chinese central enterprise behavior

8/3/2019 Chinese Central Enterprise Behavior

1/22

Does Fragmented Authoritarianism Explain Chinese

Central Enterprise Behavior?

Nick Borst


2/22

Acronyms:

CCP Chinese Communist Party

EWC Enterprise Work Commission of the Central Committee

MLSS Ministry of Labor and Social Security

MoF Ministry of Finance

MoP Ministry of Personnel

SASAC State-owned Assets Supervision and Administration Commission

SASAM State Administration of State Asset Management

SETC State Economic and Trade Commission

SPC State Planning Commission


3/22

1

Abstract

The continued existence of large and influential state-owned enterprises in Chinas economy

raises important questions for the study of Chinese political economy. These government-

controlled firms, especially the central enterprises, are politically important actors who

aggressively pursue their own interests. The framework of Fragmented Authoritarianism, most

frequently used to analyze the interaction between local governments and bureaucracies, can be

employed to understand the behavior of the central enterprises.

The central government has assigned large swathes of the economy to the central enterprises and

within these areas they dominate over private sector. This has been done in order to help the

Communist Party maintain control over the commanding heights of the economy, even while

large swathes of the economy have been liberalized. To control these central enterprises, the

central government has implemented a series of regulatory and institutional changes over the

past two decades. This paper analyzes the effectiveness of these controls by examining the

compliance of the central enterprises with a recent directive from the central government, that

the firms cease their involvement in real estate speculation.

What is revealed is that, much like the local governments and bureaucracies, the central

enterprises are very adept at deflecting and distorting central government policy directives. Most

of the central enterprises have not quickly exited the real estate market and the central

government has been forced to delay and alter its policy. Fragmented Authoritarianism thus

explains well much of the difficulty the central government faces in establishing effective

governance mechanisms for the central enterprises.


4/22

2

Introduction

Chinas economic reforms since 1978 have been a contrasting mix of liberalization and

continued state intervention. As the country shook off its command economy roots in the 1980s,

expectations soared that China would pursue a path of full market liberalization. Confoundingthese hopes, the Chinese government has attempted to remain firmly in control of what it

considers strategic areas of the economy. Instead of a free market economy, China has created

what the late communist party leader Chen Yun termed a bird cage economy. In such a system,

the market is allowed to operate and competition is encouraged, but free market forces are never

allowed to escape the confines of the cage, government control and planning.

The continued power of state-owned enterprises in Chinas economy is a testament to this

approach to economic governance. The commanding heights of the Chinese economy are

occupied by the central enterprises ( zhongyang qiye), 123 large firms directly

controlled by the central government. Control over the central enterprises is undertaken primarily

through a new agency, the State-owned Assets Supervision and Administration Commission

(SASAC), which was designed to centralize oversight responsibilities and exercise ownership

rights. The central enterprises are both enormous and influential. In 2006, the central enterprises

accounted for 20 percent of government revenues, were worth around one-third the entire

valuation of the Chinese domestic stock exchanges and controlled assets estimated to be worth1.2 trillion euros.1 In 2010, all but one of the 100 largest publicly listed Chinese companies were

state owned.2 These firms have also been tremendously profitable over the past several years,

bringing in more than $116 billion worth of profits in 2009 alone.3

One of the prevailing theories employed to understand the functioning of the Chinese

government and its policy-making process is Fragmented Authoritarianism. The theory explains

why governmental systems that appear extremely centralized on paper, can in actuality have

significant difficulty in achieving policy goals that require coordination amongst subordinate

levels of government. The difficulty arises from the fact that lines of authority below the central

government are disjointed due to overlapping spheres of responsibility and competing

1 Mikael Mattlin. "Chinese Strategic State-Owned Enterprises and Ownership Control." In The Asia Paper, 3-28:Brussels Institute of Contemporary China Studies, 2009: 9.2 Michael Wines. "China Fortifies State Businesses to Fuel Growth." The New York Times, August 29, 2010.3 Zhao Chunzhe. "China's Central Soes Make Big Profits in 2009." China Daily, 01/20/2010.


5/22

3

hierarchical structures.4 As a result, subordinate actors have opportunities to alter policy

directives to suit their own interests and fight amongst each other during the implementation

process. Fragmented Authoritarianism helps explain why the Chinese central government often

finds its policy objectives thwarted by subordinate actors, particularly when those policies could

negatively affect their interests.

