The Transformation of the State Sector: SASAC, State-owned Business: Adapting to the Market Economy and the

new Nurturing National Champions

Barry NaughtonGraduate School of International Relations and Pacific Studies (IR/PS)

University of California, San DiegoLa Jolla, CA 92093-0519

bnaughton@ucsd.edu

Paper presented to the International Colloquium, “Business and the Chinese Miracle,” Bocconi University, October 16-18, Milan, Italy. Preliminary draft. Comments and criticisms welcome.

The restructuring of China’s state-owned enterprises has been at the core A

central component of China’s transition from state socialism to state capitalism has been

the restructuring of state-owned enterprises. The long term trends are very clear:

SinceDuring the last 15 years, from 1993 to 2008, the Chinese state sector has shrunk

dramatically; Chinese state-owned firms have predominantly become market-oriented

entities; experiencedand the state sector as a whole has undergone a have gone through a

definitive phase of transformation. However, it is also clear that the state sector has been

stabilized and will now persist for the foreseeable future: further downsizing—to say

nothing of privatization—is not in prospect. , the outlines of which are just now

becoming clear. Nearly all firms have gone through a common transformation process

that includes the adoption of a corporate organizationIn retrospect, the year 2003 emerges

as a crucial turning point, with institutional consolidation after which the central state

sector stabilized and even began to grow modestly. Moreover, since 2003, the

characteristics of the state sector changed. The result has been the emergence of a

distinctive Chinese industrial system, which we might call “state capitalism” or

“centrally-managed capitalism.” In this system, the large centrally-owned firms now

operate in a market environment, but they remain privileged actors, benefiting from

special treatment and partially protected markets. This combined system—genuine

restructuring plus government protection and support—has been accompanied by a return

to robust profitability by central state enterprises. As a result, the Chinese political

leadership, which in the 1990s viewed the SOEs as a problem to be fixed, now ; in turn,

this organizational structure allows the firms a greater measure of diversity in their

strategies and business models. Thus, a common transition process has resulted in a more

diverse firm ecology. The purpose of this paper chapter is to sketch the common features

of the process and point to some of the main outcomes. By As the second decade of the

twenty-first century, draws to a close, most state firms hadve been restructured and they

are undergoing a renaissance that few predicted ten years ago. Iincreasingly, the Chinese

government views these firms as instruments that can help in the achievement of national

goals, rather than as a problem to be fixed.

2

This chaptpaper focuses on the firms controlled by the central government, and

particularly those directly under the central State Asset Supervision and Administration

Commission, or SASAC. TTthe establishment of SASAC in 2003 punctuates the

transformation process: it, and marks the end of the most dramatic change, ands the

beginning of a phase of greater institutional stabilitystate sector consolidation. The first

part of this chapter describes the 2003 establishment of SASAC, and its initial mission. It

evaluates the successes and failures of SASAC’s mission, and the changes in the nature

of the state sector that have accompanied, and to some extent resulted from, SASAC’s

efforts. The state sector, we will show, has become much more centralized and

dominated by a few large firms. SASAC has been quite successful in stabilizing these

large firms and returning them to profitability. It has been much less successful in

transforming the institutional structures, and there has been some backsliding in recent

years. Indeed, it is possible to speak of the defeat of some aspects of the original SASAC

agenda. Second, the chapter examines the extent to which new “national champions”

have emerged among central government firms, and the particular missions with which

these national champions have been endowed. No further privatization is in sight, even

dimly on the horizon. The wave of privatization that has washed over the Chinese

economy in the past thirty years now laps peacefully on the shores of this giant island of

public ownership. Central SASAC firms have developed into a powerful and profitable

economic force, representing the core of state capitalism in China.

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1. The first half of the chpapter describes the

new institutional set-up of the Chinese state economy,

and the dynamic—but slow and costly--process that

created the current system. The second half of the

paper examines the extent to which the central

government firms are becoming the “national

champions” of an emergent China.

2.

3. Creation of the SASAC a New Institutional

Set-upSystem

The creation of SASAC in early 2003 was a milestone—and in some respects a

turning point—in the process of economic reform. SASAC wasis established as an

authoritative “ownership agency,” empowered to exercise the government’s ownership

rights over government firms. Its establishment marked a turning point in two respects.

TFirst, the creation of SASAC marked the end of a period of creative destruction, in

which the main thrust of state enterprise reform had been the disruption of protected

bureaucratic relationships and the dramatic down-sizing of the state sector. State

enterprise employment dropped from 76 million at its peak in 1992 to just under 4350

million in 20025, before stabilizing.1 (including all workers in state-controlled

corporations). From 1996 through 2002, the total stock of urban unemployed (laid-off

workers plus registered unemployed) remained high (over 14 million), only declining

after 2002. Immediately before SASAC was n fact, the establishedment of SASAC,

ended a period of five years during which most central government state firms really had

had been operating without a real no owner for almost five years, since at all. In 1998,

1 This number includes workers in traditional state-owned enterprises as well as workers in corporations in which the government has a controlling stake. Statistical Yearbook (2006: 159; 2009: 158).

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Premier Zhu Rongji had had abolished most of the industrial ministries in 1998. and

with them the weak (and failed) State Asset Management Bureau which had had

responsibility for an accounting style of oversight for state firms. State firms simply

carried on as before, embedded in functioned without an “owner”: a web of interests and

traditional bureaucratic relationships, with weak accounting-style oversight exercised by

an impotent “State Assets Management Bureau.” kept firms on track—or stuck in a rut

—most of the time. The creation of SASAC as an ownership agency with clear powers

was part of an effort to enabled continuing change more dramatic and more systematic

changes restructuring within the state sector.

At the same time, it marked the end of overall downsizing and privatization

within the central government sphere.

Upon creation, Second, SASAC—established initially at the central government

level— was given ownership of a specified list of 196 corporations. Crucially, this meant

that Ccentral SASAC had therefore did not have any ownership claim on the thousands of

other state-owned companies (or, including on on any banks or other financial

companies.) For the first time, Some firms, to be sure, were still owned by ministries,

and ownership of banks and other financial institutions was gradually consolidated under

a new agency, the Huijin Corporation. But tthe vast majority of state firms were

henceforth fully “owned” by the local governments (which gradually set up their own

“local SASACs”). The localities had, of course, that had been managing them in the

state’s name for decades, but the unambiguous grant of ownership rights meant. That

gave that local governments now had greaterthe freedom to restructure and privatize

firms, and transform their industrial sectors without being paralyzed by the web of

conflicting national and local interests and policies. Meanwhile, government ownership

of banks and other financial institutions was gradually consolidated under a different new

agency, the Huijin Corporation. SASAC’s clarified ownership over some state firms was

designed to allow the restructuring and privatization of other smaller, local firms to be

carried out more smoothly and rapidly (a theme we will see repeated in SASAC’s

history).

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As for those firms that it owned directly, central SASAC was poised to carry out a

two-stranded agenda: dramatically improve corporate governance and restructure state-

owned firms so that they were concentrated in sectors in which they had some

comparative advantage and there was an economic justification for continued state

ownership. Before we examine the success and failure of SASAC’s agenda, it makes

sense to review the overall changes in ownership structure and performance that took

place during the period after SASAC’s establishment. Figure 1 shows how SASAC’s

establishment corresponded with the stabilization of the state sector. Examining the case

of industrial workers (the largest single category and the one with the best comparative

data), Figure 1 shows that state industry workers declined rapidly until 2003 (the year of

SASAC’s creation), dropping to 21 million in that year. The following year, state

industrial workers dropped below 20 million but thereafter stabilized at around 18

million, even increasing slightly after 2008. State sector stabilization needs to be put into

context, though: overall industrial employment dropped until 2001, and then began to

grow robustly from 2003. Thus, even when state sector employment stabilized, it

continued to fall as a share of total industrial employment and after 2008 amounted to

about 20% of industrial employment.2

While the overall state sector shrank, SASAC’s subordinate enterprises continued

to grow. Tables 1 and 2 compare 2002 and 2008, showing that central SASAC grew both

the number of workers and the total value of assets. Total employees in SASAC firms

grew by almost 3 million, from 8.6 to 11.4 million; and SASAC assets more than doubled

(without accounting for inflation). The growth of SASAC firms implied striking changes

in the relative position of central SASAC. Local state firms continued to shrink and shed

workers over this period. Focusing on industrial workers, local state firms had over 18

million workers in 2002; by 2008, this had declined to 10.2 million (SASAC Yearbook,

2009: 710). Thus, the apparent stabilization of the state industrial labor force conceals a

2 The precise figures in these two paragraphs should be taken with a grain of salt, since the statistical system has only recently been collecting consistent data for the main categories we are using here. These include “above-scale industry,” “state and state-controlled enterprises,” and SASAC firms. Above-scale industry includes state firms and non-state firms with above 5 million RMB output, omitting very small firms that account for about a third of total output. SASAC firms for 2002 were just being inventoried by the newly established agency and there may have been some workers and assets omitted. Despite these caveats, the data are robust enough to support the generalizations made here.

