whose money? the tug-of-war over chinese state enterprise

WHOSE MONEY?

Mikael Mattlin FIIA BRIEFING PAPER 79 • April 2011

79

THE TUG-OF-WAR OVER CHINESE

STATE ENTERPRISE PROFITS

• China’srecentlyapprovedfive-yearplanenvisionsareorientationoftheeconomytowardsamoresociallyequitableandenvironmentallysustainablegrowthmodel.

• Thenewplanlaysthefoundationforanewsocialcontract,aChinese‘NewDeal’.

• Thestateistocollectmoredividendsfromstate-ownedenterprisesthanbefore,improvingitsabilitytofundChina’sdevelopingsocialsecuritysystem.

• Newmeasureshavebeenintroducedtocontrolspeculativeinvestmentsbyenterprises.

• Politicallyinfluentialcentral-levelstateenterprises,theso-calledyangqi,haveresistedeffortstowrestcontroloverprofitsandinvestmentsawayfromthem.

WHOSE MONEY?

FIIA Briefing Paper 79

April 2011

THE TUG-OF-WAR OVER CHINESE STATE ENTERPRISE PROFITS

The Global Security research programme

The Finnish Institute of International Affairs

Mikael Mattlin

Researcher


THE FINNISH INSTITUTE OF INTERNATIONAL AFFAIRS 3

While China’s reform strategy has largely been asuccessstorythathasseenlivingstandardsrisetre-mendously,ithasalsoledtowideningincomegaps,regionaldisparities,andmuchwastefulinvestment.Largeincomegapsbreedsocialdiscontentthatmayturnintopoliticaldemands.TherulingCommunistParty has proved itself adroit at preventing suchdemands from emerging, by taking timely pre-emptiveactioninresponsetopeople’sneeds.

True to this track record, the 12th five-year plan,accepted in March 2011 by the National People’sCongress,placesmuchemphasisonincomeredistri-bution,developingafunctioningconsumereconomyandpromotingbasicpublicservices.Attheheartoftheplan is themessage that amore equitable andsustainablegrowthmodelisnecessary.Ineffect,theplansetsouta roadmap forbuildinganewsocialcontract between the government and thepeople.Ultimately,theaimistosecurethelegitimacyoftheparty’sclaimtopower.

Inordertoencouragedomesticconsumption,amorecomprehensive social security system is called for.Chineseconsumerscommonlysaveaheftyportionoftheirincome,duetoaninadequatesocialsecuritynetwork.Inacountrywithapopulationof1.3bil-lion,anyimprovementinsocialsecurityis,however,boundtobeanexpensiveaffairthatrequiressome-onetopayup.Theprofitsofstate-ownedenterprises(SOEs) have in recent years emerged as a potentsource of funding. Asmajor Chinese SOEs clearly

increased their profitability over the past decade,theuseoftheirprofitsbecameaboneofcontentioninthepolicydebate.AccordingtoChineseMinistryof Finance figures, last year SOEsmade an aggre-gateprofit in theregionof2 trillionChineseyuan,equivalentto230billioneuros,oraround20%ofthenationalbudget.

State officials regard the profits of state-ownedcompanies as a key building block in funding theevolvingChinesesocial securitysystem,aswellasin restructuring the state-owned economy and increating globally competitive Chinese enterprises.HowSOEprofitsareusedaffectsmanykeyissuesinChina’s macroeconomic management.This paperlooksat thebackgroundto thedividend issueandits relationship to social security funding and thearduoustaskofreininginspeculativerealestateandstockmarketinvestments.

The rise of the yangqi

Withthestate-ownedsector’sshareoftheChineseeconomy in long-term decline and widespreadinterest in the development of China’s privatecorporatesector, it iseasyto forgettheoftencru-cial role thatSOEscontinuetoplay in theChineseeconomy. Contrary to the bankrupt situation ofmany state-owned enterprises in the 1990s, thebiggestSOEsarenowtremendouslyprofitable.Asakeycomponentofwhathasbeencalledthe‘inside

The headquarters of China National Petroleum Corporation and PetroChina in Beijing. Photo: Charlie Fong / Wikimedia Commons.


successfulrestructuringandreorganizationofmajorSOEs is thereforeacrucial taskfortheparty-state.Unsurprisingly,bigstateenterpriseshaveanumberof political aims, such as ensuring that the state-ownedsectorstilldominatestheChineseeconomyandthatfutureChineseglobalchampionsarestate-owned.

