Clarify understanding and pool strength to advance SOE reform
Author： Source： Date：2017-09-01
Giving priority to managing capital is the highlight and breach of this round of state-owned enterprise (SOE) reform. However, due to inadequate discussion and inconsistent awareness and understanding of this issue, some contradictions and even some controversies have taken place in the process of formulating policies and reform programs. In view of the current situation, we need to clarify understanding and pool strength to accelerate the reform.
I would like to make a few comments on “giving priority to managing capital and the transformation of enterprise system”.
First, the deep-seated institutional problems of SOEs ultimately need to be resolved depending on the enterprise system.
Traditionally, the achievement of state-owned assets is made by “state-owned enterprises” in the physical form. In 1987, the “Law of the People’s Republic of China of Industrial Enterprises Owned by the Whole People” was introduced to regulate state-owned enterprises. In 1993, the Company Law was enacted, which created conditions for the capitalization of state-owned assets and the transition to corporate systems. Since then, there have been two forms of the realization of state-owned assets—enterprises in the physical form and capital in the value form, and at the same time, two kinds of enterprise systems—state-owned enterprises and companies. Correspondingly, the government has adopted two kinds of management styles, namely, “managing enterprises” or “managing capital.”
The Enterprise Law came into being during the period of planned commodity economy. According to the provisions of the Enterprise Law, the enterprise manages state-owned assets whose operations are granted by the state. In essence, the enterprise does not have its own assets, and its first task is to complete the state plan. The government manages the personnel and things in enterprise and supervises the enterprise. Therefore, both the integration of government administration with enterprise, and the integration of ownership and right of management are the provisions of the Enterprise Law.
The Company Law is an enterprise system adapted to the market economy. Generally speaking, there are three key points: First, the company is in possession of the property right of legal person and it functions an independent legal entity; second, the company practices a limited liability system; third, the governance structure is regulated by the law. Therefore, the company’s independent status is legally protected; the company’s power is inherent, not delegated by the government. The separation of government and enterprises, separation of government and funds, and separation of ownership and right of management that have haunted us for a long time are now completely the intended purposes of the Company Law.
Currently the top-level state-owned enterprises are still subject to regulation by the Enterprise Law. With the transformation of the economic system, the system of government managing enterprises has been challenged more and more seriously. In order to enhance the vitality of enterprises, the government has issued many documents and introduced many policies. On the one hand, the government has tried every means possible to delegate powers to the enterprises. On the other hand, it has gone out of its way to strengthen supervision over enterprises. To turn the “integration of government administration with enterprise”, the government has ever attempted to find a moderate degree in the institutional framework of the Enterprise Law and managing enterprises to achieve “no stagnancy in the regulatory context, and no disorder in the relaxed context,” but such attempts failed many times. Over the long period of 20-odd years, we have been hovering between “relax” and “tighten”, unable to get rid of the spell of “disorder as an immediate result of leave-alone and stagnancy as an immediate result of regulation”.
Over the past decade, the system of the government “managing enterprises” has been reinforced. Every state-owned enterprise (SOE) has had the appropriate administrative level, and “Yang Qi (meaning: enterprises directly controlled by the central authorities of China)” has become a proper noun. All types of enterprises have had ownership labels, divided into “inside the system” enterprises and “outside the system” enterprises, and they have been treated differently by the government and the banks. The government has taken the SOEs as the tools to exercise their functions, promote economic growth and undertake social functions. The Party and government departments have put enterprises under the exclusive control and managed all those personnel and things that should be managed by the board of shareholders and the board of directors. As a result, enterprises have been “administerized”, with multiple objectives. They are often powerless in face of the fierce market competition and sometimes their “going global” is hardly accepted by the international market. Faced with these circumstances, enterprises feel rather helpless and the government feels deeply entangled in a dilemma.
Objectively speaking, the reasons why institutional problems such as the integration of government administration with enterprise and the integration of ownership and right of management have not been resolved for decades are not that the Party and the government did not attach importance to, nor that few policies were issued or the documents weren’t written to the point. Practice has shown that policy adjustment cannot replace “structural reform”. Restricted by the semi-planned economic system, under the system where enterprise assets are state-owned assets, what the Enterprise Law stipulates is precisely government departments’ running or managing enterprises, or in other words, the integration of government administration with enterprise. On the contrary, what the Company Law advocates is the company’s independent status and self-governance. Therefore, the “restructuring” of state-owned enterprises refers to the transformation from being regulated by the Enterprise Law to being adjusted by the Company Law; to get rid of the entanglement of “managing enterprises”, the government should promote the capitalization and securitization of the state-owned assets, implement “giving priority to managing capital” and accelerate the restructuring of top-level state-owned enterprises as a whole, changing from following the Enterprise Law to the Company Law.