6

continuing gradual shrinkage of local state industry, combined with an ongoing gradual

increase in the size of central SASAC firms. Increasingly, the state sector is dominated

by large, centrally-controlled firms. For decades, the overwhelming majority of state

industrial workers have worked in local government firms; by 2008, this had dropped to

55%. Central SASAC firms now account for 41% of state industrial enterprise workers

(up from 24% in 2002). Moreover, since SASAC firms are much more capital-intensive

than other parts of China’s public economy, SASAC now accounts for 56% of state

industry assets. Central state industry has nearly 8 million workers, concentrated in large

firms; local state industry has more workers (10.2 million), but these are in smaller firms

that only make up about 15% of industrial employment at the local level.

The profitability of SASAC firms has rebounded strongly since SASAC was set

up. Back in the 1990s, the entire state enterprise sector, in aggregate, produced

essentially zero profits. State enterprise profitability has recovered significantly since

that time: most loss-making firms were shut down; surviving firms shed millions of

redundant workers; and firm management improved significantly. State industry today is

much smaller than it was in the 1990s, but much more profitable. SASAC firms have

been an important part of this transformation. SASAC firm profits soared to just shy of 1

trillion RMB in 2007, increasing from 2% of GDP in 2002 to 3.8% of GDP, as shown in

Figure 2. (For comparison, ExxonMobil’s record $40.6 billion profit in 2007 was equal

to 0.2% of US GDP). With substantial sums of money at their disposal, SASAC firms

have financial clout that reinforces their economic importance. Indeed, the wealth of

these large firms became a public issue in China in the wake of the publication of the

eye-watering 2007 figures. In the event, the arrival of the global financial crisis a few

months later dealt a major blow to SASAC firm profitability. When, after 2009, profits

began to recover and it became clear that the prominent financial position of these firms

had not fundamentally changed, SASAC switched from reporting gross profits to

reporting a more moderate-looking net profit (deducting profit taxes and other

remittances to the government). Despite these accounting tricks, it is quite clear that the

main SASAC firms continue to dispose of enormous financial resources.

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SASAC firm profitability is highly concentrated. In 2006, nine firms contributed

69% of total SASAC profits; in 2008, the top nine contributed 64%; and in 2009, 72%.

Seven firms were in this elite list in each year: the three big oil companies; the two top

telecom firms, and Baoshan Steel and Shenhua Coal.3 The most profitable firms—those

in petroleum and telecom—operate in protected markets that keep profit margins fat. A

key feature of China’s state firm strategy coming out of the 1990s was the creation of

limited competition in most crucial markets. The three oil firms have different areas of

concentration but also compete as potentially integrated firms; three telecom companies

compete with mobile services; and even the five main military industries were split into

two potentially competing companies. Thus, the SASAC firms do not have absolute

monopolies, but they have substantial market power, and there are virtually

insurmountable barriers to new firm entry in most cases. Thus, SASAC profitability is

significantly due to the protected markets in which these firms operate. At the same time,

there is no doubt that these flagship firms are much better managed than before. In the

next chapter, Doug Guthrie, Zhixing Xiao, and Junmin Wang find that the performance

of SASAC’s listed firms is indeed stronger than traditional SOEs. The top firms are the

elite club of the SASAC group, and it is from this group that most of China’s national

champions are likely to be drawn.

A focus on the biggest SASAC enterprises is certainly justified, but it could

alsoYet, to say that central SASAC owned exactly 196 corporations can also give a be

misleading. Most of the big enterprises directly under SASAC are in fact sense of the

central state enterprise complex, as well as of the complicated and drawn-out process of

transformation. In fact, these 196 corporations were umbrella organizations that own and

run including many subsidiary more state companies. Figure 3 provides an overall view

of the state enterprise sector in 2008, which permits both a broader and a more precise

picture. By the end of 2008, the top SASAC firms had been reduced to 142, after several

rounds of consolidation. But the total number of companies subordinate to SASAC was

a remarkable 17,638. The average top level SASAC firm—which probably evolved from

3 The electricity companies and China Aluminum (“Chinalco”) enter and exit the elite list depending upon resource prices and regulations. See Zhang Yuzhe 2007; and company profit data at http://www.sasac.gov.cn/2010rdzt/pjj/09fhgyzcyy.htm.

8

a former ministry—had more than 120 subsidiaries, sometimes Each of the large

corporations directly owned by SASAC was itself typically the owner of multiple

subsidiaries, sometimes indeed hundreds of subsidiaries organized in two or three layers

of companies. Figure 3 also shows that there is still a significant central government

enterprise sector outside of SASAC, including, for instance, the railways. These are less

important in industry, but still significant in transport and a range of social services

(financial firms are not included in this Figure). When it was established, in In 2003,

SASAC did not even know how many totalthe number of companies of which it was in

charge of, nor the value of the assets they were supposed to manage. Over the next few

years, one of SASAC’s main activities was discovering assets and clarifying ownership

relations, while also consolidating and restructuring firms. resulting in the data we show

in Figure 3.

It is useful to think of the central state sector as a gigantic pyramid. The pyramid

is being transformed by a long and drawn-out process of change, some of (the main

features of which are described in the following section). The formerWhat was once a

bureaucratic edifice has not been completely dismantled, but it has now been

incompletely transformednow more closely resembles into a network of businesses. The

largest firms sit at the top of the economy, with their near-monopolies giving them a

privileged position. But other SASAC firms, and the thousands of subsidiaries of these

firms, inter-mingle with other levels in what—which Margaret Pearson, in her chapter,

describes in her chapter as a “tiered” economy. As a first approximation, it is useful to

think of the central enterprise pyramid as being relatively market-oriented at the top and

at the bottom. Presiding over At the top of the pyramid, SASAC has advanced a vision

in which the of a publicly-owned sector would be gradually transformed into a system

where all firms are converted into joint stock companies, managed efficiently, and

controlled by their owner where firms are managed through capital market operations

processes, much as a sovereign wealth fund manages its investments. At the bottom of

the pyramid, many of the best enterprises have been thoroughly restructured into market-

oriented corporations, and quite a few thrive in the face of vigorous competition.

However, the transformation process still has much to accomplish in the least-reformed

9

“middle layertier.” In this middlee middle layer, a tangle of competing interests mixes

bureaucratic recalcitrance, agency loss, lack of transparency, and stubborn problems that

have been swept under the rug. SASAC seeks to gain and retain control over this realm,

and also to rationalize and modernize its holdings in accordance with a modern economy.

To penetrate further into the situation in the middle layer, it is necessary to examine the

dynamic processes of institutional reform carried out under SASAC’s auspices. As

mentioned above, SASAC pursued a two-stranded agenda of improving corporate

governance and restructuring the state sector. Immediately under SASAC are the peak

corporations, most of them evolved from former ministerial bureaucracies. We can now

piece together a fairly precise picture of this pyramid as of the end of 2006 (See Figure

1).4 The number of peak firms directly under SASAC had declined to 161 (and would

decline further to 12249 by July 20108), but the total number of firms of all kinds,

including all subsidiaries, was a whopping 16,373, more than 100 subsidiaries per peak

firm. Moreover, this empire included 11 million employees and assets worth 12.2 trillion

RMB (about $1.5 trillion). After more than thirty years of reform, the central state sector

in China not only remainsis intact, but big and, as we shall see, continues to growing,

both directly and indirectly through new organizational forms in the private sector.

