Вы находитесь на странице: 1из 15

Chinas state-owned enterprises remain a drag on the economy during the reform era even though their efficiency

y might be improving, (World Bank 1996). Discuss.

Introduction It is no doubt that Chinas state-owned industrial enterprises (SOEs) have fared poorly in comparison to non-SOEs during the reform era, with statistics available detailing the declining profitability endured by these firms. However, to proclaim they have been a drag on the economy without giving much thought into the changing nature of Chinas restructuring economy would be unreasonable. SOEs have performed far better than is conventionally held (Laurenceson and Chai, 2000; 24), despite having to pay higher taxes, wages, and increasing social welfare burdens compared to non-SOEs. Advocates of shock therapy or the big bang approach will disagree (Lo, 1999; 693), linking the weaker performance to institutions that conform less to market regulation and claim SOEs are not reformable. This paper will argue that SOEs have not been a drag on the economy as the World Bank has alleged in its 1996 report (World Bank, 1996; 23), but have performed remarkably well given their circumstances during Chinas reform era.

SOEs by nature are enterprises owned and governed by the state. A significant discussion has centred around SOEs being inefficient and loss making, one when considering 44% of Chinese SOEs were loss-making enterprises in 1996 is difficult to contest (Bramall, 2000; 394). Given that collectively owned enterprises (COEs) are mainly township and village enterprises (TVEs) run and influenced by local governments, the comparison between them and SOEs cannot justify private ownership is better (Lo, 1999; 695). These smaller firms are usually characterised by labour-intensive modes of production, due to the abundance of rural labour and with capital being expensive to deploy in such areas.

Page 1 of 15

If one looks into the performance of large and medium size enterprises (LMEs), which have been at the heart of Chinas transformed Soviet-type economy you will see their performance has been comparable, if not better than COEs throughout the entire reform era accounting for 46 percent of industrial output in 1993 (Lo,1999; 695). LMEs are overwhelmingly stateowned enterprises, but a question arises to why LMEs have been considered to be more successful than both SOEs and non-SOEs given their operations are less marketised and their institutions far less akin to private ownership (Lo, 1999; 694). To assess whether SOEs have been a drag on the economy we must venture into three important areas affecting their performance: profitability, productive efficiency and the restructuring of firms since 1978.

Profitability Basic economy theory will tell us falling profitability is a serious issue for the competitive firm, even if these losses are subsidised by the state. During the reform era, both SOEs and non-SOEs have faced declining performance though greater focus has been given to SOEs.

Financially SOEs outperformed COEs in the boom years of the 1980s, but were outperformed by COEs during the recession and subsequent rebound period in the 1990s (Lo, 1999; 696). During the downturn SOEs had incentives not to cut production, as a build up of inventory stock in the then accounting system would have proportionally cut the share of the wage bill and depreciation charges thereby boosting profits (Holz, 2003; 66).

Page 2 of 15

Source: (Lo, 1999; 699)

To be fair, the rapid rise of rural firms did not begin to erupt until after 1984 and the growth of their numbers bore into the monopoly profits enjoyed by SOEs and subsequently reduced profit margins (Bramall, 2000; 393). Naughton proposes it was this rise in competition from rural TVEs and COEs which contributed to the declining profitability of state-owned enterprises (Naughton, 2007; 275), and given in a perfectly competitive economy exit for non-profitable firms is easy, in Chinas context the exit of SOEs was incredibly difficult (Holz, 2003; 164). New rural enterprises could enter product niches in which SOEs did not operate in, such as producing miscellaneous household goods including buttons, ribbons and plastic ID card holders as displayed by households in the Wenzhou region (Naughton, 2007; 283).

Page 3 of 15

Whilst credible, Naughtons argument has been opposed by Fan Gang, Wing-Thye Woo and Jeffrey Sachs who propose excessive labour remuneration is to blame (Holz, 2003; 96). They show in aggregate that total income rose faster than total net output (ibid), however with the emergence of new firms and the introduction of competitive policies, SOE managers would have had to keep wages competitive or else suffer a haemorrhage of skilled labour (Bramall, 2000; 391). Furthermore, the wages of workers would eventually be tied to enterprise performance.