In a sense, this round of state-owned enterprise reform at present is not dominated by “the state-owned enterprise” in itself, but to promote state-owned assets achieving capitalization on the national level; the proposition of state-owned enterprise reform this time is not “how government agencies improve the management over state-owned enterprises”, but the shift from “managing enterprises” to “giving priority to managing capital”. This is a major breakthrough of the decisions of the Third Plenary Session of the 18th CPC Central Committee on the theory of state-owned enterprise reform, and an important breach in the current deepening reform.
Second, review the significance of reform of “establishment of a modern enterprise system”.
The Third Plenary Session of the 18th CPC Central Committee stressed once again the “modern enterprise system”. At present, it is of great practical significance to deeply understand the original intentions of “establishing a modern enterprise system” from the source.
According to the traditional theories, the public ownership corresponds to the planned economy, and to develop the market economy, the ownership must be privatized. However, these two theories are not in line with China’s national conditions. An important meaning of the socialist market economic system is to maintain a relatively large share of the public ownership or the state-owned economy, while giving play to the high efficiency of the market economic system. This raises the question of whether or not respectively independent market entities can be constructed in the category of a state-owned economy.
In the context of excluding privatization, the only way is to innovate the enterprise system. That is, to form tens of thousands of independent market entities with state-owned capital investment or stock ownership in virtue of the institutional arrangement of modern companies. For this reason, the Third Plenary Session of the 14th CPC Central Committee pointed out profoundly that “the modern enterprise system with public ownership as the mainstay is the foundation of the socialist market economy”; after that, this remark was reviewed by fewer people, but it’s very important. It was tampered to be “the modern enterprise system is the micro-foundation of the socialist market economy.” It’s not right. The Third Plenary Session did not write so. The modern enterprise system is the foundation of the socialist market economic system. To develop a market economy, it is necessary to form a diversity of market entities, and how can the diversified market entities mutually fit in with the state-owned economy? This bonding point is the modern enterprise system.
The modern enterprise system featuring “clearly established ownership, well defined power and responsibility, separation of enterprise from administration, and scientific management” represents the direction of the state-owned enterprise reform, and precisely epitomizes the characteristics of the modern enterprise system: First, clearly established ownership relationships. The ownership of state-owned assets in an enterprise belongs to the state, while the enterprise have all legal person property rights resulted from the investment made by capital contributors including the state and becomes legal entities that enjoy civil rights and bear civil liability. Second, the enterprise, with all of its assets owned by it as a legal person, shall operate autonomously and be responsible for its own profit and loss in accordance with the law, deliver taxes as required and assume the responsibilities of preserving and increasing the value of their assets for the capital contributors. Third, the capital contributors of the enterprise enjoy the rights and interests of proprietors in proportion to their respective share of capital contributions to the enterprises, such as deriving benefits from its assets, making major decisions, and selecting its management. When an enterprise goes bankrupt, it shall bear the limited liability for the debts of the enterprise only with the capital amount invested in the enterprise. Fourth, the enterprise organizes production and operation in light of market demand, and the government does not directly intervene. Enterprises are subject to the rule of “survival of the fittest” in the market competition, and those chronically loss-making and insolvent ones should declare bankrupt by the law. Fifth, a scientific enterprise leadership system and organizational management system should be established to regulate the relationships between the owners, operators and workers and form an operating mechanism featuring the combination of incentives and constraints. “All enterprises have to work hard in this direction.”
Over 20 years has passed, but the above characteristics of the modern enterprise system have not yet universally and completely embodied in enterprises. As a consequence, we are still haunted by the remaining basic problems of “the principal market player status of some enterprises has not yet been truly established and the modern enterprise system is not complete yet (CPPCC Document No. [2015] 22)” and “the integration of government administration with enterprise and the integration of government administrative functions with state-owned assets management functions still exist and there are still phenomena of offside, lack and dislocation of the supervision over state-owned assets (State Council Document No. [2015] 63)”. Today, one of the reasons behind the massive entanglement and controversies is the lacking understanding of the original purposes of establishing a modern enterprise system later on. The main attention and efforts have been given to how to manage enterprises and how to use government forces to promote the growth in size and competitive strength. The importance of enterprise system transformation has been overlooked so that the overall system transformation of top-level state-owned enterprises has failed to be carried out substantively.
Third, two kinds of understandings, practices and results of “giving priority to managing capital”
The reform of giving priority to managing capital is a new thing, which requires deepening understanding in practice and clarifying some ambiguous concepts. The concepts and management styles of managing capital and managing enterprises are mixed together in some documents, where in addition to managing enterprises, the regulatory body also has to manage capital in a wider and more detailed manner so that enterprises are at a loss what to do.
In fact, concerning the “giving priority to managing capital”, there are two kinds of understanding at present.
One understanding is that “managing capital” refers to that the direct objects of supervision by national regulatory body shift from “enterprises” to “capital.” The necessary prerequisite for this shift is that the form of the realization of state-owned assets must be transformed from “enterprises” in the physical form to “capital” in the value form. Otherwise, there’ll be no “capital” for supervision.