Along with these enterprise reforms, China has adopted the entire panoply of

modern market institutions. It is not surprising, however, to find that behind-the-scenes

implementation occurred more slowly than surface change: nominal change naturally

runs ahead of substantive change. In China, while the “shell” of a new set of institutions

has been created, they do not necessarily function according to the new institutional

regulations. Many new institutions have yet to establish an authoritative and credible role

for themselves, while the legacies of old bureaucratic relationships remain intact (Pearson

4 Figure 1 aggregates data for 2006 that for the first time in nearly a decade give us an accurate overview of the state sector. The official data in the Statistical Yearbooks, for example, say that there 26 million state enterprise employees (2007: 132), but this covers only workers in traditional state-owned enterprises. The accurate number of 37.74 million includes workers in corporations controlled by the state. Sources for Figure 1: SASAC Yearbook (2007), pp. 583-596; Statistical Yearbook (2007), pp. 518-520; Industrial Economy Yearbook (2007), pp. 6-10; 54-59.

10

2005). Examining the state enterprise sector gives us a perspective on this broader issue.

The following examines this sector, with the focus on central SASAC’s firms.5

1a. The Slow Transformation of the Enterprise SystemSlow Progress

of Corporatization

Both strands of SASACs agenda were based on the The most fundamental

change, driving every aspect of the transformation, has been the conversion of state

enterprises into corporations. “Corporatization” (gongsiufenhua) came relatively late to

the Chinese economic reform process: , having been relatively unimportant through the

1980s. In 1993, at the beginning of the highly productive 1990s in the kick-off of the

second era of reforms, the reform blueprint called for the adoption of a “modern

enterprise system,” a euphemism for corporatization. State-owned firms were to be

converted to a corporate organization, under the provisions of tThe Company Law ,

which came into effect on July 1,in July 2001994, and under this Law traditional state-

owned enterprises were to be re-organized into one of a variety of corporate forms. The

creation of joint stock company listed on the stock exchange was the most thorough

option, but enterprises could also be re-organized without listing on the stock exchange,

including through the formation of a limited liability corporation with a single (state)

owner. Reformers saw corporatization as key to both their main policy objective. As a

fundamental reform of . This was a change focused on institutions of corporate

governance, corporatization permitted much greater clarity in the relations between

owner and manager, giving managers a more clearly delineated scope of authority, while

also allowing the creation of better types of incentive payment. At the same time, the :

the corporation was viewed as a superior form for managing state assets. Reformers

believed in A crucial part of the superiority of the corporation as an institution of

corporate governance because it would provide was the greater flexibility it permitted in

5 Whenever the term SASAC is used in this paper without modification, it should be understood as referring only to the central government SASAC, and not to the numerous provincial and municipal SASACs thatwhich have been created in the years since 2003.

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a broader process of restructuring, since it provided new avenues to merge including

merging firms, spin-off peripheral companies and assets, and raiseing funds through

listing on stock markets.

The reform process was launched under conditions of considerable urgency. State

enterprise profitability had been declining for years, as state firms were increasingly

exposed to market competition. However, by the mid-1990s, state firms faced a genuine

profitability crisis, as the net profit of state industry, after losses had been deducted, had

dropped to only 0.6% of GDP.

Notwithstanding the central importance of corporatization—and the urgency of

the reform challenge— economic conditions, the actual conversion of enterprises into

corporationsfirms has been an astonishingly long and drawn-out process. Once the legal

framework provided by the Company Law was in place (in had provided the legal

framework for corporate re-organization (1994), the actual pace of reorganization was

decided by the supervisory departments of the traditional SOEs. Progress was decidedly

uneven, and many firms remained traditional SOEs for more than a decade.

Transformation of enterprises on a case-by-case basis was inevitably a long, drawn-out

process. Up until 2002 (the year before SASAC), only 30.4% of the firms that came

under SASAC’s control had been reorganized under the Company Law, after eight years

of efforts. SASAC was therefore keen to accelerate the pace of corporatization.

However, by the end of 2008, this share had increased to 64.2%, which is a significant

increase, but not much of an acceleration. Thus, fourteen years after the adoption of the

Company Law, a third of SASAC’s firms have still not been converted (Ji Xiaonan

2010). Even this overstates progress because, after all, the largest firms, the holding

companies at the top of the pyramid are the most important firms. Less than half of these

have been converted into corporations under the company law, so the majority are still

traditional state-owned enterprises with “managerial responsibility systems” (SASAC

Yearbook 2009: 57-58).

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Why has this process been so slow? In the first place, many enterprises were

simply not robust enough to survive in a market environment, and corporatization

became entangled with the decision about which firms to shut down. Local governments

in such cases frequently just cut loss-making firms loose, shut them down or sold them

off to any available buyer. But central government enterprises were more commonly shut

down or restructured through a process of “policy bankruptcy.” Waves of expensive A

first wave of policy bankrupticies extended over fifteen years. began in October 1994,

and a second wave in 2005 -2008. Policy bankruptcy is expensive, because the emphasis

is on re-locating redundant workers. Enterprises first wrote off their bank debt and sold

off their valuable assets, especially land, then restructured (if feasible) or shut down.

“Policy bankruptcy”. Then firms were restructured to make them competitive and, if

possible, retain as much labor as feasible. If additional funds were required to relocate

workers, local governments were required to contribute. According to the best estimates,

this process eventually relocated 10.18 million workers, and closed down or restructured

5,600 enterprises. Covered Eenterprises within the central plan for policy bankruptcy

wrote off a total of 464.1 billion RMB in bank loans, and . The total cost of the program

was about one trillion RMB (is estimated to have about 1,000 billion RMB, or about 10%

of About 10% of GDP in 2000, the mid-point year). (not just for ce-ntral government

enterprises). The second round of policy bankruptcies was scheduled to be wound up

during 2008, and while it will not quite meet the deadline, is largely complete (Kang Tai

and Wang Biqiang 2008; China Daily 2005).

SConversely, some enterprises possessed obviously extremely valuable assets.

This creates a completely different set of eir value created an incentives: there may be a

struggle for control, or for bureaucrats may seek ways to quickly corporatize rapidly,

especially if that enables them to list a joint stock corporation on the stock exchange,

which can raise money quickly. , since that created a package that could be listed on

stock markets, and thereby raise money for the government. The most striking examples

of this process were China’s petroleum companies. In 1998, three existing oil companies

were restructured into partially competing potentially integrated oil companies: Sinopec,

CNPC (Petrochina) and China National Overseas Oil Corporation (CNOOC).

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Subsequently, each firm packaged its highest quality assets into a fully corporatized

subsidiary. Between April 2000 and February 2001, each subsidiary was listed on the

New York and Hong Kong Stock Exchanges and a minority stake sold, raising $3.5

billion in the case of Sinopec. International oil majors, such as BP, ExxonMobil and

Shell took significant stakes in each of the companies. Domestic listings followed later:

Sinopec raised $1.4 billion listing on the Shanghai Exchange in August 2001. D, but

thereafter domestic listings were suspended for several years, but when put on hold by

the prolonged downturn of the domestic market. Petrochina was richly rewarded for

waiting: when it listed 2% of its shares value in October 2007— at the peak of the

Shanghai market bubble— it earned a whoppingstrapping $8.9 billion. (In fact, after

further appreciation, the company briefly had a theoretical market value that surpassed

that of ExxonMobil). A month earlier, ; Shenhua Coal, the central government coal

mining enterprise corporation, Shenhua Energy, had earned almost as much in its in an

IPO. a month earlier.) The attraction of these windfall gains remarkable returns for

minority stakes led bureaucrats to push forward the corporatization of other these

attractive assets.

But it was not easy to list only the valuable assets. To make the new listed

companies attractive, severe over-staffing had to be addressed. Some 360,000 workers

were laid off from CNPC by 2000, creating unrest and violent demonstrations in Daqing

and other parts of northeast China (Zhang 2005; Downs 2008). Lay-offs were only part

of the story. Government ministries created attractive candidates for stock market listing

by carving out the attractive productive assets they possessed, and stripping them of their

burdensome liabilities (social services and bank debt). This ensured that listing

candidates were presentable, and that listings were successful. But in order to quickly

implement this practice, virtually all listed SOEs left behind significant employees and

assets, often low-quality, in a non-listed parent firm. Seinfeld (1998) described how this

process worked for the Ma’anshan Steel Company. At one extreme, there are parent

firms that now consist of nothing more than a collection of junk assets that were left over

when all the valuable assets were packaged into a firm that could be listed on the stock

market. In the petroleum industry, virtually all the valuable oil and gas producing and

14

refining properties were put in the listed vehicles, while most of the money-losing

services and welfare firms were put into “successor” (cunxu) or “left behind” firms. For

example, after CNOOC (the China National Offshore Oil Corporation) was listed, it ,

after listing had 1,000 employees in its listed firm, but 16,000 employees in left behind

firms. The former was highly profitable, while the latter were significant loss makers.