Thetop-tierstateenterprisesare,throughtheirsub-sidiaries,alreadyamongthebiggestChineseinves-tors abroad. For example,no less than 13Chinesestate-owned enterprises operated in Libya, withcontractvaluesamountingtoseveralbillioneuros.ThebestSOEshavealsomorphedintoahugemoney-makingmachineandoneofthegreatestconcentra-tionsof assetsglobally.This state-controlledassetconcentration,sometimesreferredtoasChinaInc,naturally proffers political patronage opportuni-ties.ItisalsooneofthemainsourcesoffundingforChina’sdevelopingsocialsecuritysystem.

Managing state assets

China began constructing a new administrativeframework for the control of state enterprises in2003whentheState-ownedAssetsSupervisionandAdministration Commission of the State Council(SASAC)was founded.SASAC is aministerial-levelspecialorganizationdirectlyundertheChineseStateCouncilthatoverseesamulti-trillioneuroconcen-tration of state assets. SASAC has a vast structurewith a central-level organization, aswell as semi-independentprovincialandlocalofficesthroughoutthecountry.

SASAC represents the state’s ownership interests,butinitiallyalsoheldsomeregulatorypowersoverthestate-ownedenterprises.ThesomewhatunclearstatusofSASACwasclarifiedinOctober2008whenalong-awaitedlawonenterprisestateassets(企业国有资产法)wasfinallypromulgated.ThesecondsectionofthelawemphasizesSASAC’sroleastheorganiza-tionthatexercises thestate’sownershiprights, inasimilarfashiontoanyotherlargeequityinvestor.SASAC shares its authority over the state-ownedeconomy with various other organs; in financialmatterswiththeMinistryofFinance,inpersonnelappointmentswith theCommunistParty’sorgani-zationaldepartment,and in industrialpolicywiththeNationalDevelopmentandReformCommission(NDRC)–theformerstateplanningcommission.

thesystem’(体制内)1,theyarealsoofteninaspecialpositionvis-à-vistheauthorities.Forexample,thebulkofamassive4trillionyuan(about500billioneuros)infrastructurespendingpackageannouncedby the government inNovember 2008 to counterthe effects of the global economic downturnwaschannelledthroughSOEs.

Anotherreasonforincreasingpublicinterestintheuseofenterpriseprofits isthatbigSOEsareaveryvisibleandcentralpartoftheChineseeconomy.Thenumberof‘centralenterprises’(央企 yangqi inChi-nese), namelynational-level state companies, hasdroppedfromanoriginal196to121duetomergersandrestructurings.Astatedaim is toreduce theirnumber further to approximately 30-50 globallycompetitiveenterprises. In2010,theyangqimadea combinednetprofitof 849billionChineseyuan(almost100billioneuros)onrevenuesof16.7trillionyuan.

Therewasatimewhentermslikekeiretsuandchae-bolwerepracticallyhouseholdnamesthatarousedcompetitiveanxietiesinWesterncorporateleaders.Yangqiasatermhasnotyetenteredcommonpar-lanceoutsideofChina,butthestate-ownedenter-prisesthatthetermdenoteshavecertainlybeenatthecentreofgreat international interest in recentyears.Ofthe43MainlandChinesecompaniesonthelatestFortuneGlobal500list,30areyangqi,whileninearestate-ownedbanksorinsurancecompanies,andtwoareotherSOEs.Onlytwocanbeconsiderednon-stateenterprises.Theyangqilistalmostreadslike a ‘who’swho’ of China’s corporate elite. Forexample,theparentcompaniesoftelecomoperatorChinaMobile,oilcompanySinopecandthenationalflag-carrier Air China are all yangqi. Yangqi aredominantinanumberofmajorindustriesinChina.Inparticular,theycontroltheenergy,civilaviationanddefence industries,andarealsomajorplayersinthemetals,heavymachinery,shipbuilding,con-structionandcar industries.These industrieshavebeendesignatedbythestateaseither‘strategic’or‘pillar’industries.