Fragmented Authoritarianism has been used extensively to analyze the interactions between

provincial governments, government ministries, and party branches, but has seldom been applied

to the central enterprises. Fragmented Authoritarianism would predict that the central enterprises

will deflect government polices towards their own interests to the maximum degree possible,

making effective control by the central government difficult. To test this theory, I will examine

an instance where the central government has put forth a very direct policy goal for the central

enterprises, the recent order by SASAC to 78 central enterprises that they cease engagement in

speculative real estate transactions and leave the property market. An analysis of this policy is a

valuable window into Chinese politics, showing the difficulty the central government faces in

achieving compliance from large and unwieldy enterprises bent on earning a profit. The picture,

however, is more complicated that simple disobedience, with central enterprises reluctant to risk

appearing openly disobedient of central dictates. The central government has only achieved

partial success with the policy and further progress may hinge on negotiating with the central

enterprises to achieve better compliance.

Evolving Role of State Intervention in the Economy:

Despite abandoning the control economy of the Maoist era and pursuing significant market-

oriented reforms, the Chinese government has decided to remain in control of several important

sectors of the economy. The desire to retain important levers of control over the economy is

deeply rooted within the partys ideological foundation and has been reinforced by lessons drawn

from events, both foreign and domestic. Maintaining control over the means of production is an

important goal for most communist parties and the Chinese Communist Party (CCP) is no

4 Kenneth G Lieberthal. "Introduction: The "Fragmented Authoritarianism" Model and Its Limitations." InBureaucracy, Politics, and Decision Making in Post-Mao China, edited by Kenneth Lieberthal and David Lampton,1-58. Berkeley: University of California Press, 1992. 8.


6/22

4

different. State-owned enterprises were traditionally viewed by the CCP as a vehicle by which

the party could ensure employment, administer social services, ensure equality amongst workers,

and control the behavior of its citizens. The danwei (), or work unit, of these state-owned

enterprises occupied a central role in the life of Chinese workers. The danwei was responsible for

allocating housing, benefits, and even approving marriages. While many in the CCP saw

embracing market-oriented reforms as a necessary step after the economic failures of the Maoist

Era, communist hardliners have never countenanced a full-scale dismantlement of the states role

in the economy. In 1985, Deng Xiaoping confirmed these sentiments declaring that, we must

fully develop the private economy and fully develop foreign joint ventures and foreign controlled

investments, but the socialist public ownership system will always remain the principal part.5

Since the outset of its dramatic economic modernization program, the Chinese Communist Partyhas displayed skepticism towards unbridled market forces and retained a firm desire to remain in

control of the commanding heights of the Chinese economy. The political and economic turmoil

of the late 1980s helped to reinforce the belief that giving up too much control over the economy

would be a strategic mistake. The 1989 Tiananmen Massacre shook the partys confidence to the

core and in the aftermath the CCP engaged in a series of crackdowns. The party also watched in

horror as the Soviet Union and communist governments in Eastern Europe collapsed. In response

to these events, the party a began the process of reasserting control over areas viewed as sources

of instability, such as the freewheeling economy of the 1980s that had generated high levels of

inflation.

In a document published in 1991, a group of senior Chinese Communist Party officials put forth

a manifesto identifying the factors behind the collapse of the Soviet Union and the sources of

Chinas recent instability. The document,Realistic Responses and Strategic Options after

Dramatic Changes in the Soviet Union, identified the rapid liberalization of the economy as a

critical mistake made by the Soviet Union and one that should not be repeated in China.6 The

manifesto implored the party to seize control over state assets in the same way that it seized

control of the gun, alluding to the famous Maoist maxim that whoever controls the gun controls

the state. The decision was subsequently altered to shift control to the state rather than the party

5. "." People's Daily, 1985.6 "." edited by Ideology Department. Beijing: China Youth Daily, 1991.


7/22

5

because of fears that direct party control might be viewed from the outside as a sign of

weakness.7 If the party had any doubts regarding its decision to maintain control of state-owned

enterprises, the asset-stripping and corrupt dealings associated with privatization programs in

Russia during the early 1990s confirmed the danger of liberalization. Not only were state

resources being stolen at unprecedented levels, but discontent with privatization policies was

also contributing to social instability and political opposition. Political instability at home and the

negative example of the Soviet Union worked together to reinforce the belief amongst the party

elite that abandoning state control of the economy should be avoided.

