The marketization of SOEs refers to the shift of resource allocation from mainly controlled by the government to mainly controlled by the market and process of transforming SOEs to non-SOEs. It includes the following four major aspects: first, reforming the state-owned assets management system to be market-oriented; second, diversifying the ownership structure of SOEs; third, adapting the SOEs to be operated in compliance to market rules; fourth, shaping the market recession mechanism of SOEs. The marketization of SOEs aims at transforming SOEs to be independent legal entities and major market players who are responsible for their own management, risks, profits and losses.

1. Reforming the state-owned assets management system to be market-oriented

The key to transform SOEs to independent market players lies in separating them from government control, i.e. the government withdrawing from SOEs’ production and operation. While the key to separate SOEs from government control lies in separating the assets from government control, i.e. clearly redefining the different responsibilities of government as the social manager and the owner of social assets.

The Chinese government established the State State-Owned Assets Administration Bureau (SSAAB) that was solely responsible for the management of all state-owned assets in 1988. Over the past ten years, the SSAAB has mainly dedicated itself to the basic work of state-owned assets management, ranging from checking the assets, identifying the ownership, ownership registration, assets appraisal, assets accounting and evaluation. Moreover it has improved relevant rules and regulations and explored a new way to establish market-oriented state-owned asset management system.

However the SSAAB has not been authorized to perform as the owner of the state-owned assets. The central government still represents the only owner of state-owned assets and some related departments under the central government exercise different specified functions of the owner. In order to minimize the government interference, the central government has actively developed authorized operation of large-sized groups or corporations. The authorized operation means the government authorizes the groups or corporations to hold the state-owned assets of non-group-owned member enterprises that were invested directly by the state in various forms. Through this authorization the ownership structure of enterprises within the group could be reorganized, and the ownership relation between the group or corporation and the member enterprises could be redefined as the relation between the parent company and its subsidiaries. Therefore the parent company of large-sized groups (i.e. the group or the corporation) becomes a state-authorized and state-invested company. For example, many groups of petrochemical, metallurgical or aerospace industries are state-authorized and invested groups. This helps to clearly define the ownership structure within groups or corporations.

Some local practices in Shanghai and Shenzhen are more ahead of the practice of the Central Government. They built up a three-level management system of state-owned assets, namely the State-owned Assets Supervision and Administration Commission—-the operating agency of state-owned assets (state-owned assets operating or shareholding companies)—-SOE. The members on the commission are heads from economic management departments under the local government, with the local party secretary or the mayor as the director of the commission. The commission also established its office to handle related affairs. Such a system features in that through the establishment of state-owned assets operating agency, the government no longer performs both as the administrator and the owner of state-owned assets, but as an ordinary investor or owner of assets to participate in the decision-making or management process of enterprises. This has greatly helped to solve the lasting problem that SOEs have had “no definite owner” and insufficient control and incentives from the “owner”. Through the local practice the SOEs have, to some extent, become market players independent from the government.

2. Diversifying the ownership structure of the SOEs

1) Corporate reorganization is the main form of diversifying the ownership structure of the SOEs  

The diversified ownership structure of SOEs is realized mainly through reorganizing the previous SOEs into limited-liability companies or limited shareholding companies. And corporate reorganization is one major aspect of establishing independent status of SOEs in the market. Corporate reorganization, including introducing private capital into SOEs, has somehow reshaped the previous ownership pattern of SOEs, in which the state was either the only investor or the “biggest heavyweight shareholder”. According to the sample survey of State Economic and Trade Commission, 64.18% of SOEs had undergone the reform of diversified ownership structure, each with an average of 66.52% state-owned shares. If taking into consideration the bankrupt SOEs and those that were turned into private enterprises through acquisition or infiltration by other private enterprises, the above two figures were estimated to be over 75% and less than 50% respectively. Among the 64.18% reformed enterprises, 38.75% of them reorganized through employee partnership program, 31.25% through advocate establishment, 28.75% through mutual holding each other’s shares.

