelines suggest that by 2020, the goals in all the According to a study performed by “Curtis Milhaupt, a
main reform areas should be accomplished, constituting a scholar of comparative corporate law at Columbia Law School,
system that is more suitable to the nation’s socialist-market and Li-Wen Lin, a graduate student in sociology at Columbia
economy,” Xinhua notes. Echoing some of the language used University […] the network of SOEs in China “Is based on
by the country’s Central Bank when it allowed the yuan to ‘vertically integrated groups’ of large state-owned and related
depreciate, Xinhua notes that the “SOE system should be more companies. Each group has a ‘central holding company,’
modernized and market-oriented” 36. the State-Owned Assets Supervision and Administration
Commission (SASAC), which is the majority shareholder in
The new guidelines, Xinhua reports, state that the govern- a ‘core company.” That company, in turn, owns a majority of
ment will encourage SOEs to eventually “go public” though “no shares in the state-owned companies that comprise the group,
specific timetable will be set.” Additionally, “SOEs will also be including a finance company that is a source of finance for
allowed to experiment with selling shares to their employees.” members.”25
According to The Diplomat, these provisions hearken positively
for longer-term structural SOE reform and appear to address Additionally, “the Chinese Communist Party (CCP) struc-
recommendations that foreign investors have proffered for a ture exists parallel to the structure noted above. The Organiza-
few years now. China promised to create “stronger, better and tion Department of the Party is decisive in choosing top man-
larger” SOEs through a far-reaching reform program, which agers of the SOEs, and in turn some managers hold positions
includes restructuring those that are performing poorly and al- in government and the CCP The authors emphasize that more
lowing some to close, but the reform plan has been vague on than a chain of command from top to bottom is implied by this
these details. 36 structure: “These hierarchical structures are embedded in dense
networks –not only of other firms, but also of party and govern-
Skeptics may read the announcement of the new guidelines, ment organs,” and exchange and collaborate on many matters of
particularly given their timing after China’s summer of production and policy implementation.”25
volatility, as an attempt to signal reform without necessarily
pursuing it. By issuing these guidelines, The Diplomat observes, Milhaupt and Lin also observe several significant issues
the State Council could be sending investors another signal with China’s current model for the administration of SOEs.
that it is taking structural reform seriously. For the skeptics, One such issue is that “SOEs are exempt from anti-trust
they’ll believe the sort of SOE reforms these guidelines promise enforcement. Also, as the Economist noted in a recent overview,
when they see it. We do hope that China will move toward the government ‘enforces rules selectively, to keep private-sector
implementation sooner rather than later. rivals in their place’ and foreign firms can be blocked from
acquiring local firms.”
Tackling China’s State-owned Enterprises:
Background Another is that “Corporate governance is very weak. Share-
holders have no voice in corporate affairs and can not access the
(This section “Tackling China’s State-owned Enterprises” is incor- courts. Lack of transparency means that corporate misgovern-
porated from our 2015 White Paper.) ment is easy to hide.”26
SOEs enjoy a second life Also at the Communist Party Congress, SASAC chief
Wang Yong told reporters that “The direction of the SOE
The Chinese government’s preferential treatment of and (state-owned enterprise) reform should be: SOEs must be more
32
For SOE reform to make significant progress, much will de- strategic mandate for state-owned enterprises, or SOEs, has a
pend on specific implementation. SOE executives and their gov- curious history. According to some, it also has a grim outlook if
ernment patrons wield significant political clout and are likely substantive changes are not made.
to resist efforts to loosen government controls. The guidelines
already cautioned that state capital should maintain the “abso- In the mid-to-late1990s, former President “Jiang Zemin and
lute controlling position” in national security sectors, as well as then-Premier Zhu Rongji took a knife to China’s bloated and
natural resources including water, grain, forests, oil and gas. 38 unprofitable state sector, closing thousands of unproductive en-
terprises. That opened up space for private sector firms to flour-
Even if partial privatization is widely used, experts question ish, underwriting the growth of the last decade [2000-2010].”24
whether it can succeed in fundamentally reshaping the state sector.