For example, in the early 21st century, the banking industry realized the capitalization of the state-owned asset—securitization through overall restructuring and listing. But in the field of industry, this process has not yet been launched. So far, the main body that the state-owned assets regulatory body directly faces remains the state-owned enterprises in physical form, and the regulatory style remains managing enterprises.
After turning to capital, the supervised object of capital contributors’ institutions becomes the state-owned capital investment operating agencies. Through the segregation of investment operating agencies, the capital contributors’ institutions and physical enterprises will no longer have direct ownership relationships, nor have the right to intervene in their invested companies by going beyond the investment operating agencies. When capital contributors’ institutions do not manage the enterprises, the separation of enterprise from administration will be logical and natural.
In addition, “giving priority to managing capital” refers to the step-by-step full capitalization and securitization of the state-owned assets in competitive areas, but without ruling out the direct management of enterprises by the government in some special sectors and the areas where the country has special needs. This is the important meaning of giving priority to managing capital. But this should be limited to a small range of market failure, basically exerting little effects on the market’s allocation of resources.
The overall corporate system restructuring of top-level state-owned enterprises takes a process, during which the regulatory authorities still need to “manage enterprises”. But the main efforts should be turned to perform well two things. One is to promote the overall restructuring of top-level state-owned enterprises, which involves massive work such as planning, reorganization, and the setup of two types of companies; and the other is to make in-depth research on the institutional framework, implementation plans and policy measures concerning managing capital. Up till now, among the released documents, the parts about managing enterprises have been substantial, whereas the parts about the transition to managing capital feature a lack of clear thinking plus weak and inadequate measures.
There is another understanding of “giving priority to managing capital”. It pays little attention to the overall restructuring of top-level state-owned enterprises, as well as the shift of regulatory object to capital. Instead, it holds that “giving priority to managing capital” is to extend the supervision to the “capital” that can be operated by these enterprises while continuing to strengthen the supervision over non-restructuring enterprises, including focusing on well managing the “state-owned capital layout” of these enterprises. The main point of this understanding is that regulatory body keeps the system and mechanism of managing enterprises intact and constantly reinforces them. The result is those institutional problems that have haunted us for a long time cannot be resolved and that we will continue to be trapped in the circle of “disorder as an immediate result of leave-alone and stagnancy as an immediate result of regulation”.
“Giving priority to managing capital” is an important decision of the central government, and it is a key to the many institutional contradictions that have plagued us for a long time. But two understandings and two practices will generate entirely different results.
Fourth, transformation towards giving priority to managing capital
In the reform process, the coexistence of the two enterprise systems is a transitional stage. It must be clear that the establishment of modern enterprise system is the direction of reform, and traditional state-owned enterprises should gradually transform to the company system, and accelerate the transformation when conditions are met. In the process of transition, government policies must take account of the actuality of the coexistence of the two systems. However, policy formulation and implementation must lead to the healthy growth and gradually expanding coverage of the new system and the prevention of the old system from distorting the new one.
The transition to “giving priority to managing capital” cannot be achieved overnight and it requires the creation of necessary conditions. For example, where is “capital” as the management object? It needs to be transformed from the top-level state-owned enterprises. That is, to carry out company system restructuring of the top-level state-owned enterprises, convert the net assets that the government invest in companies into capital or stock equity, and make it held by entrusted investment operating companies or social security funds. This process is the transformation of the form of the realization of state-owned assets, an alternative to the enterprise system, and the change of the attribute of state-owned enterprises to market entities, as well as the transformation of government management.
Fifth, scientifically define the “state-owned enterprises” and firmly hold the direction of corporate restructuring
Nowadays, whether in the government documents or in the media, market entities are generally called “enterprises”, and those directly or indirectly related to state-owned assets are collectively called “state-owned enterprises”. This confusion in the form of address has resulted in the conceptual confusion and policy confusion. Government departments often adopt their approach of managing “state-owned enterprises” to manage “companies” with state-owned investment, or go beyond the “state-owned enterprises” and extend the management to their invested or holding “companies”, confusing the state-owned enterprises under their direct management with the invested or holding companies of the enterprises under management. This drags the modern company system back to the traditional “state-owned enterprises”, blurring the respective clear attributes of the two enterprise systems.
At present, the direct supervision of the regulatory authorities is mainly targeted at state-owned enterprises, so many policy documents lately introduced by the state are about how to improve and strengthen the management of state-owned enterprises. The problem that arises is that the “SOEs” referred to in the documents are not precisely defined. Are they for all “those that are called state-owned enterprises” or only for those state-owned enterprises registered under the enterprise law? If the policy requirements for the enterprises subject to direct regulation are observed by rule or executed in reference to the rules by “those that are called state-owned enterprises”, there will be a lot of contradictions, so that some enterprises and government officials have no idea what to do.
The key to the “restructuring” of state-owned enterprises lies in the “transformation.” It is of great importance to clearly define the two enterprise systems in the process because it involves the transformations of governance structure, relationship between the government and enterprises as well as the regulatory system. The confusion in the process of policy formulation and implementation, if not properly addressed, might make the restructuring of state-owned enterprises muddle through.