Reforms of the Central Enterprise Governance Structures:

Although Chinese leaders had decided to oppose dismantling the states control over the

economy, they knew that significant reform of state-owned enterprises was unavoidable. The

structures under which these enterprises are governed have evolved significantly over the past

two decades as the government has attempted to introduce market incentives to increase

efficiency, while retaining ownership and control.

Reforms to state-owned enterprises began in earnest in the late 1980s. During that period, large

enterprise groups and central-level financial groups were placed under the supervision of the

State Council.8 The various ministries oversaw smaller national state-owned enterprises. Major

investments by state-owned enterprises were approved by the State Planning Commission, which

coordinated these actions as part of overall macroeconomic planning.

In 1988, the State Administration of State Asset Management (SASAM) was created to track the

value of assets controlled by state-owned enterprises and authorize sales, transfers, and

restructurings. SASAM was somewhat limited in its authority in that it did not exercise

ownership rights over state-owned enterprises in the traditional sense. The agency also had a

7 Richard McGregor. The Party: The Secret World of China's Communist Rulers. 1st edition ed. New York Harper,2010. 40.8 Stephen Green, and Ming He. "China's Privatization Ministry? The State-Owned Assets Supervision andAdministration Commission." InExit the Dragon?: Privatization and State Control in China, edited by StephenGreen and Guy Liu. London: Chatham House, 2005. 171.


8/22

6

somewhat disjointed bureaucratic structure, reporting to the State Council but being overseen by

the Ministry of Finance.

In 1993, the State Economic and Trade Commission (SETC) was established to oversee the day-

to-day operations of state-owned enterprises, including issues of staffing, financing, assets salesand restructuring.9 The ministries oversaw aspects of state-owned enterprise operations that fell

within their mandate. The Ministry of Personnel (MoP) oversaw staff appointments and salaries.

The Ministry of Finance (MoF) supervised state-owned enterprise budgets. The Ministry of

Labor and Social Security (MLSS) oversaw wages and welfare benefits for workers. The same

year, the 3rd Plenum of the 14th Party Congress adopted the Company Law, setting forth guiding

principles for state-owned enterprise reform.10 The law established the legal framework for the

transition of state-owned enterprises towards modern companies.

The outbreak of the Asian Financial Crisis reinforced the idea that inefficient state-owned

enterprises represented a gigantic liability to Chinas economy. Party leaders recognized

maintaining a dynamic economy was a necessary component of the partys legitimacy and in

order to do so they would need to reform the ailing state-owned sector and make it profitable. In

1997, the 15th Party Congress adopted a major reorganizing measure called the Grab the Big,

Let the Small Go policy ( zhua da fang xiao).11 The policy called for bloated and

inefficient state-owned enterprises to be sold off or liquidated while enterprises that occupiedstrategic areas of the economy would be strengthened and made profitable. As part of this

process, by August 1997, some 9,000 SOEs had gone through the process which allowed them to

list partly or wholly on the stock market, with the government still retaining control through

maintaining a controlling stake of non-tradable shares.12Also included in these reforms was the

transfer of ownership to local governments of state-owned enterprises that operated primarily in

9 Stephen Green and Ming He. "China's Privatization Ministry? The State-Owned Assets Supervision and

Administration Commission." InExit the Dragon?: Privatization and State Control in China, edited by StephenGreen and Guy Liu. London: Chatham House, 2005. 171.10 Mikael Mattlin. "Chinese Strategic State-Owned Enterprises and Ownership Control." In The Asia Paper, 3-28:Brussels Institute of Contemporary China Studies, 2009: 8.11 Hon S. Chan. "Politics over Markets: Integrating State-Owned Enterprises into Chinese Socialist Market." PublicAdministration and Development29, no. 1 (2009). 43.12 Mikael Mattlin. "The Chinese Government's New Approach to Ownership and Financial Control of StrategicState-Owned Enterprises." InBOFIT Discussion Papers. Helsinki: Bank of Finland: Institute for Economies inTransition, 2007. 26.


9/22

7

one locality. What would be left were the central enterprises, large and dominant state-owned

firms that occupied strategically important areas of the Chinese economy.

The reforms implemented as part of the Grab the Big, Let the Small Go policy gradually

helped state-owned enterprises that remained become profitable. These enterprises also benefitedfrom a decision made by the government in 1994 that freed state-owned enterprises from having

to pay dividends to the government. 1998, the government began implementing major housing

sector reforms that shifted many workers out of state-owned enterprise provided housing and

into the private real estate market. This had the effect of dramatically reducing the cost burden of

employee benefits faced by the central enterprises.

