asian affairs

Focus on the 15th Congress (12-18 Septembre 1997)

by Fan Gang

Director National Economic Research Institute

After the 15th Congress of Chinese Communist Party, the world suddenly finds that China is on its way of serious reforms, especially the reform of State-owned enterprises (SOEs). It should not be surprised, however, because if people could be aware of what have been going on in China, they would know what the party congress did was actually the first of all a formal appreciation of what have been happening in the past 4-5 years in the local places.

The following facts seem the most important to understand what is going on in China:

1. A dynamic market-oriented non-state sector has grown up and has served as the main contributor to the economic growth. The non-state sector, which consists of joint-ventures, corporations, community-owned rural industries, private business, and the individual self-employed, now already provides the country with more than 60% GDP, about 70% of industrial output, 80% of growth (GDP), and 90% of new jobs (see note below). The so-called "gradual transition" has been taking place in the way of development of a "new-sector" or "new system" first, rather than restructuring the "old system" at the beginning. Plus the various progresses in decentralization of decision-making powers from the central to the locals and from the government to enterprises and individuals, China is already no longer a state-controlled and planned economy like what it was 18 years ago or even 5 years ago.

2. The growth of the non-state sector not only contributed to the overall growth, but also changed the conditions for the reform of SOEs. On one hand, it created market competition against the SOEs, narrowed down their monopoly profits, pushed them into financial difficulties, and forced them to look for ways of reform. On the other hand, the growth of non-state sector creates more jobs which may help to absorb the laid-off state employees and provides economic "surplus" which may be mobilized one way or anther to compensate suffering state workers when the real reforms take place. Non-state-owned capital and entrepreneurial capability also developed with the growth of non-state enterprises, which make it possible to sell the state assets and to have immediate efficiency improvement after the take-over. People also changed their attitude towards the reform in this process: Workers become more willing to look for other opportunities when they see the state is no longer reliable for their security of job and income; and the government at various levels become more reform-mined when having found the SOEs more as "burdens" of the budget and bank balance sheet rather than the source of revenue and growth.

3. Thanks to the developments described above, the reforms of SOEs started to make real progress in recent years with local initiatives and local experiments. In addition to invite foreign investors to make more joint-ventures with previous SOEs, the local governments have sold and leased out a great deal of state assets to domestic private or corporate investors. One way commonly used to reform the small-sized SOEs in recent years is to sell their net-assets (difference between the "total assets" and the debts) to the employees of the companies and convert the firms into the "employees' share-holding corporations". The creation of the employees' share-holding corporations may not solve all the problems inherited from the previous SOEs and it may have its own institutional problems which would be only overcome by further evolution and restructuring. It seems, however, to be the best feasible way to start the reform of those SOEs which are not able to be sold out under current political and economic constraints in China. In past several years, many small, unprofitable, and local SOEs at city and county level have been restructured this way, especially in the coastal regions where the non-state sector has taken bigger proportion in the economy.

4. When the local people started the experiments, the central authority did not give formal approval, but did not stop it either. It watched and later found out that there had been not much political problems and social instability caused by such kind of local initiative. Then came the announcement of new reform policy by the Party Congress.

Therefore, what the 15th Party Congress did was first of all to give an formal recognition of the legitimacy of the local practices which have already spread all over the country. This fact does not undermine the importance of the Congress because the official legalization of the reform practice is a significant break-through of various constraints and removes a great deal of political uncertainty which prevented the process from moving faster. In any sense, the Party Congress did officially inaugurate the beginning of new phase of China's transformation, the phase in which the restructuring the ownership of enterprises and the development of capital market become the central issue.

There are also some on-going operations in restructuring large-sized SOEs. For instance, the central and provincial governments now are very enthusiastic to make mergers between profitable SOEs and loss-making ones, as well as between both profitable enterprises, with the hope that this would lead to some quick improvement of the performance. There also will be more large-sized SOEs to be listed on the stock market, and more joint-ventures with either foreign or domestic private investment. Nevertheless, the conditions for restructuring the large SOEs seems still not very favourable. Large-sized SOEs are still enjoying some monopoly powers or protections. The investment in technological up-grading with government financing in previous years made the large SOEs in better position to be profitable. Therefore the incentive of reforming these enterprises is not as strong as that of small ones. Meanwhile, it is more difficult to deal with larger problems with larger enterprises, such as large amount of debt and larger number of employees.

The overall situation of Chinese economy, as described above, may be just ready for to the smaller things that perhaps is more crucial for the economy. More than 80% of SOEs fall in the category of small-sized enterprises (the definition of which are those with employees under 1000 in most industries), and 83% of loss-making SOEs are small or medium-sized. With the 80% SOEs to be restructured and developed in the market environment into larger ones together with other non-state enterprises, Chinese economy will be ready before long for further restructuring of the medium and large-sized SOEs.

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Note from the editor : The mentioned percentage does not match with the one mentioned by Vice-Minister Wu Jie in his interview. It does not necessarily mean that there is inconsistency between the two. Professor Fan Gang is lumping together the non-state sector entities that belong to the private sectors and entities that are community-owned rural industries. As mentionedby Vice-minister Wu Jie, such community-owned industries are, politically speaking, part of the public sector, not part of the private sector. What Professor Fan Gang outlines is that the core of the state sector, companies that are directly under the control of the central government, accounts now (1997) for only 40% of the output, 30% of industrial growth and for only 10% of the new jobs.