“Coexistence” of the two kinds of enterprise systems by no means signifies “laying equal stress on” the two kinds of enterprise systems. The direction of reform is the company system featuring the diversity of equities. That the central government put forward the “giving priority to managing capital” is intended to speed up the process of waxing and waning. It is not the traditional state-owned enterprises, but share-holding corporations dock with the “managing capital”.
One of the measures to achieve “equal rights, equal opportunities and equal rules” for market entities is that the classification and title of market entities should follow the enterprise system instead of the ownership. Because now every enterprise has an ownership label as if classified according to the ownership, and it’s difficult for the government to avoid treating enterprises of different ownerships differently. The enterprises regulated by the enterprise law are “state-owned enterprises”, and the share-holding corporations regulated by the company law are collectively referred to as “company”, with the ownership labels removed. The government treats them all equally without discrimination. The two kinds of enterprise systems are respectively regulated according to relevant laws to avoid confusing the two.
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Q&A Session:
Q: In recent years, there has been a phenomenon that more efficient overseas mergers and acquisitions seem to have been made by private enterprises such as Anbang Insurance, Huawei and Lenovo. How do you think of the fact that often state-owned enterprises do not have a high success rate in overseas mergers and acquisitions while more private enterprises are going global? What kind of improvement should state-owned enterprises make in this process?
A: I think it is a general orientation for state-owned enterprises to go global. Perhaps it is more difficult for state-owned enterprises to go global than private enterprises. An important point lies in our institutional problems. This is my view. For example, a state-owned enterprise has executive levels where the corporate leadership includes ministerial and vice-ministerial level officials, so that the foreign company to be acquired and its host country feel strange about whether on earth it is a business or government agency. Sometimes they will have a lot of hesitation. Even if the state-owned enterprise manages to complete acquisition of the foreign company with an effort, often it pays more. This is a quite realistic problem, which relates to our corporate governance structure. Including mixed ownership companies and holding companies, they should be called enterprises or companies, no longer in the name of “state-owned” and no longer involving administrative levels. If so, I think the situation will get better.
Q: I am the Chief Researcher of Rumble Investments. Regarding the practice of managing capital that you mentioned earlier, my survey findings in Beijing financial companies such as brokerage firms and foundations have shown that they generally acknowledge it. First of all, they are all state-owned capital. When I exchange my ideas with them about the directions of managing capital, they all strongly agree with me. As the equal of professional managers, they are generally entangled in one problem. They also believe that in order for state-owned enterprises, especially state-owned financial enterprises to move in the direction of managing capital, market-oriented talents are indeed needed to carry out market-oriented operation. Needing market-oriented talents means not only to revitalize existing talents in state-owned enterprises, but also introduce market-oriented personnel. This includes identity issues, and in fact, implies the ownership problems as you said. They will be entangled in specific regulatory issues. What they mentioned most is about the pay. Nowadays, all state-owned enterprises feature the overall pay limits. They think this kind of restriction will limit their initiative. They want to expand business and attract more market-oriented talents, but they are always subject to restrictions. It is always thought there’ll be problems here. Second, since you also serve as the director general of China EV100, you must be aware that many enterprises in the electric vehicle industry are joint ventures of private and state-owned enterprises, for example BYD and GAC share a joint venture. Judging from our survey findings, mixed ownership companies are often plagued by the problems of the regulatory power. Is this also implied in the direction of managing capital? If there is cooperation between a state-owned enterprise and a private company, one side boasts more resources and the one has more business talents, then there’s a problem of conflicts between the authority of managing capital and market-oriented management.
A: The concept of “giving priority to managing capital” put forward at the Third Plenary Session of the 18th CPC Central Committee, as I understand, is on a national level. The state-owned assets regulatory body will turn from supervising enterprises to supervising capital. It is simply on this level. For things down further, that’s a different matter. This has to be defined first. In this case, the concrete objects of supervision are state-owned capital investment companies or state-owned capital operating companies. As to governance structure in the two kinds of companies, the SASAC (State-owned Assets Supervision and Administration Commission) is studying it. And in the future, there’ll be good design. Some of the leadership members are directly under the administration of the nation. Their pay may be determined by the authority that appointed them. However, as to some of the leadership members who are professional managers hired from the market, I’m afraid; they have to be paid market-oriented salaries. If not paid enough, such people may refuse to serve.
Concerning the issue of mixed ownership, since it is not the main topic of our discussion today, I’ll just make one point. The problem of mixed ownership should be handled in accordance with the Company Law. As far as the government is concerned, managing capital is directed at the state-owned capital investment companies and operating companies, whereas the holding companies invested by state-owned capital investment companies and operating companies are fully managed according to the “Company Law”. The state is not supposed to pass through investment and operating companies and go down to manage those mixed ownership companies under them. This is my point of view. Thank you.