In 1999, the Central Committee established the Enterprises Work Commission (EWC) to oversee

appointments of senior state-owned enterprise managers. The commission also was tasked with

approving major strategic decisions for firms and organizing ideological work for workers. The

same year, the 4th Plenary Session of the 15th Central Committee issued guidelines for the

establishment of strategic sectors of the economy where state-owned enterprises would exert

monopolies or dominant market power.13

In 2003, SASAC was established. The decision marked the shift of control over the central

enterprises away from various government ministries to an organization that reported directly to

the State Council. The organization represented a major centralizing effort, bringing together

functions previously performed by the SETC, SPC, EWC, MoP, MoF, and MLSS into one

organization. SASAC would exercise ownership rights over state-owned enterprises in a more

direct method than any previous ministry.

Beyond simply centralizing oversight responsibilities, the creation of SASAC had broader

ideological implications for Chinese political economy at large. SASAC represented a boundary

being drawn on large scale state-owned enterprise privatization and an effort to strengthen the

position of the remaining central enterprises.14 SASAC exists not to promote the development of

13 Hon S. Chan. "Politics over Markets: Integrating State-Owned Enterprises into Chinese Socialist Market." PublicAdministration and Development29, no. 1 (2009). 45.14 Stephen Green and Ming He. "China's Privatization Ministry? The State-Owned Assets Supervision andAdministration Commission." InExit the Dragon?: Privatization and State Control in China, edited by StephenGreen and Guy Liu. London: Chatham House, 2005. 169.


10/22

8

the free market, but instead to ensure that profitable state firms that answer to the central

government dominate the strategically important areas of the Chinese economy.15

The sectors subject to government control were later identified more explicitly in a directive

issued by SASAC in 2006. The sectors where the state would play the dominate role includedthose that involved national security, infrastructure, natural resources, sectors that provided

public goods and services, as well as firms that supported key industries and high-tech

production.16 SASAC chairman Li Rongrong later provided additional clarification on what

industries would be included The sectors identified as strategic enough to warrant 100%

ownership stakes by the government were expansive and included defense, power generation and

distribution, telecommunications, oil and petrochemicals, coal, civil aviation, and shipping.17 The

next level of industries identified for state-owned enterprise control were the basic and pillar

industries where the government would maintain absolute or controlling stakes. These industries

include machinery, auto, information technology, construction, steel, base metals, chemicals,

land surveying, and research and development. Finally, a third set of industries was identified as

necessary for the government to maintain a controlling stake in some key firms. These industries

were trading, investment, construction materials, agriculture, and geological exploration.

In 2007, the central government began collecting dividends from the central enterprises, albeit at

low levels.

18

The structural reforms enacted in the 1990s had succeeded in making many of theorganizations profitable. A subsequent wave of initial public offerings by central enterprises

made them flush with cash. Collecting dividends from these firms thus became only a possibility,

but also a desirable move to prevent unproductive investments by enterprises overloaded with

cash.

The last two decades have thus marked an almost continuous effort to reform the state-owned

enterprises and create effective structures for controlling them. What has eventually emerged is a

15 Hon S. Chan. "Politics over Markets: Integrating State-Owned Enterprises into Chinese Socialist Market." PublicAdministration and Development29, no. 1 (2009). 48.16 "." edited by State Council. Beijing, 2006.17 Mikael Mattlin. "Chinese Strategic State-Owned Enterprises and Ownership Control." In The Asia Paper, 3-28:Brussels Institute of Contemporary China Studies, 2009: 13.18 Fred Bergsten and Charles Freeman and Nicholas Lardy and Derek Mitchell. China's Rise: Challenges andOpportunities. Washington: Peterson Institute for International Economics, 2009. 124.


11/22

9

more centralized system where large central enterprises are directly under control of a single

organization that reports to the State Council.

Changing Central Enterprise Governance Arrangements:

Late 1980s /Early 1990s

Large enterprise groups and central-level financial groups placed undersupervision of State Council, while smaller enterprise groups are overseenby the ministries

State Planning Commission (SPC) authorizes investment decisions by statefirms as part of macroeconomic planning

1988 State Administration of State Asset Management (SASAM) created

1993 State Economic and Trade Commission (SETC) created Company Law passed

1997 Grab the Big, Let the Small Go policy initiated

1999

Central Committee Enterprise Work Commission created 4th Plenary Session of the 15th Central Committee Meeting issues guideline

for the establishment of strategic sectors

2003 State-owned Assets Supervision and Administration Commission (SASAC)

created

2007 Central Enterprises directed to begin paying dividendsSource: Author

Mechanisms of Control over the Central Enterprises

The central government has a variety of tools at its disposal with which to control the central

enterprises. In theory, the central government should be able to easily force central enterprises to

comply with its policy dictates.