The parent CNOOC group company used the dividends from the profitable listed

company to offset the losses of the left behind firms. Of 1.5 million workers in the

original CNPC, only 480,000 remained in the new Petrochina, the listed company, even

thought the listed vehicle included nearly all of CNPC’s core production assets.

Thus, while a few highly visible firms were restructured quickly, the majority of

firms languished in a traditional SOE bureaucratic mode. When central SASAC was

finally established, it found that only 30% of its subordinate firms had been reorganized

under the Company Law (as of 2002). A key part of SASAC’s agenda has therefore been

to accelerate the pace of corporatization and re-organization. By 2006, the share of

central SASAC firms reorganized under the Company Law had increased to 64%, but this

is, after all, more than a decade after the adoption of the Company Law. Even when

firms were within the reorganized into corporations, they were slowly in carrying out the

full range offirms, progress in actually allocating authority according to the provisions of

the Company Law has been slow. Corporate governance reform slowed further virtually

ground to a halt for several years after 1998. Boards of Directors are a requirement of the

Company Law, but little had been achieved by 2003. It turns out that when scores of new

companies were created in 1998, the demand for qualified people had simply

overwhelmed the supply, and then-Premier Zhu Rongji declared that setting up Boards of

Directors could wait until a later stage. Today, most of the several thousand SASAC

firms reorganized under the Company Law do not have actively functioning Boards.

(Joint stock companies listed on the stock exchange The listed firms, of course, are

required to have such boards.) SASAC’s response has been to try to restructure the top-

tier firms into higher quality corporations with two attributes: they would be “100%

listed” (that is, all of their assets would be incorporated into the listed company) and they

should have functioning boards of directors with outside, independent directors.

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Unfortunately, progress on this ambitious agenda has been slow. As of the end of 2008,

only some 20 SASAC firms could be considered to be “100% listed,” even by a loose

definition; and 24 SASAC firms were carrying out “experiments” in which independent

Directors make up half or more of the Board of Directors (Ji Xiaonan 2010). This shows

SASAC’s intent, but also the difficulties and delays it has experienced in carrying out its

agenda. ; and as of 2007 19 of the firms directly under SASAC were participating in an

experiment by having an authoritative Board of Directors with outside directors (of these,

14 had a majority of outside directors). (Li Rongrong 2007). Nearly everyone agrees that

these large state firms are much better managed than in the past. But progress has been

slow limited in setting up structures of authority within the firm that guarantee

independence and transparency.

1b. Further Restructuring the State SectorAccording to Capital

Market Principles

Beyond In addition to transforming the transformation of corporate

governance, SASAC has sought to drive a further restructuring of central government

assets. From the beginning, their approach has been dynamic and flexible, and they have

held to the idea that state ownership could expand in some areas, while it should retreat in

others. The existence of a minimum level of competition is a pre-requisite for everything

else. I focus here on three , an appropriate response both to the substantial ongoing

problems and to the incredible dynamism of the economic environment in which they

must work. Rather than tracking the numerous programmatic documents SASAC has

issued, I extract five consistent principles that have guided SASAC’s actions, and which

are especially prominent in the words of Li Rongrong, the head of SASAC from its

creation in 2003 until his retirement in 2010:

(a) Sectoral Concentration: SASAC has consistently held that its job is not to

reduce state ownership per se, but rather to optimize the value of state assets

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by making them more fluid and concentrating value in sectors where there is

some rationale for public ownership. In practice, this means sectors with

national security, natural resource or natural monopoly characteristics. In

2005, SASAC head Li Rongrong specified that this meant “full control” in

seven sectors: military industry, electricity, oil, telecommunications, coal,

civil aviation and transport. In these sectors, government capital should

increase and be optimized, while key enterprises should be developed to

become internationally competitive firms. In nine9 other sectors—including

steel, electronics, machine-building, and autos—the center should maintain

control over a number of technologically advanced keypoint enterprises. State

ownership should both advance and retreat. Overall, however, state

ownership should become more concentrated in four dimensions: in

nationally strategic sectors; in sectors where the state is already competitive or

can play a key catalytic role; in a few firms with potential international

competitiveness; and with firms being more focused on their core businesses

(State Council 2006; Ren and Liu 2006).

(b) Market Leadership: Taking a page from the playbook of Jack Welch,

legendary CEO of General Electric, Li Rongrong has repeatedly declared that

central SASAC’s firms should be number 1, 2, or 3 in their main business, or

should be shut down. This means a consistent focus on “core business” and a

sustained attempt to get SASAC firms to pull out of, or spin off, their “non-

core” enterprises. As SASAC consolidates firms, Li Rongrong repeatedly

insisted thatIndeed, by 2010, the number of central SASAC firms should

should was supposed to shrink to 80-100 total firms (and certainly less than

100). As part of this, the ground should be cleared for the emergence of 30 to

50 globally competitive firms. . Although this target was not reached as of

2011, the official principle underlying such statements endures: (down from

196 initially and 149 as of July 4, 2008). Good firms should grow and only

the strong firms should survive.

17

(c) Structured Competition: Firms should not possess monopolies. Although this

principle does not feature in SASAC’s programmatic documents, it emerges

clearly from its actions. Each of the five main military industries has been

split into two potentially competing companies. When the petroleum firms

were reorganized in 1998, the previous vertical division of labor was replaced

by one in which all three firms could potentially become vertically integrated

competing firms. The telecom business is divided among three main

competing firms. While SASAC firms have substantial market power, none

has an absolute monopoly.

(d) Restructuring Vvia Capital Markets: SASAC declares, in effect, that it should

pay its own way. Purely administrative reshuffling should not be used to

restructure the state sector, since now “ownership” has been clearly defined

and should be respected. As owner, SASAC can, of course, still tell state

firms what to do. However, restructuring But it should work be carried out

through capital markets to acquire and sell assets. In order to do this, SASAC

needs financing, and it needs instruments. SASAC embarked on a long

campaign for a “Capital Asset Management Fund” to finance the restructuring

process. Moreover, it has As we discuss below, SASAC usesd firms under its

control to carry out restructuring by acquiring other firms.

At the same time, it does not always follow its own guidelines, or it follows

them only nominally.

Diversity of Business Models: Even though traditional heavy industries lie at

the heart of SASAC’s empire, SASAC has actively supported firms

developing non-traditional business strategies. Perhaps the clearest example

is Sinosteel, a steel trader. Sinosteel has moved aggressively to acquire iron

ore, chrome, nickel and uranium assets overseas, but it possesses no steel

manufacturing capacity. Instead, it pursues an integrated trading and steel

services model, which has been quite successful (Shen 2008). Another

example is the China Merchants Group. This is a direct descendant of the

18

firm founded in 1872 by Li Hongzhang. Over the years, it became a

bureaucratic subdivision of the Ministry of Transportation (within China), but

always maintained a separate presence in Hong Kong. After playing a key

role in the development of Shenzhen, the first Special Economic Zone, the

firm has continued to evolve into a diversified group. China Merchants Group

now It has more than 60 subsidiaries, and engages in container shipping,

ports, expressway development, real estate and finance. The holding

company is one of the SASAC central firms.

Based on these principles, SASAC has continuously tried to remake the state

sectors in the years since its creation.

As is the case with respect to corporate governance, progress in restructuring has been

uneven. One of Li Rongrong’s most cherished goals, the consolidation of SASAC firms

into 100 or fewer firms by the end of 2010, was not achieved. The target was abandoned

about the time Li Rongrong retired, and there were still 122 top-level SASAC firms as of

the end of 2010 (SASAC 2010). The drive for sectoral concentration has also met with

mixed success. The attempt to define exactly what sectors central government firms

should be focused on never really produced a coherent outcome. The initial rationale

covered natural resources, national defence, and public utilities, which are areas where

developed countries often relied on public ownership in the past, and in which extremely

robust regulatory agencies were needed to substitute for public ownership. However,

after intensive debate and lobbying, SASAC ended up also calling for continued state

presence for individual firms in other sectors, provided they were “highly competitive”

and/or “technologically advanced.” With such a definition, there really was no clear

dividing line showing what government firms shouldn’t do. The definitional exercise

that Li Rongrong announced in 2005-2006 never had a definitive outcome. A State

Council document called for a precise list of sectors and firms, and this was clearly

expected in 2006-2007 (State Council 2006; SASAC Yearbook 2008: 25-27). However,

such a list has never been approved, or if approved, has never been openly published.