Chen, Qingtai is former Party Secretary and Deputy Director of Development Research Center of the State Council.
Speech delivered at the Forum on Reform & Development of SOEs of the 3rd Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
I would like to make a few comments on “giving priority to managing capital and the transformation of enterprise system”.
First, the deep-seated institutional problems of SOEs ultimately need to be resolved depending on the enterprise system.
Traditionally, the achievement of state-owned assets is made by “state-owned enterprises” in the physical form. In 1987, the “Law of the People’s Republic of China of Industrial Enterprises Owned by the Whole People” was introduced to regulate state-owned enterprises. In 1993, the Company Law was enacted, which created conditions for the capitalization of state-owned assets and the transition to corporate systems. Since then, there have been two forms of the realization of state-owned assets—enterprises in the physical form and capital in the value form, and at the same time, two kinds of enterprise systems—state-owned enterprises and companies. Correspondingly, the government has adopted two kinds of management styles, namely, “managing enterprises” or “managing capital.”
The Enterprise Law came into being during the period of planned commodity economy. According to the provisions of the Enterprise Law, the enterprise manages state-owned assets whose operations are granted by the state. In essence, the enterprise does not have its own assets, and its first task is to complete the state plan. The government manages the personnel and things in enterprise and supervises the enterprise. Therefore, both the integration of government administration with enterprise, and the integration of ownership and right of management are the provisions of the Enterprise Law.
The Company Law is an enterprise system adapted to the market economy. Generally speaking, there are three key points: First, the company is in possession of the property right of legal person and it functions an independent legal entity; second, the company practices a limited liability system; third, the governance structure is regulated by the law. Therefore, the company’s independent status is legally protected; the company’s power is inherent, not delegated by the government. The separation of government and enterprises, separation of government and funds, and separation of ownership and right of management that have haunted us for a long time are now completely the intended purposes of the Company Law.
Currently the top-level state-owned enterprises are still subject to regulation by the Enterprise Law. With the transformation of the economic system, the system of government managing enterprises has been challenged more and more seriously. In order to enhance the vitality of enterprises, the government has issued many documents and introduced many policies. On the one hand, the government has tried every means possible to delegate powers to the enterprises. On the other hand, it has gone out of its way to strengthen supervision over enterprises. To turn the “integration of government administration with enterprise”, the government has ever attempted to find a moderate degree in the institutional framework of the Enterprise Law and managing enterprises to achieve “no stagnancy in the regulatory context, and no disorder in the relaxed context,” but such attempts failed many times. Over the long period of 20-odd years, we have been hovering between “relax” and “tighten”, unable to get rid of the spell of “disorder as an immediate result of leave-alone and stagnancy as an immediate result of regulation”.
Over the past decade, the system of the government “managing enterprises” has been reinforced. Every state-owned enterprise (SOE) has had the appropriate administrative level, and “Yang Qi (meaning: enterprises directly controlled by the central authorities of China)” has become a proper noun. All types of enterprises have had ownership labels, divided into “inside the system” enterprises and “outside the system” enterprises, and they have been treated differently by the government and the banks. The government has taken the SOEs as the tools to exercise their functions, promote economic growth and undertake social functions. The Party and government departments have put enterprises under the exclusive control and managed all those personnel and things that should be managed by the board of shareholders and the board of directors. As a result, enterprises have been “administerized”, with multiple objectives. They are often powerless in face of the fierce market competition and sometimes their “going global” is hardly accepted by the international market. Faced with these circumstances, enterprises feel rather helpless and the government feels deeply entangled in a dilemma.
Objectively speaking, the reasons why institutional problems such as the integration of government administration with enterprise and the integration of ownership and right of management have not been resolved for decades are not that the Party and the government did not attach importance to, nor that few policies were issued or the documents weren’t written to the point. Practice has shown that policy adjustment cannot replace “structural reform”. Restricted by the semi-planned economic system, under the system where enterprise assets are state-owned assets, what the Enterprise Law stipulates is precisely government departments’ running or managing enterprises, or in other words, the integration of government administration with enterprise. On the contrary, what the Company Law advocates is the company’s independent status and self-governance. Therefore, the “restructuring” of state-owned enterprises refers to the transformation from being regulated by the Enterprise Law to being adjusted by the Company Law; to get rid of the entanglement of “managing enterprises”, the government should promote the capitalization and securitization of the state-owned assets, implement “giving priority to managing capital” and accelerate the restructuring of top-level state-owned enterprises as a whole, changing from following the Enterprise Law to the Company Law.
In a sense, this round of state-owned enterprise reform at present is not dominated by “the state-owned enterprise” in itself, but to promote state-owned assets achieving capitalization on the national level; the proposition of state-owned enterprise reform this time is not “how government agencies improve the management over state-owned enterprises”, but the shift from “managing enterprises” to “giving priority to managing capital”. This is a major breakthrough of the decisions of the Third Plenary Session of the 18th CPC Central Committee on the theory of state-owned enterprise reform, and an important breach in the current deepening reform.