12/22

10

1. SASAC: The establishment of SASAC represented a major change in the central governments

approach to controlling the central enterprises. By centralizing the various mechanisms of

control previously exercised by the ministries and agencies, it became significantly easier to

coordinate policy and exercise control over state-owned enterprises. Additionally, the states

financial interests could be represented much more clearly now that there was an agency that was

able to exercise something close to traditional ownership rights over the central enterprises.

2. Nomenklatura System: SASAC has been granted the authority to appoint managers and other

high level officials in the central enterprises. Central enterprise mangers not only owe their

current job to the central government, but their future prospects are also dependent on staying in

the good graces of the government. This authority gives SASAC considerable leverage over

central enterprise managers, although for the largest central enterprises the Organization

Department of the Communist Party typically selects its own candidates. 19

3. Party Units: Communist party units within central enterprises play a critical role in helping

the central government exercise control. The groups exist at almost every level of central

enterprise operation. Party units are given wide discretion in decisions related to management,

personnel, key projects, financing and other important decisions .20Party units act as a separate

chain of command within state-owned enterprises and are more likely to be sensitive to

government policy edicts than profit-maximizing managers due to their status as representativesof the communist party.

4. Dividends: In 2007, SASAC was approved to begin collecting dividends from the central

enterprises and the process has become a potential tool for influencing enterprise behavior. The

central government grants differing rates of dividend payments to firms according to sector and

profitability. For example, defense industries are largely exempted from paying dividends while

many of the most profitable non-defense firms are taxed at the level of 10%.21 Internally within

the government, there is a turf war between SASAC and the Ministry of Finance over which

19 Barry Naughton. "Top-Down Control: Sasac and the Persistence of State Ownership in China." In China and theWorld Economy. Leverhulme Centre for Research on Globalisation and Economic Policy, University ofNottingham, 2006. 5.20 Hon S. Chan. "Politics over Markets: Integrating State-Owned Enterprises into Chinese Socialist Market." PublicAdministration and Development29, no. 1 (2009). 50.21 Mikael Mattlin. "Chinese Strategic State-Owned Enterprises and Ownership Control." In The Asia Paper, 3-28:Brussels Institute of Contemporary China Studies, 2009: 20.


13/22

11

agency should collect dividends, with the Ministry of Finance currently prevailing. There has

been recent discussion of increasing the level of dividends central enterprises must pay from the

relatively low level that exists today.22

5. Enterprise Budgeting and Finance: In 2005, changes were made to substantially increase

the role of SASAC in the budgeting and investment operations of the central enterprises. The

government ordered central enterprises to compile annual state capital management budgets that

are subject to SASAC supervision.23

SASAC thus gained additional leverage to shape and guide

major investment decisions by the central enterprises. The central government also controls the

main channels of financing for the central enterprises, the state-owned banks. Loan targets and

quotas set for these banks have a significant influence over the operations of the central

enterprises, albeit less than one might expect given the high rate of self financing through

retained earnings by central enterprises.

6. Control Over Subsidiaries: In 2010, SASAC promulgated a new series of rules that

instructed central enterprises to prevent the diffusion of state assets through their subsidiaries by

maintaining majority ownership and reducing the number of subsidiaries. This law was passed to

address the more than 17,000 subsidiaries of central enterprises existing across five hierarchical

levels.24 SASAC has thus staked out a greater role in managing the activities of central enterprise

activities.

7. Determination of Strategic Sectors: The central governments role defining which sectors of

the economy will be reserved for state-owned enterprise domination is a tremendous lever of

influence. The ability of the government to grant or take away this form of market protection has

significant impact on firms profitability and is thus a powerful incentive for firms to stay in the

central governments good graces.

22 "." edited by State Council. Beijing, 2010.23 Mikael Mattlin. "Chinese Strategic State-Owned Enterprises and Ownership Control." In The Asia Paper, 3-28:Brussels Institute of Contemporary China Studies, 2009: 15.24 Ibid. p. 14.


14/22

12

Central Enterprises and the Real Estate Bubble:

To determine the actual extent of control the central government is able to wield over the central

enterprises, its ability to control their actions in the real estate market will be used as a case study.