To simply ignore other costs such as tax and welfare a fair and accurate diagnosis cannot be made. COEs have enjoyed lower taxes and tax concessions throughout the reform era, as have firms in special economic zones, both paying 35 percent and 15 percent income tax prior to 1994 (Laurenceson and Chai, 2000; 33). Although 30 percent of TVE profits were channelled to local governments to support agriculture, this money was reinvested in rural enterprises as local governments knew they would make a return on their investments. SOEs on the other hand faced much higher tax obligations; 55 percent prior to 1994 (ibid). It should be noted before the tax reforms were implemented in the early 1990s, SOEs were obligated to hand over all profits to the state, and profit incentives did not come into force until the early 1980s (Naughton, 2007; 304). Contribution to state revenue by SOEs and COEs was 71 percent and 17 percent respectively in 1995, highlighting the tax inequality between the enterprises (Lo, 1999; 706). As a legacy of the planning system SOEs face high welfare burdens including providing housing, health insurance, disability insurance and pensions; an obligation not necessitated by rural enterprises (Qian and Weingast, 1997; 259). Pension payments in particular have been on the rise, increasing from 9bn Yuan in 1985 to a staggering 60bn in 1995, equivalent to 12 percent and 90 percent of their after-tax profits respectively (Lo, 1999; 706).

Page 4 of 15

Private firms will generally avoid venturing into industries where profitability is low, such as the energy sector in Chinese industry. In sectors such as coal mining, petroleum extraction and electricity output prices were kept administratively low by the state, as these outputs would act as inputs for other sectors. The lions share (Cheng and Lo, 2002; 421) of losses endured by SOEs was concentrated in this sector, accounting for 83 percent of total losses in 1986, 80 percent in 1990 and 72 percent in 1995. Although productivity may have been high, profits could not be increased due to the state-set prices. One cannot simply overlook this fact and ascertain that SOEs are inherently unprofitable, because if output prices in this sector were set at market prices, then inputs in other sectors would have been much higher, producing uncompetitive firms.

Neoclassical economists will argue fixed prices distort the optimal allocation of resources and do not reflect the level of scarcity in an economy (Laurenceson, 2000; 23), though fixed prices in China have allowed inflation to remain relatively low. A surge in inflation did occur in 1988, at the cause of market-price implementation which would have caused demand to fall and real income to decline; this led to a policy of macroeconomic contraction which then adversely affected profits and productivity (Bramall, 2000; 390).

Profitability by itself cannot explain the worsening performance of state-owned enterprises during the reform era, nor can it dig into the changing productivity of firms throughout this period which we now look into.

Productive efficiency SOEs are said to be less efficient than COEs and TVEs, with their share of industrial output falling to 33 percent in 1996 from 77 percent in 1978, whilst the TVE share of output rose

Page 5 of 15

from 9 percent to 28 percent in the same period (Naughton, 2007; 300). By having the state subsidise losses and finance investment, SOEs could afford to be lacklustre in their productivity habits, unlike rural enterprises that had to compete to survive in an ever growing atmosphere. However, enterprise loss subsidies have been falling throughout the reform era accounting for only 0.5 percent of GDP in 1996 (Lo, 1999; 702) indicating performance has been improving.

Source: (Lo, 1999; 702)

To analyse changes in productivity growth we look into changes in total factor productivity (TFP), a residual we can obtain from the Cobb Douglas function:

a = q - l (1-)k,

where a represents TFP and and (1-) the elasticity of labour and capital respectively. Lo estimates TFP growth for SOEs to have been 1.49 percent between 1980-1886, and 3.6 percent for COEs in the same period when =0.4 (ibid; 699).

Page 6 of 15

Source: (Lo, 1999; 700)

Laurenceson and Chai have graphed the changing patterns of TFP of SOEs over the course of reform along with total price performance (TFP), with the results showing a rising trend in TFP but a decline in TPP, indicating a worsening of the terms of trade for SOEs due to input prices from agriculture being high and many output prices being low (Laurenceson and Chai, 2000; 31).

