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The Red Line, Bottom Line, and Direction of State-Owned Enterprise Reform (translation)

China's president Xi Jinping discussing State-sector reform in December 2013.

China’s president Xi Jinping discussing State-sector reform in December 2013.

Translators note: This essay was first published in Qiushi’s online journal Red Flag in early June and then recirculated on various CCP and government websites/publications including the official CCP News website, SASAC website, and most recently SinoPec’s  official site.  Its analysis provides key insight into the both the nature of China’s coming state-owned enterprise reforms and challenges to launching reforms.  

The author, Zhu Jidong, first outlines that the reforms will not be a massive sell-off or a granting of private and foreign firms access to state assets as many pundits have suggested, but rather a reform that re-introduces corporatization and mixed-ownership structures to China’s state-owned firms.  The essay continues with a discussion of the connection between the importance of state-owned industries and the survival of the Chinese state and Communist Party.  It touches on the dangers and risks of reform going off in a wrong and misguided direction and hints that power currently is unevenly distributed in the state-owned sector and that managers of state-owned industries could continue to use their power to make arbitrary decisions, engage in corrupt practices, and take advantage of reform.  The author calls on the Party and governments from the central to local level to promote the supervisory powers of various societal sectors to ensure the coming reform process is fair and transparent.  He encourages Party commissions and local governments to set up hotlines using various forms of social media for observers and whistle-blowers within the state-sector to utilize in reporting malfeasance and corrupt practices that occur during the coming round of state-owned enterprise reform.

 The timing of this essay’s release is critical as state-owned enterprise reform should be a key issue discussed at the coming 4th Plenary Session of the 18th Party Congress this fall. To date this is the essay’s only known English language translation.

 

 The Red Line, Bottom Line, and Direction of State-Owned Enterprise Reform

Deepening state-owned enterprise reform is a major undertaking and is a major issue gaining attention and controversy around the future fate of the party and the state.  During the “two sessions” of 2014, General Secretary Xi Jinping stressed that state-owned enterprises cannot be undercut but rather must strengthen.  State-owned enterprises must absorb the experience and lessons of past reforms and state assets cannot turn into an opportunity for speculative profiteers amidst the wave of reform.  The underlying spirit of this essay is to further advance the definition of state-owned enterprise reform’s red line, identify the bottom line, and clarify its direction.

Drawing the red line: Speculative profiteering opportunities cannot be made in the name of State-owned enterprise reform

“Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform,“ the document produced during the CCP’s Third Plenary Session of the 18th Party Congress clearly states for the positive development of a mixed ownership economy.  There are those who advocate the position that the development of mixed ownership economies will serve as a big push to advance privatization, to permit more private and foreign enterprises to control the shares of state-owned enterprises while at the same time allowing state-owned enterprises to retreat away from competitive sectors.  This has created a certain mindset of confusion throughout society.  Looking back at more than 30 years of Reform and Opening, the loss of state assets during the process of state-owned enterprise reform has been a controversial topic which triggered many problems.

Some people say that the purpose of reform is to sell state-owned enterprises, as if success is only delivered through wholesale sell-offs and the price of the efforts of privatization is the laying off of large quantities of employees. A sentiment exists that not only can state employees not share fruits of this kind of reform, but they also serve as the sacrifices of reform; further the state must shoulder the welfare burden of this heavy issue.  Correspondingly a minority state-owned enterprise upper management who once carried the torch of reform have become billionaires.  Now there are even those who advocate “To mix is to sell, if you don’t sell you can’t mix.” If the name of reform is to forcibly make state-owned enterprises sell off rights and assets to private and foreign enterprises, then state-owned enterprises are not strengthened, rather they are weakened..

Developing a mixed ownership economy calls for open and transparent principles. Some people stress that the process of developing mixed ownership is to allow private enterprises to participate in the affairs of state-owned enterprises.  But if upper management of some state-owned enterprises take up this slogan and combine it with the efforts of private managers, then the possibility of “state assets becoming opportunities for private exploitation in the wave of reform” will arise. The crux of reform is openness and transparency and it is a reform to be carried out under the supervision of the masses.