The result is that although central firms are clearly concentrated in a few key sectors

19

(which are often also profitable), they continue to sprawl into most parts of the economy.

By one standard Chinese classification, there are 99 total economic sectors. Of these 99,

the top level SASAC firms are represented in 41, but their first level subsidiaries are

represented in 81, and the next level subsidiaries in 87, sectors (Ji Xiaonan 2010).

Clearly, state firms are having some difficulty “withdrawing” from some of the sectors

they ought to be vacating.

1. Outcomes

The main outcome of this protracted process of restructuring and corporatization

has been a dramatic return to viability and an increase in the relative importance of the

large-scale central government-run sector. Tables 1 and 2 compare 2002 and 2006,

showing that the Central SASAC empire has grown in size over that period. Between

2002 and 2006, the number of employees in SASAC firms grew from under 9 million to

11 million; and SASAC assets increased from under 7 trillion RMB to 12 trillion RMB

(about 75% in current prices). These figures reflect the fact that the most painful

downsizing for big firms was completed by 2002; that privatization of large-scale firms

was halted after April 2005; and that the process of building large, internationally-

competitive national champions has allowed some SASAC firms to expand through

acquisitions.

Even more striking is the relative position of central SASAC in the overall state

economy. Since the other parts of the state enterprise sector have continued to shrink,

SASAC’s relative weight has increased substantially. SASAC now accounts for almost

30% of all state enterprise workers (up from 17%), and almost 40% of state industrial

enterprise workers (up from 24%). Since SASAC firms are much more capital-intensive

than other parts of China’s public economystate industry, SASAC now accounts for 54%

of state industry assets (up from 48%). To a significant extent, this reflects the gradual,

steady withdrawal of state ownership from ordinary competitive sectors, in accordance

with general policy guidelines. The resulting concentration in capital-intensive heavy

20

industries—in which central SASAC specializes—leaves central SASAC with the

dominant position within state-run industry. Finally, it is striking that through four years

of explosive national industrial growth, the share of SASAC’s large firms has scarcely

changed. SASAC’s share of all workers in above-scale firms slid only slightly from

10.8% to 9.8%, and its share of assets slipped from 29.9% to 25.8%. SASAC’s role in

the exploding Chinese industrial economy is just as central today as it was in 2003five

years ago.6

Indeed, in one respect, SASAC firms are more important than they were several

years ago. SASAC profitability has rebounded strongly since 2002. Overall, state firm

profitability has recovered significantly from the mid-1990s. State industry, despite

being smaller today than it was in 2002, is more profitable, even scaled to rapidly rising

GDP. Overall state industry profits reached 4.2% of GDP in 2007. As Figure 2 shows,

SASAC firm profitability has, in recent years, grown even more rapidly, reaching 4.0%

of GDP in 2007 from a lower base (central SASAC firms include many non-industrial

firms; it is only coincidence that the total profit figures are so close). In the next chapter,

Doug Gutrie, Zhixing Xiao, and Junmin Wang find that the performance SASAC’s listed

firms is indeed stronger than traditional SOEs. In short, Wwith substantial sums of

money at their disposal, SASAC firms have financial clout that reinforces their economic

importance.

It is not surprising to find thatYet the success of SASAC firms is also highly

concentrated, as only a handful of firms contribute the bulk of SASACs profits. Indeed,

in 2006, nine firms contributed 69% of total profits: the three oil companies; China

Mobile and China Telecom; Baoshan Steel; Shenhua Coal; Chinalco ( Chinese

Aluminum Company); and the State Electric Grid (Zhang Yuzhe 2007). The most

prominent firms, those in petroleum, telecom and electricity, operate in protected markets

6 The precise figures in these two paragraphs should be taken with a grain of salt, since the statistical system has only recently been collecting consistent data for the main categories we are using here. These include “above-scale industry,” “state and state-controlled enterprises,” and SASAC firms. Above-scale industry includes state firms and non-state firms with above 5 million RMB output, omitting very small firms that account for about a third of total output. SASAC firms for 2002 were just being inventoried by the newly established agency and there may have been some workers and assets omitted. Despite these caveats, the data are robust enough to support the generalizations made here.

21

that keep profit margins fat. The others have benefited from the global surge in energy

and commodity prices in the mid- to late 2000srecent years. These firms are the elite

club of the SASAC group, from which most China’s national champions are likely to be

drawn.

1c. Discussion: Limitations on SASAC’s Authority

The achievements of state sector reform should not obscure the its limitations to

the progress that has been made. In three important respects, progress has been much

less than would be desired. First, reform and transparency has progressed relatively

slowly in the “middle layer” of firms in between the “top” (SASAC) and the “bottom”

(especially firms listed on the stock markets). This middle layer is extremely complex,

characterized by diverse organizations that run the gamut from worthless shell companies

to rich and powerful conglomerates. SASAC presides over not so much a portfolio of

enterprises as a grab-bag of semi-bureaucratic intermediate agencies. In China’s stock

market today, most listed companies have parent firms that are also state-owned firms.

Those parent firms, typically labeled something like group companies (jituan gongsi), or

investment companies (touzi gongsi), are much less transparent than are the listed

companies. These parent firms do harvest profits from their subsidiaries. Dividends are

paid up to this middle layer, which currently has the authority to control and reinvest

these funds. This creates an enormous scope for non-transparent related-party

transactions between parent and subsidiary, which are linked by multiple ties and

numerous types of business transactions. The resulting lack of transparency has been an

enormous drag on the Chinese stock market for years. Indeed, some of these corporate

parents are utterly dependent upon their listed subsidiaries to pay their bills (including

paying interest on debt assumed from the subsidiary).

However, these middle level firms are not necessarily poor and economically

dependent. Quite the contrary, since the middle level firm still controls both the

profitable and non-profitable firms, the middle level firms often operate with enormous

22

discretion. Since these firms were carved out of the ministries, they can rely on strong

networks of cooperating bureaucrats and officials, and they are not very transparent.

Particularly following the revival of state sector profitability, some of these organizations

are extremely rich and powerful. The state companies under central SASAC’s purview

include, for example, the State Electricity Grid and the big Electricity Companies, some

of the biggest and least transparent companies in China, and military-linked companies

like Baoli and the Nuclear Industry Corporation. These companies have long standing

links to top Communist Party officials, in some cases specific families. They have power

as well as money. This middle layer of the state economy is the least transparent and

least reformed part of the state economy.

Understanding the middle layer of the state economy helps understand to reveal

the other limitations on SASAC’s role. Ironically, despite the fact that SASAC is a

modern “ownership agency,” it does not fully dispose of the two most salient

characteristics of ownership. Until very recently, SASAC has had no direct control over

the stream of net income—the profits—that SASAC firms earn. In terms of the pyramid

we described earlier, profits move upward but only up to the “middle layer,” where they

are quarantined by the parent companies. Parent companies thus have substantial

retained profits and dividends, and they use these funds to draw up and make their own

investment plans.7 For example, listed firms pay dividends to their “owners,” when those

owners are the group companies of the “middle layer,” (as our story about CNOOC

illustrated). But the money has typically gone no further up the hierarchy. This state of

affairs originated in 1994, at a time when state firms were making little in profits anyway.

In order to strengthen the financial position of state firms and build support for further

reforms, the requirement of remitting after-tax profits to the government was abolished.

From that time until mid-2007, state firms paid no dividends and remitted no profit to the

government. Change came only in 2007, with a new requirement that firms remit 5% of

their after-tax profits to the government (or 10% for the handful of firms in natural

monopoly sectors, such as oil). Even with this modest new financial source, SASAC was

frustrated in its effort to claim direct control over the funds remitted. The Ministry of 7 In order to legimitize this relationship, the parent companies have generally been designated “delegated investment agencies” (shouquan touzi jigou).

23

Finance insisted that remitted dividends go into the national budget first, and only then be

reapportioned to SASAC, when necessary, for restructuring and reform costs. Moreover,

it took SASAC more than two years to push this change through, suggesting the depth of

organized interest group resistance to the change.