Source: (Laurenceson and Chai, 2000; 32)

Page 7 of 15

One explanation for the slower rise in TFP can be attributed to the fact that many SOEs corporatized following the introduction of Company Law in 1994, thus changing their enterprise category and leaving inefficient firms behind in the SOE category. However the shareholding sector experienced declining TFP, at an average rate of 7.96% per annum between 1993-1996 (Jefferson, et.al, 200; 13), quite surprising due to their nature as profitseeking enterprises. Furthermore, some TFP growth can be credited to accelerated technical progress in the 1980s, and through technology transfers through FDI which expanded after 1992 (Bramall, 2000; 237) causing a rise in capital productivity in SOEs of 7.72 percent between 1992-1996 (Jefferson et.al, 2000; 8). As firms were restructuring their enterprises, many formed joint-ventures with foreign firms who then invested and transferred new capital into China. Foreign firms were encouraged to invest in China with intellectual property rights incentives if production and technology were transferred (Naughton, 2007; 360). Although rural enterprises enjoy greater property rights over collective land, TVE property rights have been viewed as fuzzy (ibid; 121) given the complexity of land-use negotiations.

Rural enterprises were able to absorb surplus labour, and were free to relieve workers if their contributions were not providing much value. In contrast, as many SOEs predate back to the planned era in where employment was preferred over profitability; state-industrial workers were offered permanent contracts and could not be laid off during downturns or periods of falling demand (Laurenceson, 2000; 29). Thus in the economic downturn of 1988-92 labour productivity fell, but began to rise across all sectors during the decade as corporatisation allowed firms to lay off redundant workers, growing at 8.5 percent for SOEs between 19921996 and 18.81 percent for COEs (Jefferson et.al, 2000; 9). SOE capital productivity too suffered similar declines in the downturn, averaging 3.42 percent per annum in the downturn,

Page 8 of 15

but rose to 7.72 percent between 1992-96; with their profit-to-capital ratio being close to that of COEs (Lo, 1999; 694).

Source: (Lo, 1999; 698)

One advantage state-owned enterprises enjoyed over their rural competitors was the fact that they were able to benefit from soft budget constraints, with 62 percent of fixed investment being funded by the government in 1978 (Naughton, 2007; 305) though this figure dropped to a mere 3 percent in 1997. The state soon stopped lending to banks but carried on asking for remittances, and the only source of finance for enterprises were now banks which had been broken up into central and four large smaller banks (Holz, 2003; 62). Borrowing from banks was an incentive to increase efficiency, though in practise many banks lent on the request of local politicians and planners rather than commercial viability (ibid). In contrast, TVEs and COEs faced a hard budget constraint. They did not have access to state finance, but relied on finance from rural credit cooperatives (RCCs), who were funded from household savings (Qian and Weingast, 1997; 259). Household savings began to grow along with the rapid rise

Page 9 of 15

of rural enterprises, and with it loans increased because deposits increased (Naughton, 2007; 279). Harder budget constraints simply contributed to greater incentives for non-SOEs to increase their profitability; else they would of course go out of business.

Restructuring The pre-reform era was characterised by central planning and fixed prices, neither of which would deem practical to neoclassical economists. However, the 1980s would see many reforms be implemented to provide greater incentives for SOEs to improve their productivity and profitability, in order to become more competitive with the rising trend of rural enterprises. Pilot reforms in the 1980s and the Company Law act in the early 1990s sought to turn enterprises into profit-seeking firms, and paved way for the restructuring of organisations.(Lin and Zhu, 2001; 310). Under the modern enterprise system SOEs transformed into limited liability and limited liability stock companies, employeeshareholding co-operative and private enterprises, the latter being the least favourite with only 7 percent of restructured SOEs choosing this option according to an industrial survey carried out in 1998 (ibid; 321).

Page 10 of 15

Source: (Lin and Zhu, 2001; 323)

For the limited companies, assets would be divided into shares and sold internally and externally, with limited liability stock companies being allowed to enlist on the stock exchanges. The number of industrial SOEs shrank from 120,000 in the mid 1990s to 31,750 in 2004 (Naughton, 2007; 313), and with it the proportion of loss-making SOEs have fallen but non-SOEs have gone up (Cheng and Lo, 2002; 421). Better performance has come about through greater pressures slapped onto managers who now report to the board of directors, albeit they are still chosen or appointed by members of the state. But then why have profits been falling despite this drive for profit-seeking? Many firms were heavily indebted and had surplus personnel which they simply could not lay off easily, giving rise to Nicholas Lardys argument that it is this high liability-to-asset ratio which is the cause of loss making (Cheng and Lo, 2002; 421). Though the debt problem was alleviated somewhat by banks lowering interests rates seven times between 1996-1999 reducing SOE obligation in interest payments by 250bnYuan (Lin and Zhu, 2001; 337).