The basic policy of developing a mixed ownership economy is already clear and its essence, as well as its success and failure, is in the details of regulation.  It is imperative for the transfer of state ownership and assets to be an open and transparent process.  Financial assets should be made known to exchange markets.  Transfers should be public knowledge.  State-owned enterprises should engage in open, fair, and just exchange.  The state should establish an institution with the sole purpose of managing, supervising, and quickly establishing a platform for the transfer of state ownership and assets and mandate all state-owned enterprises regardless of reputation to openly, fairly, and justly execute the transfer of state assets.  The private transfer or third party management of the transfer of state assets is impermissible. At the same time, this platform must be built to be as transparent as a glass window in order to put a stop to end all under the table dealings.

In order to develop mixed ownership economies it is necessary to guard against foreign capital controlling the pulse of the Chinese economy.  In accounting for the livelihood of the Chinese people, China’s state-owned industries not are not only the key sector for economic stabilization and boosting the economy, but these firms also bear the load of fending off the control of International monopolistic capital controlled by multinational corporations.  They take on the heavy task of protecting the security of the national economy, and because of this, frequently are a target in the eyes of Western countries and multinational corporations.  If foreign capital and foreign firms are to enter the reform of the state sector, we must first consider the question of the security of the economy and the security of the entire country.  Otherwise after foreign capital and foreign firms enter this sector, it is possible they will spy on the state sector’s confidential policies and strategic decisions.  One can easily imagine that this will influence the security of China’s economy.

A 2006 report issued by the State Council’s Development Research Center expressed that among industries already open to foreign capital investment, each of the top five firms in those industries were nearly completely under the control of foreign capital.  Particularly among twenty-eight major industries, foreign capital exploits the controlling rights to multiple forms of assets of twenty-one industries.  It can be said that foreign capital controls these twenty-one industries.  Today this data should be even more shocking.  Because of this, we must guard against foreign capital from taking advantage of mixed ownership economies to control the lifeline of the Chinese economy and threaten China’s economic stability.   We must take strict precautions against foreign capital from seizing the opportunities of national defense, railways, energy resources, telecommunication, public industries, and those that are associated with national security and major industries associated with the economic pulse of the state and people.

The development of mixed economies needs to allow for the participation and supervision by the masses.  We must appeal for the positive activation of the masses to supervise the whole process of the development of mixed ownership economies and absolutely cannot allow for the invaders to embezzle from and take advantage of state industries.  The party committees and governments at the central and local levels have all installed hotlines, mailboxes, and websites and are positively ready to receive reports on neglect, malfeasance, and corrupt activities associated with state enterprise reform. We will positively investigate and make public the clues reported by the masses pertaining to the loss of state assets.  Toward the actions and behavior of those who embezzle state assets, we will investigate resolutely and severely punish. Through dissecting case studies involving the loss of state assets, we will establish and strengthen the institutions to protect state assets and the benefits of workers during the process of state sector reform.

In the development of mixed ownership economies, we must prevent the torchbearers of this reform from carving up state assets for their own purpose.  The selling of shares to managerial levels and to employees is a topic that will attract much attention during this round of state-owned enterprise reform.  Some locals are already implementing models for share distribution, so this direction has already been established. State assets are legal assets owned by the people of the socialist state of China, and the spirit of state assets cannot be violated. No one has the right to turn these assets into the private assets regardless if they are at the managerial level or a common employee.  Importantly the leaders and employees of state-owned enterprises cannot grant distribution of shares to themselves or transfer all of the people’s assets into private assets.  To permit or even encourage employees and managerial levels to hold shares or to institute models for the holding of shares is a means to permit these people to buy enterprise shares using their own money –  not to carve up state assets for their own usage.

Identifying the bottom line: State enterprise not only cannot weaken, but it must strengthen

In the Communist Manifesto, Marx and Engels pointed out that: “The question of ownership is the fundamental issue of the movement.” The common means of production is the economic base of the socialist system and state-owned enterprises are the principal part and pillar of the common means of production.  The Constitution of the People’s Republic of China clearly stipulates common ownership economy is the guiding power of the economy of the Chinese people and the state.  The state must guarantee the strengthening and development of the state economy.  The development of a strong state economy is assured by the state economy’s controlling the economic lifeline of the people and the state.  In order to express the superior characteristics of the socialist system as well as provide national defense and social cohesion, it is critically important to strengthen the power of China’s economy.