2) Reforming and diversifying the ownership structure of state-owned small and medium-sized enterprises (SMEs)

By the end of 2001, 81.4% of state-owned SMEs have already carried out corporate reforms. Among those SMEs, 51% were joint-stock businesses or joint ventures. Various reforms and reorganizations facilitated the state-owned SMEs to give a better overall economic performance and stopped the six-year successive net loss of the SMEs.

3) Reforming and diversifying the ownership structure of large SOEs.

Great progress has also been made in diversifying the ownership structure of large SOEs. Take state-owned business groups for example, in 2000, 1725 business groups registered their parent companies as state-owned ones, of which 1265 or 73.33% of the total underwent corporate reforms. 507 or 40.08% of the 1265 groups reformed their parent companies into solely private-funded ones (other limited-liability companies or shareholding limited companies). While in 2001, 1772 groups registered as state-owned ones and 1269 or 71.61% of them turned into corporate enterprises. 468 or 36.88% of the 1269 groups became solely private-funded. (See table 2-9)

Table 2-9    Corporate Reform of Large Business Groups (Unit: enterprise; %)

The data outside the brackets are the number of different enterprises. The data inside are the relevant proportion of enterprises. The inside data of solely-funded companies, other limited-liability companies and limited shareholding companies are their respective proportion among all corporate businesses.

Source: the statistics are based on Chinese Large Business Groups (2000,2001) issued by State Statistical Bureau.

4) Diversifying the ownership of shares of listed companies

Compared with unlisted companies, listed companies have a more diversified ownership structure of shares. More previous state-owned listed companies have private holding stakeholders. State-owned shares have been withdrawn from more and more companies. Thus those previous state-owned listed companies have already become private companies. Likewise the state got bigger shares in more and more private listed companies. And the state-owned shares frequently outweighed the private shares in some of them. In 1992, all 53 listed companies are state holding ones. In 2000, of the total 1086 listed companies, 458 or 42.17% companies had no state shares or involved moderate quantity of state shares; state shares withdrew from 50 or 4.60% of the 1086 companies; 628 or 57.83% of them had either an absolute or relative bigger part of the shares. In 2001, those figures were 1159 (except incomplete data of one company), 415 or 35.81%, 55 or 4.75% and 744 or 64.2% respectively. The state shares accounted for 41.38% of the total shares of all listed companies in 1992, dropped to 38.9% in 2000 and increased to 46.2% in 2001. The private shares in listed companies generally showed the trend of taking a greater and greater part of the total shares, with 58.6% in 1992, up to 61.1% in 2000 and down to 53.8% in 2001. That reflects a stronger mutual infiltration between the state stockholders and the private ones in listed companies.

Table 2-10    Changes of State Holding listed Companies

Source: Based on the Basic Analysis of Chinese Listed Companies

3. Commercialized operation of SOEs

Although some SOEs did not initiate corporate reform and some reformed SOEs are still solely state-funded The SOEs have become highly commercialized in terms of market operation, especially in terms of production and management. The reformed SOEs certainly show more standard commercialized operation. 

1) Managerial mechanism of SOEs

According to sample survey conducted by the State Economic and Trade Commission, 92.8% of the reformed SOEs considered their managerial structure to be rational or relatively rational, and compatible with market requirements and actual conditions of their own enterprises.

①Selection Rate of Managers/Operators from the Market

When it comes to the issue of appointing managers or operators of enterprises, 89.8% of reformed SOEs have non-government-commissioned managers or select managers from the market (including selection forms such as board of directors appointment and election by the workers congress). 76.4% of unreformed enterprises select their managers from the market. The overall selection rate of managers or operators of reformed and unreformed enterprises from the market reached 86.3%. While in 1993 that rate was only 3.4%. There had been an annual increase of 49.82% from 1993 to 2001.

②The independent decision-making

On the issue of decision-making, 71.3% of the enterprises chose collective decision-making before corporate reform, 22.1% chose centralized decision-making and 6.6% decentralized decision-making; after the corporate reform, those figures were down to 55.8%, 18.6% and up to 24.8% respectively. 87.8% of the reformed enterprises considered that improved or even greatly improved rational policies had been made after the corporate reform. 89.4% of them decided their policies on their own, or in other words, 89.4% of them possessed independent decision-making power. The other 10.6% enterprises chose their decision-making pattern with governmental interference or guidance. In 1993, 54.9% of all enterprises had independent decision-making power. There was an annual average increase of 6.28% from 1993 to 2001.