The big SOEs are the enterprises chosen by theparty-statetosecuretheparty’sgriponpower.The

1 Seee.g.Walter,CarlE.andFraserJ.T.Howie(2011)Red Capita-

lism: The Fragile Financial Foundation of China’s Extraordinary

Rise.Singapore:JohnWiley&Sons,p.8.


In practice, it is virtually impossible to effectivelycontrol the huge concentration of assets that hasbeenplacedunderSASAC’ssupervisioninacentral-izedmanner.Amanagementmodelthatseemstobegaininggroundisforahandfulofcentralenterprisestoassumerolesasakindofsuperholdingcompanyfor other state enterprise assets, placed betweenSASACandtheotherenterprises.AsoneofSASAC’skeytasksistooverseetherestructuringofthestate-ownedeconomy,theseenterprisesareeffectivelyakind of assetmanagement company dealingwithmergers,restructuringsandtheorderlydisposalofnon-coreassets.Since2005,threesuchassetman-agementcompanieshavealreadybeenformed–theStateDevelopmentandInvestmentCorporation,theChinaChengtongGroupandGuoxinGroup.Thelastonewasestablishedasrecentlyaslate2010.

In practice, SASAC has faced an uphill struggle toestablishitsauthorityovertheSOEsthatitsuppos-edlycontrolsasarepresentativeofthestateowner.Thisispartlybydesign.WhileSASACisaministerial-levelunit,soare54ofthebiggestcentralenterprises.Inotherwords,SASAC’schairman isequivalent inranktothebossesofthecentralenterprisesthatitsupervises,making it hard to issue direct orders.2ThefactthatSASACisaspecialunitonthesidelinesof the formalgovernmentapparatus, lacking inde-pendent authority over personnel appointments,

2 WalterandHowie,Red Capitalism,pp.167–168.

financialmattersandregulations,almostinevitablyresults in a gap between its ambition and actualpowers.Evenintermsofinformalpoliticalinfluence,eversoimportantinChina,powerfulSOEexecutivesare often much better placed than SASAC bosses.Manyofthecentralenterpriseexecutivesholdinflu-entialpartypositionswithadirect line to the topleadership.

The dividend issue

Inmostcountries,thestatecollectsdividendsfromitsenterprises.Dividendandprivatisationproceedscommonly go either directly to the state treasury(Ministry of Finance) as general revenue or aredirectedtoasocialsecurityfund.Alternatively,pro-ceedscanbeearmarkedforaspecificpurpose,suchasreducingpublicdebt.Collectingdividends fromstate-ownedenterprisesreducestheriskofmanag-ers making unprofitable investment decisions onthebackofexcessivefunds.Aselsewhere,Chineseenterprisemanagersprefertoreinvestprofits,some-timesspeculativelyintherealestateorstockmarkets.

Inconjunctionwithabigtaxreformin1994,stateenterprises were exempted from having to paydividendstothestate.However,theirstockmarketlisted subsidiaries still paid dividends to the non-listedwhollystate-ownedparentcompanies.They,inturn,couldretainallprofitsratherthanpassingthemontothegovernment.Forthemostprofitable

People trying to coax donkeys on a riverboat near Yangshuo. SASAC has faced a similar situation when trying

to cajole dividends from state-owned enterprises. Photo: Stougard / Wikimedia Commons.


listedSOEsthismeantthattheirparentcompanieswere frequently awash with cash. In the contextof a long-runningmacro-economicdebateon theChineseeconomy’soverheating,whichcentresonexcessive(andwasteful)investments,SOEretentionof profitsmade it onto thepolitical agenda.Over-capitalisation of some SOEs due to strengthenedprofitability,thedividendexemptionandpoliticallyinfluenced bank lending, has contributed to over-investmentinmanyindustries.