The third limitation on restructuring is the fact that SASAC does not directly

appoint the most important managers of the companies it “owns.” To be sure, SASAC is

supposed to possess appointment power, since that is the means through which its control

of state assets ought in theory to be realized. But the reality of a Communist Party

system is that the Party makes the ultimate decision about all key personnel matters

(Chan 2009). Central SASAC shares appointment power with the highest organs of the

Communist Party. Unusually, specific details of the arrangements have been openly

published: for the 53 largest SASAC enterprises, the top manager and chairman of the

Board are appointed directly by the Communist Central Committee Organization Bureau

(Communist Party of China 2003). These positions are simply too important, as

patronage posts and controllers of resources, to slip out of the hands of the Party.

Typically, the head of these firms has ministerial rank in the Chinese system, which is

prized. As a result, true SASAC personnel power begins with the smaller firms and at the

vice-manager level for the largest firms.

The Communist Party uses its control over the personnel process to reinforce or

pre-empt the emergent institutions of corporate governance. Although SASAC

nominally exercises the government’s role as owner, the Communist Party continues to

make the most important personnel decisions. More generally, as McNally (2002) lays

out, the Party Committee lies at the center of a network of interacting organizations that

hold ultimate authority in the state-run corporate sector. Ordinarily, the Party chooses to

exercise power in the background, especially when the foreground institutions are

functioning well. But in the event of a mishap, the direct control relationship can always

be resumed. This is particularly useful in a situation where nascent regulatory institutions

are imperfect, not arm’s length, and sometimes incapable of performing their function. In

these cases, the hierarchy simply makes rulings directly, especially through personnel

24

decisions. This capability gives China’s institutional innovations and organizational

repurposings reforms a robustness that is not available to others.

Currently, this type of direct control is facilitated because virtually all of the state-

owned enterprises have a government controlling share greater than 51% of the total

equity outstanding. This means that in appointments to the Board of Directors, the

traditional (i.e., Communist Party-run) personnel appointment procedures are not really

controversial. Whatever the negotiations necessary among SASAC, the Organization

Department of the Party, and other stake-holders, they take place behind the scenes and

are basically irrelevant to the other shareholders. The owning “family” may have its

squabbles, but once the family closes ranks, it decides how the family business is to be

run. In their analysis of pyramidal groups in this volume, Dylan Sutherland and Ning

Lutao similarly find a high degree of insider control. The challenge will be to take this

system one step further toward truly diversified ownership. Today, officials face long-

term career incentives that were increasingly stable and predictable. This “incentivized

hierarchy” strongly characterizes the Chinese system, and is intertwined with the

Communist Party’s survival and reinvention of its role (Naughton 2008a). However,

these changes tend to reward generalists and reinforce the authoritative role of generalists

in the hierarchical system. It also implies that managers of state firms have very strong

incentives to subordinate the interests of their specific firm to that of the nation. Given

From the incentive characteristics of this type of state capitalismte system, we would

expect to see that Chinese firms would shape their behavior to conform to the wishes of

their bureaucratic and regulatory superiors.

Managers today receive conflicting messages are facing increasing conflicts about

their objectives. The profit crisis of the state sector has passed, and as a result

government policy-makers have lost the exclusive focus on profitability thatwhich led

them to accept painful restructurings in the 1990s. Instead, under the Hu Jintao-Wen

Jiabao leadership, policy has soughtseeks to make China’s growth more sustainable, and

to spread the benefits of growth more broadly among society (Naughton 2008b). These

are admirable goals. But the blending of social policy goals with economic ones is means

25

that enterprises now face a situation where supervisory bodies with a mixture of

managerial and regulatory authority have been given a broader and more diverse policy

mandate. In addition to establishing workable markets, supervisory authorities are now

supposed to achieve energy conservation, reward good corporate governance, and protect

the public’s health and safety. This expansion of policy mandates may create the

undesirable outcome that “regulators” are increasingly intervening in multiple

dimensions of firms’ operational decisions, an observation that is further detailed in

Margaret Pearson’s chapter in this volume. This may actually make it harder to separate

the regulatory from the managerial authority that we would otherwise expect as the next

step in institutional consolidation and market transition.8 In other words, China’s brand

of state capitalism includes politically-defined goals that extend beyond the state

ownership of economic production. This raises broader issues of how China’s political

leaders will choose to define these non-business mandates.

4. The New National Champions: The System

The SASAC firms are a very important part of China’s economy. They control the

energy resources and most of the transportation infrastructure of the country. Moreover

the large defense industry conglomerates make up the entirety of China’s military

industrial complex. Most of these firms provide intermediate goods and services to

China’s domestic economy. However, we should note that the SASAC firms are not the

most technologically dynamic firms, and they are not a very important part of China’s

export economy. All central SASAC firms in 2006 provided $35 billion in exports, only

3.6% of China’s total exports (SASAC 2007). By contrast, foreign-invested firms

produced over 60% of China’s total exports (Ibid?). If we examine the high-tech sectors

that are of particular concern outside China, the imbalance is even more extreme. Only a

tiny handful of central SASAC firms produce any high tech exports at all, and 87% of

high tech exports were produced by foreign-invested enterprises in 2007 (Ibid?).

8 In contrast, Dali Yang views the growth of China’s regulatory state as facilitating market transition. Dali Yang, Remaking the Chinese Leviathan: Market Transition and the Politics of Governance in China (Stanford: Stanford University Press, 2006).

26

Thus, SASAC’s national champions do not constitutemake up the leading edge of

the Chinese economy. They do not have the same kind of potentially brilliant future that

firms like Huawei or Hai’er might seem to have. The technologically dynamic firms are

typically hybrid firms with some government participation, but with substantial private or

independent ownership as well. It is true that Baoshan Steel follows a legacy established

by Nippon Steel, POSCO in Korea, and China Steel in Taiwan, in which state ownership

or state sponsorship was used to build a world-class supplier of high quality industrial

inputs, underpinning other dynamic sectors. ButSimilarly, SASAC firms are not

repositories of the nation’s future hopes in the way that, say, Samsung is in Korea or

Taiwan Semiconductor Manufacturing Company (TSMC) is in Taiwan. (It is true that

Baoshan Steel follows a legacy established by Nippon Steel, POSCO in Korea, and China

Steel in Taiwan, in which state ownership or state sponsorship was used to build a world-

class supplier of high quality industrial inputs, underpinning other dynamic sectors.)

SASAC’s elite firms are not the cutting edge.

More generally, then, SASAC’s role is as best characterized as providing a sturdy

foundation for China’s rapid growth. SASAC firms provide a stable supply of energy,

power, transport and communication services, and industrial materials. So far, they have

done so rather successfully. China’s economy has occasionally, in the last few years,

seemed on the brink of shortages of electricity or transport. But in fact shortages have

not materialized of sufficient seriousness to hobble China’s spectacular growth. In that

sense, SASAC’s firms have succeeded. These firms are defensive national champions,

rather than offensive champions. But what then is the nature of the relationship between

government objectives and national champion firms? A few illustrative

examplesanecdotes are the best way to lay out this relationship.

2a. Stories of the New National Champions: Stories

27

Are China’s state-run companies are being transformed into national champions?

There are no simple answers, because of the substantial diversity among firms, and

because reform and restructuring are very much works in progress. However, it is

possible to assemble a few narratives that illustrate some of the most important trends:

Acquiring Resources Internationally. Chinese government policy generally

encourages Chinese companies to “go international.” There are many different strands to

this policy; for example, acquiring well-known foreign brands is encouraged, so that

Chinese producers of consumer goods can eventually differentiate their products and

become household names. However, by far the most powerful strand of the “go

international” policy is the drive to own and control natural resources on a global scale.

This is the area where China’s putative national champions have taken the leading role.

In the US, Tthe most controversial famous case, in the US at least, of Chinese

companies aiming to acquire resources has been the attempt by CNOOC (China National

Overseas Oil Company) to acquire U.S. oil company Unocal in 2005. Ultimately,

CNOOC was frustrated in its attempt when the competing bidder, Chevron, succeeded in

creating enough political uncertainty about CNOOC’s bid that Unocal’s Board accepted

their lower offer. The outcome was ironic. CNOOC (the listed company) presented itself

as a corporation that had been thoroughly modernized and operated on purely market

principles. Indeed, the fact that the listed company was fairly transparent, and met

financial disclosure requirements, allowed deal opponents to point out that of the total

$18.5 billion all-cash offer, $7 billion was financed by a loan from CNOOC’s parent,

$2.5 billion interest-free and the remainder at a 3.5% interest rate. (Other funding was

market-rate financing plus retained funds). The disclosure of this non-arm’s length

transaction with the government entity that is simultaneously the controlling shareholder

seriously undermined CNOOC’s presentation of the situation (“CNOOC’s bid for

Unocal” 2005).