Through controlling the economic lifeline of the people and the state, the state-owned economy can keep the entire national economy running and serve as the engine of development.  The state-owned economy is the effective means for macro-economic adjustment, adjusting market inefficiencies and for realizing the prerequisite conditions of national strategic planning.  Because of this CCP General Party Secretary Xi Jinping has emphasized, “State owned enterprises not only must not weaken, but they must strengthen.” Regardless of the manner of reform, we cannot go beneath this bottom line, otherwise we will end up on the wrong road.
Even after if the many years of privatization and liberalization in Europe, the state owned economies of many countries in many still occupy dominant positions in key sectors and state-owned enterprise investment takes up approximately 20% of total national investment.  For example, state-owned enterprise investment is more than 27% in France.  Moreover the French national government owns more than fifty-one enterprises and employs 838,000 people.  The income of these enterprises contributes approximately 15% of France’s GDP ranking sixth in Europe.  Norway’s government owns forty-six firms which employ 230,000 and contribute about 9.4% of national employment, levels these firms’ incomes comprised nearly 70% of Norway’s 2008 GDP, an increase of 10% from 2004.  Although post-Soviet economies went through a spurt of privatization, by and large, the state-owned sector of many powerful former Soviet states is extremely large.  Russia’s state-owned fixed assets account for 40% of total state assets and state-owned enterprises control nearly 50% of the economy, and state-owned enterprises account for 31% of total employment.  Moreover, the state owned economy comprises more than 70% in Belarus.  Perhaps this is the reason why Russia and Belarus have the confidence to not fear the West and even dare to stand up to Western hegemony.

A few foreign friends have also provided advice for the reform of China’s state-owned economy. On February 15, 2012, German Prime Minister Schmidt reminded China in an interview that the question of ownership reform is one of hundreds of trillions of RMB. Currently most state enterprises are monopolistic and relate to state security.  These firms should develop in the interest of long-term stability and are not for the purpose of profit-seeking as top priority.  The profits of state-owned enterprises are the profits of the people; if these state-owned enterprises privatize, they will not necessarily become more competitive, and they will not necessarily provide more benefit.  Schmidt used the railway system as a case in point: some of China’s western railways are seriously bearing too much weight and collecting too little in fees.  If the railway firms privatize, these railways might halt transportation or raise their price.  This will bring major (negative) impacts to the development of the country’s interior.  If foreign friends can clearly see the danger, should their words fall on deaf ears?

China’s 2012 GDP was 51.9322 trillion RMB and per capita income 38,354 RMB.   This is already higher than 6000 USD.  This makes China the world’s second largest economy.  Moreover the rapid development of China’s state-owned economy was the major guarantor of China’s reaching the rank of the world’s second largest economy.  It is also the major motivational fountainhead of China’s economic development.  The CCP’s “Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform” calls for the transitioning of a portion of state-owned capital to enrich social welfare funds, improve the budgetary system of state capital operations, improve the rate of contribution of state-owned enterprises to public finance.  The decision sets the goal of 30% contribution to public finance by 2020 in order to guarantee welfare benefits for the people.  Further, this reveals how state capital relates to all people, and it is only through the strengthening of enterprise that the broad masses can enjoy the benefits of state capital.

Let me ask, can the state enrich social welfare funding through foreign capital and private capital?  Can foreign capital and private capital act without conditions, not seek return on investment, invest in the infrastructure of impoverished areas or fend off earthquake, floods, and other natural disasters? The answer is obviously no.  Because of this, if China is to strengthen and is to allow the people to better enjoy the fruits of reform and development, it must demonstrate the guiding function of the state-owned economy, continuously increase the state economy’s vitality, controlling capabilities, and influence, and make this bottom line clear to the world.

Many people think of the selling off of state production rights and assets when they hear of mixed ownership economies and envision the single possibility of private enterprises and foreign enterprises entering into state-owned enterprises.  Actually the development of mixed ownership in no way should be or is a one-way concept.  Moreover, the development of mixed ownership is two-directional and even multi-directional.  Private and foreign enterprises can enter the state owned sector by purchasing production rights and assets, and state-owned enterprises can also purchase the production rights and assets of private and foreign enterprises and even control the shares of some private and foreign enterprises.  This is the true meaning of mixed ownership economy.

If the development of a mixed ownership economy means only the selling-off of state production rights and assets then the obvious result is the weakening of state-owned enterprises and not their strengthening. Because of this we certainly need to clarify that the development of a mixed ownership economy is not for the purpose of weakening state-owned enterprises and surely is not to privatize.  We need to promote dual directional and multi-directional mixed ownership structures of state-owned enterprises, private enterprise, and foreign enterprise and not simply sell off the production rights and assets of state-owned enterprises to private and foreign enterprises.