Inthiscontext,itwasdecidedthatdividendswouldagainbecollecteddirectlyfromstate-ownedenter-prises.From2008onwards, thestatehasrequiredallwhollystate-ownedenterprisestopaydividends.However, thedecision to resume the collectionofdividends gave rise to a protracted dispute. TheprincipalprotagonistswereSASAC,whichwantedSOEdividendsearmarkedforrestructuringdomesticindustries and strategic investmentpriorities, andtheMinistryofFinance,whichwantedtheproceedsincludedintheregularstatebudget.

Not surprisingly, the dividend collection systemalsoprovokedmuchresistancefrompowerfulSOEs.Eventually, a compromise solution was reachedwherebySASACbecametheleadagencyincompil-ingtheso-calledstatecapitalmanagementbudgets(国有资本经营预算),themainvehicleforcollectingand redistributing SOE dividends. However, allproceedswerefirsttoberemittedtotheMinistryofFinance,fromwhichfundswouldthenbeturnedovertoSASACforuseinthestrategicrestructuringofSOEs. In simplified terms, the fundsflow fromthestateenterprisesthroughtheMinistrytoSASAC,fromwhichmuch of themoney is eventually re-allocated to the state enterprises, and earmarkedforspecificpurposes.

Whenrolledoutnationally,thedividendratioswereset at ten, five and zero per cent, based on enter-prise categorisations determined by SASAC. Themostprofitablecompanieswererequiredtopaythehighest rate,whilemilitary-industrial enterprisesand research instituteswere largely exempt fromremittingprofits to thestate.Asprofitsarehighlyconcentratedincertainindustries,inpractice,atenpercentratehasbeenappliedtothemostprofitablecentralenterprises,especiallyintheenergysector.

Attheendof2010,theMinistryofFinanceissuedadirective that raises thedividend ratiosacross the

board,commonlybyfivepercentagepoints.Startingthisyear, themostprofitableyangqi (suchaspet-rochemical,powergeneration,tobaccoandtelecomcompanies)willpay15%oftheirprofitstothestate,while steel companies and airlines, for instance,willpay10%.ASASACvice-chairmanrecentlyalsoindicatedthatthedividendratiosshouldgraduallyberaisedclosetothelevelpaidtoshareholdersbystockmarketlistedcompanies inChina.Followingthe announcement of dividend ratio hikes, it canbeexpectedthatthestatewillsubsequentlygathermore than 10billioneuros from thecentral enter-prisesintostatecoffers.Incomparison,thiswouldbeapproximately25timestheFinnishgovernment’sdividendincomein2010.

State capital management budgeting

As a legacy of the planned economy, the govern-menthadverybroadcontroloverstateenterprisesuntil the 1980s.Theywere an integral part of thestatebudgetingsysteminChina,withallenterprisefinancingneedscoveredbythestate,andprofitsandlossesdirectlyincludedinthestatebudget.Thiscon-trolgraduallyloosenedfollowingthereformpolicies,tothepointwhereSOEshadbecomealmostentirelyseparatedfromstatefinancespriortothereinstitu-tionof thedividend. Integral to this developmentwasthe1994dividendexemption.Inwrestingbackcontrol over enterprise profits, the state capitalmanagement budget, stipulated in the enterprisestateassetslaw,isthemaintool.

The state capitalmanagementbudgets aim to con-solidate companies’ investment funds and requirethattheyturnoveraportionoftheirpost-taxprof-its to the state. Inaddition to remittinga shareofoperatingprofitstothegovernment,theenterprisestateassetslawalsostipulatesthatcompanieshavetoremitpartofassetsaleproceeds,liquidationpro-ceedsandotherprofitstothegovernment.

Pre-approvalisalsorequiredfornon-corebusinessinvestments and pre-notification of core businessinvestments. Core business categories have beenofficially determined for each company.With toomuchmoneyat theirdisposalandpoorreturns inmany economic sectors, SOEs account for muchspeculativeinvesting.Nowhereisthismoreevidentthanintheoverheatingrealestatemarkets.Recently,SASACorderedtheyangqitodivestthemselvesofall


non-essentialrealestateinvestments.However,theprocess has been slow with enterprise managersdraggingtheirfeet.AyearagoSASACannouncedthat78yangqi,whoseprimarybusinessisnotrealestate,wouldhavetosellofftheirrealestateinvestments.Yet,only14oftheimplicatedenterprisesdidsointhefirstyearaftertheannouncement,againattestingtothe difficulties SASAC encounters in enforcing itsdirectives.