Second, review the significance of reform of “establishment of a modern enterprise system”.
The Third Plenary Session of the 18th CPC Central Committee stressed once again the “modern enterprise system”. At present, it is of great practical significance to deeply understand the original intentions of “establishing a modern enterprise system” from the source.
According to the traditional theories, the public ownership corresponds to the planned economy, and to develop the market economy, the ownership must be privatized. However, these two theories are not in line with China’s national conditions. An important meaning of the socialist market economic system is to maintain a relatively large share of the public ownership or the state-owned economy, while giving play to the high efficiency of the market economic system. This raises the question of whether or not respectively independent market entities can be constructed in the category of a state-owned economy.
In the context of excluding privatization, the only way is to innovate the enterprise system. That is, to form tens of thousands of independent market entities with state-owned capital investment or stock ownership in virtue of the institutional arrangement of modern companies. For this reason, the Third Plenary Session of the 14th CPC Central Committee pointed out profoundly that “the modern enterprise system with public ownership as the mainstay is the foundation of the socialist market economy”; after that, this remark was reviewed by fewer people, but it’s very important. It was tampered to be “the modern enterprise system is the micro-foundation of the socialist market economy.” It’s not right. The Third Plenary Session did not write so. The modern enterprise system is the foundation of the socialist market economic system. To develop a market economy, it is necessary to form a diversity of market entities, and how can the diversified market entities mutually fit in with the state-owned economy? This bonding point is the modern enterprise system.
The modern enterprise system featuring “clearly established ownership, well defined power and responsibility, separation of enterprise from administration, and scientific management” represents the direction of the state-owned enterprise reform, and precisely epitomizes the characteristics of the modern enterprise system: First, clearly established ownership relationships. The ownership of state-owned assets in an enterprise belongs to the state, while the enterprise have all legal person property rights resulted from the investment made by capital contributors including the state and becomes legal entities that enjoy civil rights and bear civil liability. Second, the enterprise, with all of its assets owned by it as a legal person, shall operate autonomously and be responsible for its own profit and loss in accordance with the law, deliver taxes as required and assume the responsibilities of preserving and increasing the value of their assets for the capital contributors. Third, the capital contributors of the enterprise enjoy the rights and interests of proprietors in proportion to their respective share of capital contributions to the enterprises, such as deriving benefits from its assets, making major decisions, and selecting its management. When an enterprise goes bankrupt, it shall bear the limited liability for the debts of the enterprise only with the capital amount invested in the enterprise. Fourth, the enterprise organizes production and operation in light of market demand, and the government does not directly intervene. Enterprises are subject to the rule of “survival of the fittest” in the market competition, and those chronically loss-making and insolvent ones should declare bankrupt by the law. Fifth, a scientific enterprise leadership system and organizational management system should be established to regulate the relationships between the owners, operators and workers and form an operating mechanism featuring the combination of incentives and constraints. “All enterprises have to work hard in this direction.”
Over 20 years has passed, but the above characteristics of the modern enterprise system have not yet universally and completely embodied in enterprises. As a consequence, we are still haunted by the remaining basic problems of “the principal market player status of some enterprises has not yet been truly established and the modern enterprise system is not complete yet (CPPCC Document No. [2015] 22)” and “the integration of government administration with enterprise and the integration of government administrative functions with state-owned assets management functions still exist and there are still phenomena of offside, lack and dislocation of the supervision over state-owned assets (State Council Document No. [2015] 63)”. Today, one of the reasons behind the massive entanglement and controversies is the lacking understanding of the original purposes of establishing a modern enterprise system later on. The main attention and efforts have been given to how to manage enterprises and how to use government forces to promote the growth in size and competitive strength. The importance of enterprise system transformation has been overlooked so that the overall system transformation of top-level state-owned enterprises has failed to be carried out substantively.
Third, two kinds of understandings, practices and results of “giving priority to managing capital”
The reform of giving priority to managing capital is a new thing, which requires deepening understanding in practice and clarifying some ambiguous concepts. The concepts and management styles of managing capital and managing enterprises are mixed together in some documents, where in addition to managing enterprises, the regulatory body also has to manage capital in a wider and more detailed manner so that enterprises are at a loss what to do.
In fact, concerning the “giving priority to managing capital”, there are two kinds of understanding at present.
One understanding is that “managing capital” refers to that the direct objects of supervision by national regulatory body shift from “enterprises” to “capital.” The necessary prerequisite for this shift is that the form of the realization of state-owned assets must be transformed from “enterprises” in the physical form to “capital” in the value form. Otherwise, there’ll be no “capital” for supervision.
For example, in the early 21st century, the banking industry realized the capitalization of the state-owned asset—securitization through overall restructuring and listing. But in the field of industry, this process has not yet been launched. So far, the main body that the state-owned assets regulatory body directly faces remains the state-owned enterprises in physical form, and the regulatory style remains managing enterprises.