Page 11 of 15

Profit incentives introduced in the early 1980s were accompanied with the dual-track price system. Managers could retain a portion of the profits earned by the enterprise should quota targets be met (Naughton, 2007, 311) and these profits would be paid out in bonuses to managers and employees, causing a concern for the state council who levied a progressive bonus tax in 1984 (Holz, 2003; 78). Greater autonomy in price setting was given to enterprises and managers were given greater latitude in setting wages for workers, which were later linked to profits (Yusuf, 2006; 56); giving rise to criticism that excessive wages have caused falling profitability. No longer would workers be offered permanent employment but rather 5 year contracts would be the new method (Bramall, 2000; 391). TVEs have also privatised during the reform era mainly in 1995-6, with many closing down due to inefficiency or increased competition both domestically and abroad (Naughton, 2007; 271).

Conclusion This paper has attempted to counter the argument that SOEs have remained a drag on the Chinese economy throughout the reform era, despite improvements in efficiency. The performance of SOEs to non-SOEs has been close, despite having to pay higher taxes, wages and welfare contributions, whilst having to remit all profits back to the state until later reforms were implemented.

SOEs located in the energy industries were subject to keeping output prices low, so that other sectors in the economy could benefit from cheaper inputs; this of course contributed to lower profitability but labour productivity in these sectors has remained high. Labour productivity has risen in the state sector, albeit through the policy reforms carried out in the 1980s causing firms to be more profit-seeking (Cheng and Lo, 2002; 418). A shift towards market prices has

Page 12 of 15

taken place, and although earlier efforts resulted in a rise in inflation, later efforts have been much smoother.

The comparison of SOEs to non-SOEs is biased against SOEs. The average performance of SOEs is poor because the worst performing SOEs are not allowed to exit in large numbers whereas some of the best performing SOEs prior to 1998 restructured into companies or joint ventures (Holz, 2003; 164). This paper has confined the analysis to three areas: profitability, productive efficiency and restructuring, but one must go beyond competition and ownership analysis to determine how best to solve the paradox of declining profitability and increasing efficiency (Jefferson, et.al 2000; 16) if China is to set a concrete example of successful economic development for other developing countries to follow.

Page 13 of 15

Bibliography Bramall, C. (2000), Sources of Chinese Economic Growth 1978-1996, (New York: Oxford University Press) Cheng, Y.-S. and Lo, D.(2002) Explaining the financial performance of Chinas industrial enterprises: beyond the competition-ownership controversy, The China Quarterly, no.170: 413-440. Holz, C.A. (2003), Chinas Industrial State-Owned Enterprises: Between Profitability and Bankruptcy, (Singapore: World Scientific Publishing Co. Pte. Ltd) Jefferson, G.H., T.G. Rawski, L. Wang and Y. Zheng (2000) Ownership, productivity change, and financial performance in Chinese industry, Journal of Comparative Economics, 28: 786-813. Laurenceson, J. and J.C.H. Chai (2000) The economic performance of Chinas state-owned industrial enterprises, Journal of Contemporary China, 9 (23): 21-39. Lin, Y.-M. and T. Zhu (2001) Ownership restructuring in Chinese state industry: an analysis of evidence on initial organizational changes, The China Quarterly, 166: 305-41. Lo, D. (1999) Re-appraising the performance of Chinas state-owned industrial enterprises, 1980-96, Cambridge Journal of Economics, 23 (6): 693-718. Naughton, B. (2007) The Chinese Economy: Transitions and Growth, (Cambridge and London: MIT Press). Qian, Y. and B.R. Weingast (1997) Institutions, state activism, and economic development: a comparison of state-owned and township-village enterprises in China, ch.9, in M. Aoki,

Page 14 of 15

H.-K. Kim and M. Okuno-Fujiwara (2006) The Role of Government in East Asian Economic Development (Oxford: OUP). Smyth, R., J. Wang, and Q.L. Kiang (2001) Efficiency, performance and changing corporate governance in Chinas township-village enterprises since the 1990s, Asian-Pacific Economic Literature, 30-41. Yusuf, S. Nabeshima, K and Perkins, D. (2006), Under New Ownership: Privatizing Chinas State-Owned Enterprises, (Washington: Stanford University Press and the World Bank)

Page 15 of 15