The Chinese Government's New Approach to Ownership and Financial Control of Strategic State-Owned Enterprises

Abstract

This paper reviews recent regulatory and policy changes that affect the Chinese central government's ownership and authority over the capital allocations of strategic state-owned enterprises (SOE). The paper examines the reform of the central government's relationship with key SOEs as a consequence of the establishment of the State Assets Supervision and Administration Commission of the State Council (SASAC) in 2003, the coming introduction of a centralised operating and budgeting system for SOEs, and the government's ongoing re-evaluation of its ownership policy. SASAC appears to have the potential to develop into a major actor in China's domestic capital allocation, with an active role in strategic financing and restructuring of key sectors of the Chinese economy. The data reviewed for this paper strongly suggests that the Chinese central government aims to retain significant ownership control over key SOEs and, by extension, over a major part of the domestic economy. The new operating and budgeting system is set to significantly enhance central government control over SOEs' capital allocation.

State-owned enterprise reform in China: Past, present and prospects

“…The government issued the Company Law in 1993 and the Competition Law in 1994. The promulgation of specific laws and policies was a substantial step in establishing the regulatory framework for the growing multi-ownership enterprise sector and supervisory functions over SOEs (Mattlin 2007). Further, the xiagang ('laid-off') policy, which allowed a large number of workers to be laid-off in the process of ownership change, was carried out (Song 2015;Jefferson 2016).…”

“…As a result, the number of SOEs increased and they became huge corporations. From 2003 to 2006, the number of central SOEs under SASAC was reduced from 196 to 159 after consolidation and restructuring (Mattlin 2007). This number continued to fall, to 106, during 2015-16, with the largest enterprises in the industrial sector (Jefferson 2016: 3).…”

“…SOEs internalise such losses in exchange for their privileged access to government-controlled resources, especially bank lending and land. Also, the government collected no dividends from profitable SOEs before 2007 (Mattlin 2007) and few dividends (5-15 per cent) after 2007 (Milhaupt and Zheng 2015). Those support measures have significantly exacerbated the SOEs' soft budget constraint problem.…”

“…Moreover, many local governments encouraged local SOEs to undertake large investment projects in pursuit of regional economic growth (Mattlin 2007). These have contributed to problems of overcapacity, large debts and 'zombie' firms, particularly in steel, coal and metal industries (Naughton 2016).…”

Product Market Regulation and Competition in China

“…These non-tradable shares can be exchanged outside of the market in a number of ways including: arranged sale, indirect takeover, free or judicial transfer, or entrusted shares (Mattlin, 2007). Transactions involving non-traded shares have to be approved by SASAC.…”