③ Incentives and performance

On how to encourage managerial personnel, 53.5% of the reformed SOEs adopted the performance-based incentives, 21.7% adopted yearly-salary system.

④ amplified financial and accounting systems

91.6% of all demonstration SOEs (including both reformed and unreformed ones) have implemented General Financial Provisions of Enterprises and Enterprises Accounting Standards, 13.5 percentage points higher than private enterprises. That shows the SOEs have a more regulated financial and accounting system.

⑤The relation between improved managerial mechanism and the real performance and profits of enterprises

As same as private enterprises, improved managerial mechanism has an obvious bearing on enhancing the performance and profits of enterprises. An analysis shows a highly direct relationship exists between managerial mechanism and profitability and taxability level, assets quality, capital turnover, technical progress and upgrading equipment, and utilization efficiency of personnel and equipment. Thanks to the amplified managerial mechanism, over the recent three years, 77.3% enterprises have witnessed increased profitability and taxability, about 46.7% enterprises increased by over 20% in this respect; 84.7% enterprises have seen ordinary or great improvement in assets quality; 85.7% of them have had accelerated capital turnover; 76.2% of them have renewed their equipment and enhanced their technical standard; 85.9% of them have reduced over-consumption or under-consumption of human and equipment resources by a little or a great margin.

2) SOEs production and operation

The State Council approved the Regulations on Transforming the Operating Mechanism of Industrial Enterprises of Ownership by the Whole People. The regulations, authoring SOEs 14 significant independent operating powers, brought SOEs onto the track of commercialized operation. By 2001, over 80% of all SOEs had basically implemented 14 independent operating powers. For example, of 1994 reformed business groups, 93.4% had been approved to invest independently, 74.5% had the power to guarantee for foreign clients, 72.5% had power to import and export products related to their own business, 53.9% had the power to conduct outsourcing and labor export.

Commercialized production and operation can be reflected from the following aspects:

① Very low financial subsidies from the state to make up losses of SOEs

The national fiscal subsidies which makes up the losses of SOEs is accounting for a smaller and smaller part of the total GDP, from 5.66% in 1985 down to 0.31% in 2001. Moreover the absolute value of subsidies kept dropping, from ￥50.7 billion in 1985 to ￥30.04 billion in 2001. If calculated at constant price in 1990, China reduced the absolute value of subsidies to make up losses of SOEs from ￥71.8 billion in 1985 to ￥16.4 billion in 2001, with an annual decrease of 8.82%. Besides as the marketization of interest rate accelerates, state-owned specialized banks become solely state-funded commercial banks that are responsible for their own profits and losses. That led to the end of disguised subsidies in the form of soft bank loans to SOEs from the government. The reduction and disappearance of subsidies urged the SOEs to seek surviving opportunities in the market.

②The government almost stops all free allocation of funds for SOEs

The capital input required by production and operation of SOEs is mainly from their own reserves, bank loans, issuing bonds or stock market. The free governmental allocation of funds has almost come to an end. According to statistics, bank loans to SOEs took up nearly 70& of the total loans of state-owned commercial banks. Those bank loans were reached through commercial negotiations, which did not require the government to arrange loans from state-owned commercial banks to SOEs. Since 1993, shareholding limited companies and limited-liability companies, which tally with the requirements on enterprises for issuing bonds according to Corporate Law, could issue enterprise bonds to the public. That was a new way for some enterprises to raise funds. These arrangements made by the enterprises on the basis of their own conditions and market requirements were generally market behaviors. The ratio of funds gained on the stock market to GDP was 0.023% in 1991, 1.084% in 1993, 1.783% in 1997, 2.351% in 2000 and 1.305% in 2001, showing an overall momentum of growth.

③Market pricing mechanism of SOE products took the initial shape

At present the government has relaxed the control over pricing of most competitive factors/items and other products or services and left it to be decided by the market. SOEs buy various factors/items, other products or services that they need in their production and operation from the market. The market pricing mechanism took initial shape since SOEs independently decided the prices of their products based on their own cost of production and operation and market demands. From 1978 to 2001, market pricing ratio of capital assets increased from 0 to 90.5%, that of agricultural or side-line products from 5.6% up to 97.3%. Sample survey shows 90.8% enterprises thought they decided the input, cost and pricing completely on their own.