The failure of CNOOC’s bid for Unocal was met with dismay in China, but the

reaction was also revealing. A few months later, CNOOC’s parent proposed to outside

28

shareholders an amendment of the legal arrangement between CNOOC and the parent.

Unusually, when it was listed, CNOOC was given the exclusive right to explore, develop,

or produce oil offshore and outside China: its parent, in other words, was forbidden to

compete in these respects with the listed vehicle. The outside shareholders rejected the

amendment (Poon 2006). The proposal by CNOOC’s parent would have put the parent

in the same position as the parent companies of the other Chinese oil majors. In the two

other cases, the parent takes the lead in international transactions, bringing in the listed

subsidiary only partially. CNPC, the parent of Petrochina, operates in Sudan and

Kazakhstan; China Petrochemical Corp, parent of Sinopec, teamed up with CNPC to buy

assets in Ecuador. In these cases, China utilizes the lack of transparency thatwhich

characterizes the “middle layer tier” of companies, particularly in the case of Sudan,

where there is an explicit effort to shield the listed company from the appearance of

involvement (Sudan Divestment Task Force 2007).

Resource acquisition has also been a main theme of some other main SASAC

firms. In 2008, Sinosteel recently succeeded in acquiring Midwest Corporation, an

Australian iron miner. In contrast to the CNOOC debacle, Sinosteel’s acquisition was

done with patience and finesse, and allowed Sinosteel to add Midwest to existing mineral

assets in Australia, as well as those in South Africa, Zimbabwe, Indonesia (Santini and

Carew 2008). Similarly, Chinalco (China Aluminum Corporation) made a strategic move

in February 2008 to buy 9% of Rio Tinto, the Anglo-Australian mining giant, in order to

prevent its acquisition by BHP Billiton. Arguably, that tie-up would threaten Chinese

steel producers as much as Chinalco, and blocking it was clearly in the interests of China

as a whole. What these episodes have in common is a simple generalization: the firms

most directly involved in overseas resource acquisitions are those closest to Chinese

government control.

Assisting Macroeconomic Price Stability. In order to contain the inflationary

pressures that became serious in 2007-2008, the Chinese government has recontrolled

prices for energy final products in gasoline and electricity. Prices for coal and crude oil

have already been placed on a market basis, but refinery product prices were effectively

29

capped. Obviously, these rules put China’s refiners and electricity generators in an

impossible position. From early on, China’s planners (in the National Development and

Reform Commission, or NDRC) agreed to pay subsidies to partially offset the impact of

this asymmetric regulation. Petrochina has plenty of crude oil, but Sinopec does not, so

the NDRC started with direct subsidies to Sinopec. The NDRC provided Sinopec with

RMB 9.4 billion in 2005; 5 billion in 2006; 4.9 billion in 2007, as world prices rose and

fell, and domestic prices sometimes caught up and sometimes fell behind them. Gas and

diesel prices were raised in November 2007, but even so the gap with world oil prices got

larger and larger. Sinopec was given 7.4 billion RMB for the first quarter of 2008, and

Petrochina received a staggering 12.3 billion RMB payment at the end of May, by far the

largest payment to date. However, despite their size, the direct subsidies are believed to

offset only about half of the losses the oil companies experience because of government

policy. According to estimates from China International Capital Corporation, total

implicit and explicit subsidies for oil products in 2007 were 220 billion, or 0.9 percent of

GDP, and by some estimates they may reach 2.2 percent of GDP in 2008 if policy is

unchanged and world oil prices average $130 a barrel (Naughton 2008c). It is interesting

that the petroleum and electricity companies are supposed to bear some of the costs of

price controls, but not all. Not wishing to expropriate shareholders, the government

provides significant compensation, but well below 100% of the costs imposed.

Creating a Chinese 3G Telecom Standard. The Chinese government has

invested substantial resources in the attempt to establish a home-grown Chinese third

generation (3G) telecommunications standards, known as TD-SCDMA.9 Those efforts

have included creation of a “production chain” of state-supported research and equipment

providers, anchored by Potevio (Putian), formerly the manufacturing division of the

Ministry of Post and Telecom and now one of the SASAC 150. Issuance of 3G licenses

for the existing international standards (WCDMA based on GSM; and CDMA2000 based

on CDMA) were put on hold as Chinese engineers tried to get TD-SCDMA ready for

market. While TD-SCDMA is clearly a technologically viable standard, the progress

9 TD-SCDMA stands for Time Division Synchronous Code Division Multiple Access.

30

from theory to practice has been difficult (as indeed was the case earlier for the other 3G

standards). As a result, roll-out of TD-SCDMA systems has been repeatedly pushed

back, and the promise to provide 3G service at the 2008 Beijing Olympics was missed.

Finally in May 2008, Chinese planners took steps to re-organize the three main

telecom firms in order to begin TD-SCDMA implementation. The challenge for planners

was to enable TD-SCDMA, but to act in ways that were not flagrantly inconsistent with

market rules, while also maintaining some degree of competition in the market. The

complex solution involved the dominant carrier, China Mobile, being assigned the

responsibility to develop TD-SCDMA. The implication of this decision is that

developing TD-SCDMA is a business handicap, and that only the highly profitable,

market leading carrier could undertake it, and then only when given a significant head

start. China Mobile absorbed a small player (China Railcom), and began to roll out its

TD-SCDMA network on a trial basis. China Telecom, previously a fixed-line provider,

was to purchase the CDMA network from China Unicom, and merge with China Satcom.

China Telecom was happy with this because it gave it the opportunity to enter the mobile

business for the first time, potentially gaining synergies with its fixed-line business.

China Telecom will develop CDMA2000-based 3G networks, but only after it absorbs

the CDMA network and receives a 3G license, which could be another year or more in

the future. Finally, China Unicom will merge with China Netcom, and is well positioned

to build a WCMDA-based 3G network, but again only after it receives a 3G license. This

complex, many-sided transaction was reasonably successful in keeping all parties

reasonably satisfied, not egregiously expropriating shareholders, and maintaining some

balance in the market (Luo 2008).

The great unanswered question is whether the expenditure of time and resources

on the establishment of TD-SCDMA is likely to ever come close to being a good

investment. In August 2008, the head of China Mobile acknowledged that TD-SCDMA

was “a few years behind” the other 3G standards, after trial operations met generally with

consumer rejection. Some analysts believe that China Mobile accepts the need to make a

good effort with TD-SCDMA in order to maintain its dominant position, but actually

31

expects the system to fail, and has preserved its flexibility to move quickly to the

WCDMA standard if that becomes necessary. What is striking is the asymmetry of the

costs and benefits in this situation. If TD-SCDMA is established, Chinese producers will

be able to negotiate for lower royalties in future equipment manufacturinge; will have a

shot at developing future export markets for TD-SCDMA based equipment; and will have

a better seat at the table as 4G systems are developed internationally. Any and all

benefits will by reaped by the equipment manufacturers. If TD-SCDMA fails, the costs

will be in resources wasted (hard to measure), and in the time costs of delaying China’s

move to 3G telecom and thus its participation in software and services that will develop

out of the new technological possibilities 3G makes possible. All the costs are being

borne by the telecom providers, or by the Chinese public.

Protecting the Domestic Machinery Industry. The stress on consolidating

SASAC firms into 80-100 firms creates strong incentives for firms to grow bigger,

reinstating some of the “expansion drive” of the old planned economy. In the last few

years, some of the big SASAC firms have engaged in substantial merger and acquisition

activity to support this goal. Ironically, their favorite take-over targets are often

relatively large, but locally controlled, state-owned firms. There is a widespread sense

that such takeovers are relatively smooth, since there are fewer cultural clashes than

would be the case in mergers between public and private firms. Moreover, as local

governments struggle to finalize their own restructurings—facing the fact that most of the

smaller public firms have already been restructured and/or privatized—they welcome

intervention by big SASAC companies. These dynamics have recently interacted with

an increasing will on the part of the Chinese government to protect the local machinery

industry from foreign control. A number of foreign tie-ups have been subtly or overtly

blocked.