Setting the Course: Continuously strengthen the vitality, controlling abilities, and influence of the state economy

In order to promote national modernization, guarantee power the mutual benefit of the people, the continuous development and strengthening of state-owned enterprises is the major force that supports the rise of the Chinese economy. It is also the guarantor of the endurance, strength, and perfection of the party leadership.  “To continuously strengthen the vitality, controlling abilities, and influence of state-owned economy” is the direction set forward for reform in the state sector by the CCP’s 18th Party Congress.

State-owned enterprises should take steps of self-improvement and like a phoenix rising from the ashes take on social responsibilities, establish a proper image, and increase the degree of promoting the processes of reform.  This requires us take a serious look at  the existing challenges to the current development of state-owned enterprises and persevere to strengthen and perfect the party leadership and realistically strengthen the positive characteristics which promote the working class as masters of society.  We should take action in accepting the supervision of multiple levels of society, severely punish graft and corruption, and in the deepening of state-owned enterprise reform promote the continuous improvement of modern enterprise system.

At the high strategic level we must prioritize and continuously strengthen the vitality, controlling abilities, and influence of state-owned industries. As the corporatization of state owned industries attracts strategic investors and key groups, state owned property rights are diversified, and the vitality, controlling abilities, and influence of the state economy continuously strengthens.  But at the same time we can see that the existing problems within state-owned industries are many.  The salary differences in some state-owned enterprises are comparatively large even to the point of great disparity. Disparities exist in the execution of corporate social responsibility programs within some state owned enterprises.  The management method of some state-owned enterprises is careless and accidents have occurred, some state-owned enterprises’ modern enterprise systems are just for show or have large degrees of patrimony.  Some leaders of state-owned enterprises make arbitrary decisions, their lives are extravagant and degenerate, they practice nepotism, and even will sell off state interests for their own personal benefit.

These issues not only influence the initiative of employees, but also damage the vitality, controlling capabilities, and influence of the state-owned economy.  The report of the 18th Party Congress calls to stimulate new energies in various market sectors and calls for all state-owned enterprises to adopt a specific and realistic focus. Thus the increase, stimulation, and demonstration of these new energies is a major challenge that all state-owned enterprises and their leaders must face directly, and this challenge must be highly respected at the strategic levels.  The issue of how to continuously reform and increase the state-owned economy’s vitality, controlling capabilities, and influence is for the relevant departments, work units, and experts located within the Central level’s  Leading Groups on Comprehensive Deepening of Reform to deepen research and determine the right path, polices, and regulations.

We must clearly see that from the distribution of industries, to date 90% of state-owned enterprise are outside the realm of competitiveness.  A slogan such as “Allow state-owned enterprises to leave the realm of competitiveness” is a covert argument of those who support privatization, and the basic motive of those who support privatization of state enterprises is to destroy our party’s economic base.  We must prioritize at a high degree how to scientifically develop a mixed ownership system while preventing new losses of state assets and guard against people from taking advantage of state assets in a new round of privatization.  To develop mixed ownership economies, we should select a portion of firms within a portion of industries as demonstration sites and expand the scale of development after summarizing experience and learning.  We must act accordingly to the path, policies, and regulations set by the central government in order to orderly develop mixed economies and prevent a mad rush.

We must persevere to strengthen and perfect the party leadership of state-owned enterprise reform.  General Party Secretary Xi Jinping has stressed many times “China is a major power, and we absolutely cannot allow any subversive errors.” What are subversive errors?  It is those errors of directionality which depart from the fundamental characteristics of socialism. And it is on this point that the 3rd Plenary of the 18th Party Congress stresses that comprehensive deepening of reform must strengthen and perfect party leadership.  Serving as the resolute leadership core of China’s socialist cause, the CCP naturally also forms the leadership core of China’s economic construction and serves as the leadership core of state-owned enterprise reform.

During the coming reform of the state-owned sector, we must demonstrate the offensive and defensive functions of party organs and the vanguard and model nature of party members.  Further we must dare to shoulder responsibility and resolutely confront all erroneous words and deeds.  It is only through perseverance in strengthening and perfecting the party leadership that the existing degeneration, extravagant waste, and nepotism within state-owned enterprises can be solved. We must unite and lead the masses the struggle against the activities of those who would embezzle state assets in order to maintain the right direction of state-owned enterprise reform. The nature of mixed ownership economies is decided by who controls shares. This is the central issue. The Central government should not give up shareholding rights in the name of state-owned enterprise reform.  Moreover, the Central government cannot change the characteristics of strategic enterprises.  This is what is meant by persevering to strengthen and perfect the party leadership as a strong base and powerful safeguard.