Since that time, however, “some of those gains have been re-
Some analysts warn that as long as the party maintains ulti- versed, as the government has thrown its weight behind state
mate control, SOEs will never act as purely profit-seeking entities. champions. The number of state-owned enterprises as a share of
The issue has never been an easy one for the Party leadership to the total has continued to fall, dropping to 5 percent in 2011.
pursue, given powerful vested interests in the existing SOE struc- But with SOEs still dominant in the commanding heights of
ture. So instead of unveiling something too radical, what they’ve the economy, their share of total output has remained relatively
outlined instead is a five-year road map for modest reform. 39 buoyant at 26 percent.”24
“The guidelines suggest that by 2020, the goals in all the According to a study performed by “Curtis Milhaupt, a
main reform areas should be accomplished, constituting a scholar of comparative corporate law at Columbia Law School,
system that is more suitable to the nation’s socialist-market and Li-Wen Lin, a graduate student in sociology at Columbia
economy,” Xinhua notes. Echoing some of the language used University […] the network of SOEs in China “Is based on
by the country’s Central Bank when it allowed the yuan to ‘vertically integrated groups’ of large state-owned and related
depreciate, Xinhua notes that the “SOE system should be more companies. Each group has a ‘central holding company,’
modernized and market-oriented” 36. the State-Owned Assets Supervision and Administration
Commission (SASAC), which is the majority shareholder in
The new guidelines, Xinhua reports, state that the govern- a ‘core company.” That company, in turn, owns a majority of
ment will encourage SOEs to eventually “go public” though “no shares in the state-owned companies that comprise the group,
specific timetable will be set.” Additionally, “SOEs will also be including a finance company that is a source of finance for
allowed to experiment with selling shares to their employees.” members.”25
According to The Diplomat, these provisions hearken positively
for longer-term structural SOE reform and appear to address Additionally, “the Chinese Communist Party (CCP) struc-
recommendations that foreign investors have proffered for a ture exists parallel to the structure noted above. The Organiza-
few years now. China promised to create “stronger, better and tion Department of the Party is decisive in choosing top man-
larger” SOEs through a far-reaching reform program, which agers of the SOEs, and in turn some managers hold positions
includes restructuring those that are performing poorly and al- in government and the CCP The authors emphasize that more
lowing some to close, but the reform plan has been vague on than a chain of command from top to bottom is implied by this
these details. 36 structure: “These hierarchical structures are embedded in dense
networks –not only of other firms, but also of party and govern-
Skeptics may read the announcement of the new guidelines, ment organs,” and exchange and collaborate on many matters of
particularly given their timing after China’s summer of production and policy implementation.”25
volatility, as an attempt to signal reform without necessarily
pursuing it. By issuing these guidelines, The Diplomat observes, Milhaupt and Lin also observe several significant issues
the State Council could be sending investors another signal with China’s current model for the administration of SOEs.
that it is taking structural reform seriously. For the skeptics, One such issue is that “SOEs are exempt from anti-trust
they’ll believe the sort of SOE reforms these guidelines promise enforcement. Also, as the Economist noted in a recent overview,
when they see it. We do hope that China will move toward the government ‘enforces rules selectively, to keep private-sector
implementation sooner rather than later. rivals in their place’ and foreign firms can be blocked from
acquiring local firms.”
Tackling China’s State-owned Enterprises:
Background Another is that “Corporate governance is very weak. Share-
holders have no voice in corporate affairs and can not access the
(This section “Tackling China’s State-owned Enterprises” is incor- courts. Lack of transparency means that corporate misgovern-
porated from our 2015 White Paper.) ment is easy to hide.”26
SOEs enjoy a second life Also at the Communist Party Congress, SASAC chief
Wang Yong told reporters that “The direction of the SOE
The Chinese government’s preferential treatment of and (state-owned enterprise) reform should be: SOEs must be more
32