④ Personnel employment and wages in majority of SOEs could be decided through voluntary labor-capital negotiations.

Sample survey showed, in 2001, 98% employees of SOEs were contract employees, and barriers to stop them from seeking jobs in other enterprises was greatly reduced. 53.5% enterprises decided employee wages based on their performance and contributions. Although the wages level was decided by the enterprises, thanks to the already easy flow of employees, the employees were able to refuse such wages and leave. Therefore the SOE employee wages could somehow be viewed as the result of voluntary negotiations between employees and employers. The sample survey showed 71.6% people thought so. In addition, the Ministry of Labor and Social Security adopted Proposed Regulations on Collective Negotiations on Wages. The regulations strengthened the important function of workers’ union to participate in coordinating labor relations on behalf of employees and helped to safeguard the overall legal interests and rights of employees. The three relatively standardized insurance systems in SOEs ensured their marketization of personnel employment and wages. Of all kinds of enterprises, the SOEs had the highest rate to pay pension, medical care and unemployment insurance fees in the strictest sense.

4. The SOEs exit from some sectors of the economy

One important aspect of commercializing SOEs is that they should exit some sectors according to their own operation and changing market demands. Since 1993, the central government has made it clear many times that the state-owned economy would be focused on military industry and other industries that provide important public products and services or naturally-monopolized industries and would take a dominant position in those industries; In areas like petrochemical, automobile, information, engineering and hi-tech industries which demonstrate comprehensive national strength, the dominant position of a small number of key SOEs must be guaranteed; in other moderately competitive areas, the state would withdraw itself from being the dominant stockholder or even exit certain areas completely. The reform includes the following three aspects.

1) To sell, restructure or bankrupt money-losing SOEs.

To sell, restructure or bankrupt the money-losing SOEs is a significant part of deepening reforms of SOEs. The year of 2001 witnessed the most bankrupt SOEs, with 460 SOEs bankrupt, ￥51.5 billion non-performing loans written off and 690,000 employees resettled. The central government prepared ￥50 billion bank reserves to write off non-performing loans to ensure the merger and bankruptcy of SOEs. In 2002, the central government identified 382 enterprises to be merged or bankrupted. 248 got settled, with ￥26.9 billion non-performing loans written off. More than 3000 large or medium-sized state-owned enterprises that are at a disadvantageous position in competitive fields will exit the market in the next few years. The process to sell, restructure or bankrupt state-owned SMEs will progress more rapidly. According to sample survey, sold, restructured and bankrupt enterprises accounted for 67.5% of the total number of money-losing SOEs and most of them are SMEs.

2) To reduce state-owned shares of SOEs in moderately competitive areas and invite private capital to those areas.

Through reducing state-owned shares of SOEs in moderately competitive areas, the government encourages private enterprises, individuals or foreign investors to participate in restructuring or reforming those enterprises and allow them to control the shares of the enterprises. 15.4% listed SOEs changed their structure of shares in 2001. The state had a moderate share or gave up all possessed shares in those 15.4% enterprises. The enterprises with a moderate state share have actually become private enterprises. China’s accession into WTO has greatly inspired foreign capital to acquire domestic SOEs. There are the following practices: ① to acquire all assets  ownership of a SOE  and make it a subsidiary; ② acquire over 51% of the shares and make the enterprise a holding enterprise; ③ during joint operation, the foreign partner increases capital and its shares, dilutes Chinese shares and turns equity participation into equity expansion. Except the key industries and enterprises that have a great bearing on national security and economic sectors, the Chinese government will cancel the limitation on the proportion of shares in enterprises of other ownerships in order to invite more foreign capital to acquire SOEs.

3) To transform small-sized SOEs into private enterprises

The small-sized SOEs can gradually be transformed into private enterprises through joint-stock system, transfer by auction or other forms. According to sample survey, about 80% of small-sized SOEs finished corporate reform by the end of 2001. Most of them have transformed into private enterprises.