A leader in this process is Sinosteel, the firm we have met in previous sections.

Through mid-2007, Sinosteel had acquired seven locally-controlled SOEs. Four of them

were large, locally run machinery enterprises, including Jilin Electrical Equipment

Company and the Xi’an and Hengyang Heavy Equipment Factories. The acquisitions

32

were in line with Sinosteel’s objective to provide integrated upstream and downstream

services to steel mills, but also clearly supported the government’s goal of keeping the

machinery industry out of foreign hands. In a related fashion, the Chinese oil majors

negotiated a tie-up with Shenyang Blower Works, to improve its bargaining position vis-

à-vis GE and Siemens, which were negotiating joint ventures (Da and Zhang 2007). Here

the firms’ interests a fairly well aligned with the governments’ interests: both sides

appreciate the comfortable relationship and protection from foreign competition, and the

firms enjoy the opportunity to grow.

What do these anecdotes tell us? Without doubt, as China’s centrally-run

enterprises return to economic health, they take on a special role as national champions.

They are afforded preferential treatment and partially protected, but still competitive

markets within China. Yet we see a strong tendency emerging. These firms are all being

used as instruments of national governmentstate policy. They are “national champions”

in the sense that they can be sent forth to battle for objectives the national government

wants to achieve. What is less clear is whether they are national champions in the sense

that they receive support from the statenation, and in return are expected to reflect well

on the nation by becoming internationally successful in their main businesses.

5. Conclusion

There has been remarkable change in the structure, organization and performance

of China’s central government-run enterprises. Those changes have created a crop of

national champions in certain senses of the word. The firms have been successful

playing defense: they have removed the danger that they would be financial drains on the

government or the banking system. They have successfully provided key inputs to an

economy growing at historically unprecedented rates. These are very substantial

achievements, and may be enough to declare success. No further privatization is in sight,

even dimly on the horizon. The wave of privatization that has washed over the Chinese

economy in the past thirty years now laps peacefully on the shores of this giant island of

public ownership.

33

At the same time, following these successes, these firms are increasingly being

used as instruments by for the central government in pursuit of its goals. Of course,

being used as an instrument is not necessarily bad for these firms. They receive resources

and high level attention as part of this use. But it is not necessarily beneficial to their

long-term growth. In that sense, while China has grown a crop of national champions,

those champions are currently working for the Chinese government. This key dimension

of China’s state capitalism system places political limits on the extent to which such

firms can pursue market-based objectives.

34

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Sources for Tables and Figures

Figure 1: Total workers in industry refers to workers in all “above scale” industrial firms, those that have gross output in excess of 5 million renminbi annually. Workers in state-controlled industry refer to those in traditional state-owned industrial enterprises as well as those in corporations in which the state has a controlling stake. Statistical Yearbook (2010), p. 526; Statistical Abstract (2011), p. 132.

Figure 2: Lian Yuming (2004). SASAC (2009), p. 17. Data from 2009 through 2011, SASAC website, accessed through data page: http://www.sasac.gov.cn/n1180/n1566/n258203/n259490/index.html

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Figure 3: SASAC Yearbook (2009), pp. 709-715

Tables 1 and 2: Lian Yuming (2004); Statistical Abstract (2003), p. 132; Statistical Yearbook (2010), p. 526: SASAC Yearbook (2009), pp. 709-715.

39

0

10

20

30

40

50

60

70

80

90

100

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Mill

ion

Wor

kers

Figure 1: Industrial Work Force

Total Workers in Industry

Workers in State-Controlled Industry

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-6mo

Perc

enta

ge o

f GD

P

Figure 2: Profit of Central SASAC Firms (Percent of GDP)

Gross Profit of Central SASAC Firms

Net Profit of Central SASAC Firms

41

State Enterprise Sector119,254 Enterprises

37.75 Employees, M.29 Assets (Trillion)

Central Government22,582 Enterprises

16.96 Employees, M.14.8 Assets (Trillion)

Local Governments96,672 Enterprises

20.79 Employees, M.15.65 Assets (Trillion)

SASAC Ministries16,373 Enterprises 6,209

11.04 Employees, M. 5.9212.2 Assets (Trillion) 2.6

Industry Commerce Other Industry Commerce Other6,610 2,226 7,537 Enterprises 1,020 699 4,490

7.23 0.25 3.56 Employees, M. 0.38 0.39 5.157.4 0.4 4.4 Assets (Trillion) 0.4 0.5 1.7

Industry Commerce OtherEnterprises 24,929 21,372 50,371Employees, M. 11.19 1.50 8.10Assets (Trillion) 5.9 1.0 8.8

Figure 1: State Enterprise Sector: Center and Local (2006)

42

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2003 2004 2005 2006 2007

Perc

enta

ge o

f GDP

Fig. 2: Profits of State Industry and Central SASAC

Profit of All SOEs and State-controlled Industrial Firms

Profit of Central SASAC Firms

43

Table 1: Central SASAC Share of State Enterprise Workers

    2002 2006All State Enterprise Employees (million) 50.3 37.75 of which: Central SASAC 8.6 11.04 Central SASAC Proportion 17.1% 29.2%

State Industrial Enterprise Employees (million) 24.9 18.8 of which: Central SASAC 5.9 7.23 Central SASAC Proportion 23.7% 38.5%

N.B. All Above-Scale Industrial Employees (M.) 54.73 73.58 Central SASAC Proportion 10.8% 9.8%       

Source; Statistical Abstract (2003), p. 132; Lian Yuming; SASAC Yearbook (2007), pp. 587, 591; Industrial Economy Yearbook (2007), p. 59.

44

Figure 3: The State Enterprise Sector, 2008

Total State Enterprise SectorOverall Industrial

113,731 36,297 Enterprises36.72 18.59 Employees (Million)42.5 20.6 Assets (Trillion RMB)

Central Government Local GovernmentsOverall Industrial Overall Industrial

23,592 10,174 Enterprises 90,139 26,123 Enterprises17.02 8.39 Employees (Million) 19.71 10.20 Employees (Million)21.3 12.4 Assets (Trillion RMB) 21.8 8.2 Assets (Trillion RMB)

SASAC MinistriesOverall Industrial Overall Industrial

17,638 9,412 Enterprises 5,954 762 Enterprises11.37 7.65 Employees (Million) 5.65 0.74 Employees (Million)17.6 11.5 Assets (Trillion RMB) 3.6 0.9 Assets (Trillion RMB)

45

Table 1: Central SASAC Share of State Enterprise Workers

2002 2008All State Enterprise Employees (million) 50.3 36.7 of which: Central SASAC 8.6 11.4 Central SASAC Proportion 17.1% 31.0%

State Industrial Enterprise Employees (million) 24.9 18.6 of which: Central SASAC 5.9 7.7 Central SASAC Proportion 23.7% 41.2%

N.B. All Above-Scale Industrial Employees (M.) 54.7 88.4 Central SASAC Proportion 10.8% 8.7%

46

Table 2: Central SASAC Share of State Enterprise Capital

    2002 2006All State Enterprise Capital (Billion RMB) n.a. 29,012 of which: Central SASAC 6,930 12,192 Central SASAC Proportion n.a. 42.0%

State Industrial Enterprise Capital (Billion RMB) 8,972 13,693 of which: Central SASAC 4,336 7,389 Central SASAC Proportion 48.3% 54.0%

N.B. All Above-Scale Industrial Capital (B. RMB) 14,479 28,594 Central SASAC Proportion 29.9% 25.8%       

Source; Statistical Abstract (2003), p. 132; Lian Yuming; SASAC Yearbook (2007), pp. 589, 592; Industrial Economy Yearbook (2007), p. 59.

47

Table 2: Central SASAC Share of State Enterprise Capital

2002 2008All State Enterprise Capital (Billion RMB) n.a. 42,547 of which: Central SASAC 6,930 17,629 Central SASAC Proportion n.a. 41.4%

State Industrial Enterprise Capital (Billion RMB) 8,972 20,616 of which: Central SASAC 4,336 11,543 Central SASAC Proportion 48.3% 56.0%

N.B. All Above-Scale Industrial Capital (B. RMB) 14,479 43,131 Central SASAC Proportion 29.9% 26.8%

48