After turning to capital, the supervised object of capital contributors’ institutions becomes the state-owned capital investment operating agencies. Through the segregation of investment operating agencies, the capital contributors’ institutions and physical enterprises will no longer have direct ownership relationships, nor have the right to intervene in their invested companies by going beyond the investment operating agencies. When capital contributors’ institutions do not manage the enterprises, the separation of enterprise from administration will be logical and natural.
In addition, “giving priority to managing capital” refers to the step-by-step full capitalization and securitization of the state-owned assets in competitive areas, but without ruling out the direct management of enterprises by the government in some special sectors and the areas where the country has special needs. This is the important meaning of giving priority to managing capital. But this should be limited to a small range of market failure, basically exerting little effects on the market’s allocation of resources.
The overall corporate system restructuring of top-level state-owned enterprises takes a process, during which the regulatory authorities still need to “manage enterprises”. But the main efforts should be turned to perform well two things. One is to promote the overall restructuring of top-level state-owned enterprises, which involves massive work such as planning, reorganization, and the setup of two types of companies; and the other is to make in-depth research on the institutional framework, implementation plans and policy measures concerning managing capital. Up till now, among the released documents, the parts about managing enterprises have been substantial, whereas the parts about the transition to managing capital feature a lack of clear thinking plus weak and inadequate measures.
There is another understanding of “giving priority to managing capital”. It pays little attention to the overall restructuring of top-level state-owned enterprises, as well as the shift of regulatory object to capital. Instead, it holds that “giving priority to managing capital” is to extend the supervision to the “capital” that can be operated by these enterprises while continuing to strengthen the supervision over non-restructuring enterprises, including focusing on well managing the “state-owned capital layout” of these enterprises. The main point of this understanding is that regulatory body keeps the system and mechanism of managing enterprises intact and constantly reinforces them. The result is those institutional problems that have haunted us for a long time cannot be resolved and that we will continue to be trapped in the circle of “disorder as an immediate result of leave-alone and stagnancy as an immediate result of regulation”.
“Giving priority to managing capital” is an important decision of the central government, and it is a key to the many institutional contradictions that have plagued us for a long time. But two understandings and two practices will generate entirely different results.
Fourth, transformation towards giving priority to managing capital
In the reform process, the coexistence of the two enterprise systems is a transitional stage. It must be clear that the establishment of modern enterprise system is the direction of reform, and traditional state-owned enterprises should gradually transform to the company system, and accelerate the transformation when conditions are met. In the process of transition, government policies must take account of the actuality of the coexistence of the two systems. However, policy formulation and implementation must lead to the healthy growth and gradually expanding coverage of the new system and the prevention of the old system from distorting the new one.
The transition to “giving priority to managing capital” cannot be achieved overnight and it requires the creation of necessary conditions. For example, where is “capital” as the management object? It needs to be transformed from the top-level state-owned enterprises. That is, to carry out company system restructuring of the top-level state-owned enterprises, convert the net assets that the government invest in companies into capital or stock equity, and make it held by entrusted investment operating companies or social security funds. This process is the transformation of the form of the realization of state-owned assets, an alternative to the enterprise system, and the change of the attribute of state-owned enterprises to market entities, as well as the transformation of government management.
Fifth, scientifically define the “state-owned enterprises” and firmly hold the direction of corporate restructuring
Nowadays, whether in the government documents or in the media, market entities are generally called “enterprises”, and those directly or indirectly related to state-owned assets are collectively called “state-owned enterprises”. This confusion in the form of address has resulted in the conceptual confusion and policy confusion. Government departments often adopt their approach of managing “state-owned enterprises” to manage “companies” with state-owned investment, or go beyond the “state-owned enterprises” and extend the management to their invested or holding “companies”, confusing the state-owned enterprises under their direct management with the invested or holding companies of the enterprises under management. This drags the modern company system back to the traditional “state-owned enterprises”, blurring the respective clear attributes of the two enterprise systems.
At present, the direct supervision of the regulatory authorities is mainly targeted at state-owned enterprises, so many policy documents lately introduced by the state are about how to improve and strengthen the management of state-owned enterprises. The problem that arises is that the “SOEs” referred to in the documents are not precisely defined. Are they for all “those that are called state-owned enterprises” or only for those state-owned enterprises registered under the enterprise law? If the policy requirements for the enterprises subject to direct regulation are observed by rule or executed in reference to the rules by “those that are called state-owned enterprises”, there will be a lot of contradictions, so that some enterprises and government officials have no idea what to do.
The key to the “restructuring” of state-owned enterprises lies in the “transformation.” It is of great importance to clearly define the two enterprise systems in the process because it involves the transformations of governance structure, relationship between the government and enterprises as well as the regulatory system. The confusion in the process of policy formulation and implementation, if not properly addressed, might make the restructuring of state-owned enterprises muddle through.