A single case study is not definitive, but it useful in illuminating several of the key issues

impacting central enterprise governance. One of the most perplexing issues facing the central

government has been the emergence of a large pricing bubble in domestic real estate markets.

The topic is especially suitable for study because it has received a tremendous amount of

attention in the Chinese press. The impact of property prices on the personal finances of so many

Chinese citizens has made it difficult for government censors to suppress news regarding the real

estate market.

Source: Wu, Gyourko, and Deng

As a result of a variety of factors, including an undervalued currency and low interest ratesoffered on domestic savings accounts, Chinese investors (and foreign speculators) have poured

money into the domestic property market. Property prices have skyrocketed over the past several

years and an unprecedented wave of property speculation has gripped the country. By early 2010,

the Chinese central government had become aware that the housing market was out of control,

despite cooling measures taken in previous years. The price to income ratio, a common measure


15/22

13

of housing affordability, has reached a critical 20 in major cities across the country, surpassing

even the highs of the Tokyo land bubble.25 In Beijing, one of the epicenters of the boom, housing

prices in real terms have increased by 900% since the beginning of 2003. State-owned

enterprises played a large role in this increase with the percentage of land purchases involving

state-owned enterprises (central and local) exceeding two-thirds of total transactions in 2008.26

Domestic and international economists began to sound alarms bells that the property market was

in danger of crashing and urgent action needed to be taken by the state.

At the beginning of March 2010, Chinese Premier Wen Jiabao publicly expressed concern over

the direction of real estate markets and the need to control speculation. Shortly after, on March

18, SASAC ordered the 78 state-owned companies to shed their real estate divisions.27 The 78

firms ordered to exit the property market by SASAC were those whose core business was not in

real estate. The 16 central enterprises whose core business was in real estate and China Railways

would be allowed to continue. The firms were ordered to draft plans within two weeks on how

they would dispose of the real estate holdings. The policy was an aggressive move by the central

government, which had clearly decided that it wished to tamp down property markets. The move

was followed by a series of additional measures in April of 2010, such as increasing mortgage

interest rates, orders to state-owned banks to slow down on property lending, and new rules

limiting property speculation by individual investors.

In the period following SASACs March edict, both Chinese and foreign news sources reported

that the compliance of the central enterprise has been mixed at best. In late April, The Economic

Observer News, wrote that the subsidiaries of some central enterprises reported that they had not

received instruction to divest of real estate holdings and were continuing their operation.28 An

editorial in the Chinese Financial Times echoed the view that subsidiaries of central enterprises

were not exiting the market. The New York Times reported that in August the majority of central

enterprises still had property units, despite the order by SASAC. At the end of September,

Southern Daily reported that the 16 central enterprises allowed to remain in the real estate

25 Andy Xie. "Frayed String for China's Propery Balloon." Caixin, 03/22/2010.26 Wu Jing and Joseph Gyourko and Deng Yongheng. "Evaluating Conditions in Major Chinese Housing Markets."In Working Papers. Cambridge: National Bureau of Economic Research, 2010. 33.27 David Barboza. "State-Owned Bidders Fuel China's Land Boom." The New York Times, 08/01/2010.28 Kang Yi and Zhou Yaling. "Real Estate Business of 78 Central-Owned Enterprises to Be Transferred to MainState-Owned Players."Economic Observer, 04/21/2010.


16/22

14

business had been making use of easy financing to aggressively buy land from central enterprises

leaving the market, contradicting the desires of the central government to reduce the role of

SOEs in the land market.29 By October, Xinhua Finance was reporting that not only had some

central enterprises failed to make adequate provisions to exit the market, but others have

continued to actively engage in real estate transactions through their subsidiaries.30 In late

October, CaiXin newspaper reported that the China Banking Regulatory Commission had issued

a document ordering state-owned banks to stop accepting loan applications from the 78 central

enterprises instructed to leave the property market, although at the time there questions

surrounding the actual scope and scale of the loan ban.31 In mid November, Business China

reported that in order to circumvent the SASAC mandate, central enterprises were trying to

market existing projects as low income housing, while continuing to sell most of the units as

commercial residential units.32 The same month, Shenzhen News reported that the 78 central

enterprises were still sitting on nearly $15 billion in real estate assets and were moving slowly in

disinvestment due to pressures to remain profitable.33 In summary, it appears in the months

following SASACs order the central enterprises did not undertake a prompt withdrawal from the

property market.