We must strengthen the master status of the working class.  Strengthening the master status of the working class is to continuously strengthen the vitality, controlling abilities, and influence of the state-owned economy’s solid base.  The working class is China’s leading class.  It is the representative of China’s advanced production force and production relationship.  It is our party’s most solid and most reliable class base and the comprehensive construct of a moderately prosperous society.  Lastly, the working class is the main force of upholding and developing socialism with Chinese characteristics.  To uphold and develop socialism with Chinese characteristics, we must rely on the working class with our whole hearts and whole minds and strengthen the master status of the working class to realize the full function of the working class as a main force.

In recent years the issue of corruption has arisen within state-owned enterprises and within some industries to the point of extreme severity. A contributing factor to this corruption is that the master status of the working class is wrongly viewed.  Some leaders and cadres within state-owned enterprises do not take supervision by the working class and the interest of workers to heart, and for their own personal benefit, these leaders will sacrifice the interests of workers and the state.  Relevant documents have expressed that the gap between actual average salaries of leaders of centrally owned enterprises to their employees is exponentially widening.  This has raised questions and criticisms in some enterprises.  When developing the mixed-ownership structure, state-owned enterprises should consider the raising of employee’s salaries.  Actually many centrally owned enterprises achieved rapid improvement and synergy in increasing industrial efficiency and employee’s salaries when shifting to mixed ownership.

Chen Jieyuan, Party Secretary and Board Chairman of the Shanghai Port Group LLC said, “In recent years, The Shanghai Port Group, through has experience the sweet taste of mixed ownership.  From 2006 when we fully listed on the market, our net assets have doubled, profits have basically doubled, and employees’ incomes have doubled.  These three “doubles” mark the direction in which state-owned enterprise reform should persevere especially in the process of developing mixed ownership, priority should be placed on promoting the distribution of shares to employees, establish a modern enterprise system, and fully raise income of employees.

The data shows that in 2010 the average income of an employee in a state-owned enterprise was 38359 RMB, 5% higher than the national average.  The average income of an employee in a private enterprise was 20759 RMB, 43% lower than the national average.  It is obvious which kind of enterprise serves as a better model for increasing the incomes of workers.  Because of this, the only way to strengthen the master status of the working class is to continuously increase the income levels of employees in the private sector, not the other way around.  Relevant organs at the central level should come up with a proposal for the distribution of shares to employees based on rigorous surveying and research and make this a major breakthrough point for feasibly strengthening the master status of the working class.

We must require state-owned enterprises to accept supervision from many levels of society.  This is the major guarantor for the continuous strengthening of the vitality, controlling ability, and influence of state-owned enterprises. We must open various channels of supervision, promote and accept the supervision of the masses, and accept and participate in supervision of the process of mixed ownership reform.  We must also draw from the concepts and management experience of private enterprises and foreign enterprises. Party committees at the central and local levels and governments should set up whistle-blower hotlines, mailboxes, and websites and accept reporting from all levels of society on malfeasance, dereliction of duty, and corruption during the process of state-enterprise reform. Concerning state-owned enterprise reform these committees should take advice and suggestions from various societal levels, and make use of the body of people’s wisdom and power to make good on state-enterprise reform.

Especially with the rapid development of the internet, online news, Weibo, Wechat, forums, blogs, podcasts, these broadcast formats provide the best arena and platform for the people to supervise government and fight corruption in an ever-strengthening manner.  Relevant organs should organically integrate educational experiences from the mass party line and pure and clean frameworks into the reform of state-owned enterprises.  These organs should positively involve the participation of the masses, make progress in using the internet, and widen and open to the masses channels for reporting corrupt practices.  Anti-corruption departments must especially focus on clues related to the loss of state assets which are revealed through reporting from the internet, and encourage and direct the masses to report on the egregious ways and issues of corruption through legal methods.  Those who would attempt to transfer state assets into personal exploits should be called out and swatted like mice crossing the street. This is the way to uphold the core status of common ownership.

About the author:  Zhu Jidong is a researcher at the Qinghua University Research Center for College Moral Education.  Holds a post-doctorate in Marxism Theory, is Head of China Academy of Science World Socialism Research Center and General Secretary of National Cultural-Security and Ideology Research Center.

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