“Coexistence” of the two kinds of enterprise systems by no means signifies “laying equal stress on” the two kinds of enterprise systems. The direction of reform is the company system featuring the diversity of equities. That the central government put forward the “giving priority to managing capital” is intended to speed up the process of waxing and waning. It is not the traditional state-owned enterprises, but share-holding corporations dock with the “managing capital”.
One of the measures to achieve “equal rights, equal opportunities and equal rules” for market entities is that the classification and title of market entities should follow the enterprise system instead of the ownership. Because now every enterprise has an ownership label as if classified according to the ownership, and it’s difficult for the government to avoid treating enterprises of different ownerships differently. The enterprises regulated by the enterprise law are “state-owned enterprises”, and the share-holding corporations regulated by the company law are collectively referred to as “company”, with the ownership labels removed. The government treats them all equally without discrimination. The two kinds of enterprise systems are respectively regulated according to relevant laws to avoid confusing the two.
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Q&A Session:
Q: In recent years, there has been a phenomenon that more efficient overseas mergers and acquisitions seem to have been made by private enterprises such as Anbang Insurance, Huawei and Lenovo. How do you think of the fact that often state-owned enterprises do not have a high success rate in overseas mergers and acquisitions while more private enterprises are going global? What kind of improvement should state-owned enterprises make in this process?
A: I think it is a general orientation for state-owned enterprises to go global. Perhaps it is more difficult for state-owned enterprises to go global than private enterprises. An important point lies in our institutional problems. This is my view. For example, a state-owned enterprise has executive levels where the corporate leadership includes ministerial and vice-ministerial level officials, so that the foreign company to be acquired and its host country feel strange about whether on earth it is a business or government agency. Sometimes they will have a lot of hesitation. Even if the state-owned enterprise manages to complete acquisition of the foreign company with an effort, often it pays more. This is a quite realistic problem, which relates to our corporate governance structure. Including mixed ownership companies and holding companies, they should be called enterprises or companies, no longer in the name of “state-owned” and no longer involving administrative levels. If so, I think the situation will get better.
Q: I am the Chief Researcher of Rumble Investments. Regarding the practice of managing capital that you mentioned earlier, my survey findings in Beijing financial companies such as brokerage firms and foundations have shown that they generally acknowledge it. First of all, they are all state-owned capital. When I exchange my ideas with them about the directions of managing capital, they all strongly agree with me. As the equal of professional managers, they are generally entangled in one problem. They also believe that in order for state-owned enterprises, especially state-owned financial enterprises to move in the direction of managing capital, market-oriented talents are indeed needed to carry out market-oriented operation. Needing market-oriented talents means not only to revitalize existing talents in state-owned enterprises, but also introduce market-oriented personnel. This includes identity issues, and in fact, implies the ownership problems as you said. They will be entangled in specific regulatory issues. What they mentioned most is about the pay. Nowadays, all state-owned enterprises feature the overall pay limits. They think this kind of restriction will limit their initiative. They want to expand business and attract more market-oriented talents, but they are always subject to restrictions. It is always thought there’ll be problems here. Second, since you also serve as the director general of China EV100, you must be aware that many enterprises in the electric vehicle industry are joint ventures of private and state-owned enterprises, for example BYD and GAC share a joint venture. Judging from our survey findings, mixed ownership companies are often plagued by the problems of the regulatory power. Is this also implied in the direction of managing capital? If there is cooperation between a state-owned enterprise and a private company, one side boasts more resources and the one has more business talents, then there’s a problem of conflicts between the authority of managing capital and market-oriented management.
A: The concept of “giving priority to managing capital” put forward at the Third Plenary Session of the 18th CPC Central Committee, as I understand, is on a national level. The state-owned assets regulatory body will turn from supervising enterprises to supervising capital. It is simply on this level. For things down further, that’s a different matter. This has to be defined first. In this case, the concrete objects of supervision are state-owned capital investment companies or state-owned capital operating companies. As to governance structure in the two kinds of companies, the SASAC (State-owned Assets Supervision and Administration Commission) is studying it. And in the future, there’ll be good design. Some of the leadership members are directly under the administration of the nation. Their pay may be determined by the authority that appointed them. However, as to some of the leadership members who are professional managers hired from the market, I’m afraid; they have to be paid market-oriented salaries. If not paid enough, such people may refuse to serve.
Concerning the issue of mixed ownership, since it is not the main topic of our discussion today, I’ll just make one point. The problem of mixed ownership should be handled in accordance with the Company Law. As far as the government is concerned, managing capital is directed at the state-owned capital investment companies and operating companies, whereas the holding companies invested by state-owned capital investment companies and operating companies are fully managed according to the “Company Law”. The state is not supposed to pass through investment and operating companies and go down to manage those mixed ownership companies under them. This is my point of view. Thank you.
Chen, Qingtai is former Party Secretary and Deputy Director of Development Research Center of the State Council.
Speech delivered at the Forum on Reform & Development of SOEs of the 3rd Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
