China’s SOEs Reform and Associated Issues

1.0 Introduction

Before Deng Xiaopeng held in office and decided to implement the economic reform policies in 1978, Chairman Mao actually appointed Hua Guofeng as his successor before his death(Teiwes&Sun, 2011). Hua in fact only had junior standing in the Chinese Community Party (CCP). As compared with Deng, Hua had poor leadership capability and unable to make China get rid of the stagnant economic status in Mao’s era. When Deng gained support from military generals such as Xu Shiyou and Wei Guoqing, he had made a difficult decision to make a bold move in reforming large sections of the country’s communist planned economy despite the fact that he also received strong resistance from hardliners. In 1979, Deng became the first Chinese leader to visit the U.S and meet with President Jimmy Carter at the White House. He hoped to persuade foreign investors to build up confidence on China’s economic reform as the country would clearly shifting away from planned economy toward market economy. Deng also developed good relationships with other countries especially developed countries to learn about their successful stories. After implementing the Reform and Opening-up policy, it can be observed from the figure 1 below that China’s economy is taking a leap forward after 1978. Before the global economic downturn in 2008, China has enjoyed nearly two decades of double-digit economic growth. Now the GDP growth rate is stabilized at over 6%, higher than most of other developing countries in the world. It also becomes the world’s second largest economy in terms of GDP only after the U.S. In this report, China’s economic reform in State-owned enterprises (SOEs) area will be discussed in details. Moreover, the potential problem of migrant workers and demographic dividend will also be analyzed accordingly. 

 Source Credit: UNCTAD Statistics, 2017;

Fig 1: China’s GDP per capita and GDP growth rate from 1978 to 2017

2.0 Economic Reform in SOEs

Before the reform and opening-up policy was officially implemented, China followed a highly planned economy model. In a planned economy, the state-owned enterprises played a critical role in the whole economic structure. At the beginning state of the economic reform, SOEs absorbed over half of the urban employment and contributed to nearly 70% of government fiscal income. Hence, the communist government led by Deng decided to first employ a dual-track approach to gradually release labor force from SOEs. Dual-track approach is a strategy to make both planned economy and market economy co-existed in China’s economic structure. Deng had made such a decision because there would be huge unemployment due to employment adjustment if China tried to fully implement a market economy. Workers would soon lose their jobs due to poor economic and productive efficiency within state-owned enterprises. Such economic adjustment would pose a threat on the political and social stability. However, it does not mean that SOEs are organizations without any merits. As a matter of fact, workers in SOEs could normally benefit from major welfare services. In a planned economy, these services are called from-cradle-to-grave welfare such as housing benefits, health care, children education, retirement compensation, etc.

However, Deng discovers that SOEs did not have any decision-making power in business operations and activities. When enterprises were not profit-driven according to the market mechanism, workers would become lackluster and lack of motivations to accomplish production operations and tasks. Eventually, they would develop counter-productive behaviors such as absenteeism. The net output also depended upon collective work. In other words, individual achievement was compromised under such organizational environment. Without effective performance management, workers became indifferent toward their own work. Deng’s economic reform polices aim to release state-owned enterprises from central planning and make them adapted to market challenges.

Deng’s economic reform in SOEs sector is mainly comprised of four important phases(Rees et al., 2010). As shown In table 1, at the phase 1, the central government was basically doing some experiment about releasing control and autonomy to state-owned factories. For instance, in 1978, China expanded autonomy to 6 state-owned factories. The managing team of these enterprises were allowed to determine their own product prices after being guided by the government. In 1983, after five years of experiments, SOEs were finally made to accept a new responsibility system for profit and losses. Besides, SOEs were also allowed to retain 3% profits. It provided motivation for the managing team and workers to be actively engaged in the companies’ decision-making process.

Table 1: First Phase (1978~1983)

At phase two (1983~1984), the SOEs of China were receiving much more autonomy. From 1983 to 1984, most of the SOEs’ profits started to be combined with taxes. However, the SOEs could hardly practice autonomy because these companies and organizations were still protected and remained unchanged by other private companies in the market. The reform of “bank loans for budgetary grants and tax-for-profits” policies did not realize enterprises’ self-operating potentials and responsibility for profits and losses. As such, fair competition was still not promoted at this stage.

Table 2: Second Phase

At phase three (1987~1992), the contract responsibility system or CRS was finally introduced by the central government (Choe&Yin, 2000). The aim of adopting contract responsibility system was to separate property rights and operating rights of the SOEs. The contract was often signed for three to five years as one-term. The content subject also clearly stipulated how many profits and taxes a SOE should submit to the government. By the end of 1992, nearly all small and medium-sized SOEs had adopted the CRS. CRS aimed to reduce government intervention in SOEs’ operations and decision-making processes. It also hoped to make these enterprises to be more financially independent and focus less on plan fulfillment.

At the last phase (1992~1997), the central government hoped to finally establish a “social market economy”. Basically it is an economic structure to describe a market economy with socialism characteristics(Rees et al., 2010). In other words, state-owned enterprises would have both autonomy and monitoring in the management operations.

3.0 Impact Demographic Dividend

However, state-owned enterprises now are gradually transformed into modern enterprise system. Before China implemented the “one-child policy”, it also experienced the post-war baby boom. N other words, when China launched the economic reform policies in 1978, the country benefited tremendously from the large working population which outgrew the dependents such as the elderly (Cai, 2010). Due to the decentralization process in the agricultural sectors, millions of migrant workers were flooding into the urban area and provided cheap labor for both SOEs and private companies(Cai&Treisman, 2006).. But the imminent danger is that the demographic dividend is not a permanent benefit. The situation is also worsened by China’s tight population control policy. Nowadays, the size of working population in China was significantly shrinking. One direct consequence is that the labor cost would remarkably increase. It will discourage foreign investors and business-owners from doing businesses in China.

4.0 Conclusion

 In China’s market, it seems that only the fittest could survive due to the increase production cost. SOEs as compared with private companies are much less competent. It is still difficult for SOEs to improve its overall production efficiency and effectiveness. Many of China’s small and medium-sized SOEs were facing bankruptcy due to poor management strategies. Therefore, in the near future, it seems that fewer and fewer SOEs, perhaps only those who represent the core interests of the state such as aerospace, oil refinery and military weapons, would retain as stated-owned but SOEs would have an inevitable fate of being privatized.

Reference

Chow, G. C. (2007). China’s Economic Transformation. Oapen.org

Cai, F. (2010). Demographic transition, demographic dividend, and Lewis turning point in China. China Economic Journal, 3(2), 107-119.

Choe, C., & Yin, X. (2000). Contract management responsibility system and profit incentives in China's state-owned enterprises. China economic review, 11(1), 98-112.

Cai, H., & Treisman, D. (2006). Did government decentralization cause China's economic miracle?. World politics, 58(4), 505-535.

Rees, C. J., Hassard, J., Morris, J., Sheehan, J., & Yuxin, X. (2010). China's state‐owned enterprises: economic reform and organizational restructuring. Journal of Organizational Change Management.

Teiwes, F. C., & Sun, W. (2011). China's new economic policy under Hua Guofeng: party consensus and party myths. The China Journal, (66), 1-23.