The instances of noncompliance reported by the media contrasted sharply with statements put

out by the government on the policy. In early April, Xinhua reported that the 78 central

enterprises ordered to leave the real estate market had all submitted plans for withdrawal and

resolved towards achieving the goal.34 SASAC chairman Li Rongrong relayed to a Xinhua

reporter that he was determined that the central enterprises would fulfill their promise of leaving

the property market. In mid-September, a SASAC representative issued a statement declaring

that the withdrawal of the central enterprises from the property market was proceeding

smoothly.35

The official relayed to a reporter from Xinhua that the plan was proceeding

according to plan and that reports of noncompliance were false. Given the widespread reports of

29 "300." Southern Daily, 07/26/2010.30 ""."Xinhua Finance, 08/10/2010.31. "." Cai Xin, 10/20/2010.32 "Chinese Soes Remain in Property, Eye Low-Income Housing Projects."Business China , 11/18/2010.33 "78." Shenzhen News, 11/19/2010.34 "78."XinHua, 04/09/2010.35 ": 78""." First Finance Daily, 07/13/2010.


17/22

15

noncompliance in the media, it is difficult to believe the governments reports of progress were

accurate.

Towards the end of 2010 and the beginning of 2011, the actual extent of the problems with the

policy was finally acknowledged. In early December of 2010, China Daily confirmed thatChinas commercial banks had been instructed to curtail loans to central enterprises not in the

real estate business and the only 7 of the 78 firms instructed to leave the market had complied.36

In February, SASAC held a press conference in which an optimistic spin was put on what could

only be considered a relatively significant defeat for the agency. Deputy Director Shao Ning

announced that only 14 central enterprises had complied with SASACs order and that only

another 20 were expected to fully withdraw by the end of 2011.37 Shao explained that the

companies would need more time to withdraw from the market due to the difficulty in balancing

the interests of different parties.38 SASACs high publicity demand that the central enterprises

exit the property market expeditiously seems to have fizzled out, with less than half of the central

enterprises on track to comply almost two years later.

Conclusion:

There are several factors behind the refusal of numerous central enterprises to comply with

SASACs mandate. One reason is the extreme profitability of these real estate projects. Central

enterprises have a mandate from the government to maintain profitability and these property

transactions have thus far proved to be quite profitable, accounting for 7%percent of reported

central enterprise profits.39 It is also worth mentioning that these types of transactions are laden

with opportunities for corruption and personal enrichment of central enterprise staff, which may

be a factor in noncompliance. Additionally, many central enterprise managers feel a profound

sense of responsibility as the custodians of public assets and have been reluctant to initiate any

type of sell off that could reduce the value of state assets. Central enterprises are also targets ofpublic scrutiny, with allegations of fraud and waste being followed closely by the netizens.

36 Hu Yang. "71 Central Enterprises Not Leave Real Estate." China Daily, 12/06/2010 2010.37 Aaron Back. "China Government: Need Time for Some Central Soes to Fully Exit Real Estate Business." FoxBusiness, 02/21/2011 2011.38 Liang Fei. "Central Soes Exit Needs Time." The Global Times, 02/23/2011 2011.

. "." People's Daily, 1985.39 "78."XinHua, 04/09/2010.


18/22

16

Finally, the difficulty and contractual headaches of unwinding large and complex real estate

transactions may be preventing many central enterprises from complying with the order.

The central enterprise managers who have disregarded the governments mandate have done so

in a somewhat cautious manner. Brazenly defying government dictates on a topic of high prioritymay invite retribution. The central government clearly has enough influence over these

organizations that they will not openly flout orders. Regardless, the property bubble case study

shows that will of the central government has been frustrated by the ability of subordinate actors

to alter policies towards their own interests.

In the case of the property bubble, fragmented authoritarianism seems to explain some of the

difficulties the central governments policy has encountered with respect to the central

enterprises. The limits of central government power to command the central enterprise has been

confirmed in other incidents, such as the gas shortages rumored to have been caused by Sinopec

as it lobbied for fuel subsidies in 2005.40 It seems clear that central enterprises, especially large

and powerful ones, will aggressively lobby for their own interests. There are, however, counter

examples of strong and decisive intervention by the central government against central

enterprises. The central government appears capable of cracking down on individual firms that

openly flout central dictates or impinge on critical interests, as shown by recent intervention in

the steel and electricity markets. A more nuanced understanding of the governance of centralenterprises thus emerges. Direct control is more likely to be exerted in cases where a significant

government interest is involved and a limited number of firms are adversely affected. In cases

like the withdrawal from the real estate market, the large number of firms affected and the

potential impact on their profitability had the effect of increasing the incentives for

noncompliance and making the task of enforcement difficult.