Followingtrialsinpilotlocations,in2008thestatecapitalmanagementbudgetwasrolledoutnationallyforallstate-ownedenterprises.The2008budgetforcentralenterprisesamountedto54.8billionChineseyuan (6bneurosatcurrentexchangerates).Afterbeing routed through the Ministry of Finance toSASAC, 49% of thismoneywent towards increas-ingstateownershipoverassetsrelatedtonationaleconomic security and people’s livelihood, 36%towardscoveringSOElossesincurredduetonaturalcalamities,andtheresttowardscoveringcorporaterestructuring costs. During the economic down-turnin2009,SASACprovidedemergencyfinancialsupport to ailingyangqi.Thecapitalmanagementbudget dropped considerably during that year, to31.5billionyuan(3.5bneuros).In2010,itjumpedcorrespondinglyto60bnyuan(6.6bneuros).

A Chinese ‘New Deal’?

The16thPartyCongress in2002 set a loftygoal forChina.By2020,Chinashouldhaveachievedsome-thingreferredtoasaxiaokang (小康) society.TheconceptderivesfromclassicalChineseandroughlytranslates asmoderatewellbeing or a society thatis basically well-off. A long line of policy initia-tiveshavesincebeendesignedtofurtherthisbroadobjective,mostnotablyadecisionin2005torelievefarmersofthetaxesandfeesthathadbeenapartoftheir lotforthousandsofyears.The xiaokang goalandthepolicymeasuresembodiedinthefive-yearplancanbeseenassomethingofaChineseversionoftheAmericanNewDealinthe1930s,anewsocialcontract between the government and thepeople.Theyreorientthefocusoftheentireeconomy,fromaninvestment-ledbutwastefulandunevengrowthstrategy to amore consumption-driven, balancedand socially just one.Wealth transfers from state-ownedenterprises to the state canbe seen in thiscontext.

OneoftheaimsofincreaseddividendcollectionfromstateenterprisesistoraisetheabilityofthestatetofundChina’sdevelopingsocialsecuritysystemandpromoteaconsumereconomy.Tofurtherthisaim,inJune2009theStateCouncilalsoannouncedthatallSOEslistedonthestockmarketsince2005havetotransfersharesworth10percentoftheirinitialpublicofferingtothenationalsocialsecurity fund.Demandingmoreremittancesfromstateenterprisesand forcing divestments of speculative real estateinvestments will also assist in macroeconomicadjustment.

The Chinese government’s role in supervisingthe investments of state-owned enterprises hasgradually been enhanced. However, there haveunderstandablybeensomedoubtsas tohoweffec-tiveSASAChasactuallybeeninassertingitsauthor-ity over SOEs, given their political clout and theadministrativeconstraintsonSASAC.Theperennialtug-of-warbetweenSASACandthepowerfulyangqi overtheusesoftheirprofitsatteststothepoliticalstrengththatbigChinesestate-ownedenterpriseshaveacquired,astheofficiallydesignatedcoreoftheChineseeconomy.

Mikael Mattlin


Kruunuvuorenkatu 4

FI-00160 Helsinki

tel. +358 9 432 7000

fax. +358 9 432 7799

www.fiia.fi

ISBN 978-951-769-300-4

ISSN 1795-8059

Cover photo: Nate Luzod / Flickr.com

Layout: Juha Mäkinen

Language editing: Lynn Nikkanen

The Finnish Institute of International Affairs is an

independent research institute that produces high-level

research to support political decision-making and

public debate both nationally and internationally.

The Institute undertakes quality control in editing

publications but the responsibility for the views

expressed ultimately rests with the authors.

whose money? the tug-of-war over chinese state enterprise

Documents