The results of the withdrawal policy thus far suggest that SASAC will need to negotiate with the

central enterprises to produce a policy that better protects their interests in order to achievegreater compliance. Ultimately, SASAC may continue to face difficulties in controlling the

central enterprises as long as its chairman is a minister-level official supervising central

40 Richard McGregor. The Party: The Secret World of China's Communist Rulers. 1st edition ed. New York Harper,2010. 63.


19/22

17

enterprises managers who are also minister-level. This confused hierarchy is the essence of

fragmented authoritarianism and a vexing problem for Chinas policy effectiveness.


20/22

18

Bibliography

"78 ."XinHua, 04/09/2010.

"78." Shenzhen News, 11/19/2010.

. "." People's Daily, 1985.

""."Xinhua Finance, 08/10/2010.

"300." Southern Daily, 07/26/2010.

" ." edited by State Council. Beijing, 2006.

" ." edited by State Council. Beijing, 2010.

": 78""." First Finance Daily, 07/13/2010.

. "." Cai Xin, 10/20/2010.

" ." edited by Ideology Department. Beijing: China Youth

Daily, 1991.

Back, Aaron. "China Government: Need Time for Some Central Soes to Fully Exit Real Estate

Business." Fox Business, 02/21/2011 2011.

Barboza, David. "State-Owned Bidders Fuel China's Land Boom." The New York Times, 08/01/2010.

Bergsten, Fred and Charles Freeman and Nicholas Lardy and Derek Mitchell. China's Rise: Challenges

and Opportunities. Washington: Peterson Institute for International Economics, 2009.

Chan, Hon S. "Politics over Markets: Integrating State-Owned Enterprises into Chinese Socialist

Market." Public Administration and Development29, no. 1 (2009).

"Chinese Soes Remain in Property, Eye Low-Income Housing Projects." Business China, 11/18/2010.

Green, Stephen and Ming He. "China's Privatization Ministry? The State-Owned Assets Supervision and


21/22

19

Administration Commission." InExit the Dragon?: Privatization and State Control in China,

edited by Stephen Green and Guy Liu. London: Chatham House, 2005.

Hu, Yang. "71 Central Enterprises Not Leave Real Estate." China Daily, 12/06/2010 2010.

Liang, Fei. "Central Soes Exit Needs Time." The Global Times, 02/23/2011 2011.

Lieberthal, Kenneth G. "Introduction: The "Fragmented Authoritarianism" Model and Its Limitations."

InBureaucracy, Politics, and Decision Making in Post-Mao China, edited by Kenneth

Lieberthal and David Lampton, 1-58. Berkeley: University of California Press, 1992.

Mattlin, Mikael. "Chinese Strategic State-Owned Enterprises and Ownership Control." In The Asia

Paper, 3-28: Brussels Institute of Contemporary China Studies, 2009.

Mattlin, Mikael. "The Chinese Government's New Approach to Ownership and Financial Control of

Strategic State-Owned Enterprises." InBOFIT Discussion Papers. Helsinki: Bank of Finland:

Institute for Economies in Transition, 2007.

McGregor, Richard. The Party: The Secret World of China's Communist Rulers. 1st edition ed. New

York Harper, 2010.

Naughton, Barry. "Top-Down Control: Sasac and the Persistence of State Ownership in China." In

China and the World Economy. Leverhulme Centre for Research on Globalisation and Economic

Policy, University of Nottingham, 2006.

Wines, Michael. "China Fortifies State Businesses to Fuel Growth." The New York Times, August 29,

2010.

Wu, Jing and Joseph Gyourko and Yongheng Deng. "Evaluating Conditions in Major Chinese Housing

Markets." In Working Papers. Cambridge: National Bureau of Economic Research, 2010.

Xie, Andy. "Frayed String for China's Propery Balloon." Caixin, 03/22/2010.

Yi, Kang and Zhou Yaling. "Real Estate Business of 78 Central-Owned Enterprises to Be Transferred to


22/22

20

Main State-Owned Players."Economic Observer, 04/21/2010.

Zhao, Chunzhe. "China's Central Soes Make Big Profits in 2009." China Daily, 01/20/2010.

chinese central enterprise behavior

Documents