Privatization in China

How Is the Chinese Government Reforming the State-owned Enterprises?

by Zhang Kai

This article is from the Hong Kong socialist publication October Review (vol. 26, no. 5/6) for December 31, 1999.

For over twenty years, the government headed by the Chinese Communist Party (CCP) has stressed the need for “reform” of the state-owned enterprises. It has implemented many different schemes, yet it seems they have all been quite ineffective.

In September 1999, at the fourth meeting of the 15th CCP Central Committee, this  was treated as a key issue, and a “Resolution on several issues relating to reform of the state-owned enterprises” (hereafter referred to as the September 1999 resolution) was adopted.

The resolution explained the urgency of this “important and urgent task”: “At present, some profound contradictions and problems have been disclosed. Due to the long-term effects of the traditional system, the many questions accumulated in history, redundant construction, and the rapid changes in the market environment, quite a proportion of state-owned enterprises cannot adapt to the demands of the market economy. Their operating mechanisms are inflexible, their inventiveness limited, their debts and social burdens heavy, their redundant staff numerous, their production operations difficult, their economic efficacy declining, and some of their workers live an arduous life. Hence it is imperative that effective measures be taken to resolve these problems.”

The Problems and the Reform

The elaboration by Gui Shiyong, director of the Research Bureau of the State Council, was more concrete. In an article titled “Reform of state-owned enterprises is important and urgent,” published in the People’s Daily, he said that according to the third general census of industry, out of 402 industrial products, 83 percent suffered from underutilization or serious underutilization of production capacity. In 1998, the assets deficit rate of industrial state-owned enterprises was 65.9%, interest expenditure was RMB 109.7 billion yuan (US$1 = RMB 8.5), amounting to 37.9% of the sales profits of the products.

The tendency to operate in the red has been increasing. In 1990, the amount and rate of deficit for state-owned enterprises was 27.6% and 47.2% respectively, and in 1998, the figures were 41.5% and 68.8% respectively.

Zheng Xilin, deputy director of the State Ministry on Economy and Commerce, made some disclosures about the situation in 1999: he said that despite the fact that the deficit of state-owned enterprises was 51.3% in 1999, that was already a 7% decrease from the preceding year. (This means that for 1998 the figure was 58.3%, much higher than the 41.5% quoted by Gui Shiyong.) Zheng further said that the production capacity utilization rate for over half the industrial goods produced was less than 60%; that redundant staff numbered around 10 million; and that while the net assets of industrial state-owned enterprises was 6,000 billion yuan, the mobile capital was only 1,300 billion yuan. Most enterprises had a debt rate of over 75%.¹

It was also reported that Xie Ping, director of the Research Bureau of the People’s Bank of China, said that bad loans of state-owned enterprises with four state banks were estimated to be over 1,000 billion yuan, amounting to 25% of total loans from these banks. This constituted a major obstacle to reform of the state-owned commercial banks.²

The reform proposed by the September 1999 resolution was to reduce the weight of state-owned enterprises in the national economy. Except for some “key” enterprises involved with state security and advanced technology, or those that provide significant public goods (the resolution did not specify what these “key” enterprises are), all state-owned industry could undergo restructuring and be opened to investment by the private sector. The resolution encouraged the introduction of foreign investments into enterprises that could be competitive on the world market, the merging of enterprises with potential markets but now suffering from difficulties, and the bankruptcy and closure of enterprises which have long been running on a deficit and which are wasteful of resources and highly polluting.

Take Chongqing, the largest industrial base in western China, as an example. The municipal government has announced the plan of implementing bankruptcy or merging of 77 enterprises in the coming two years, and offering privileged conditions to attract capital, especially from abroad. The 77 enterprises would be more than the total number of enterprises merged or gone bankrupt in all the preceding years. It is estimated that this would reduce the deficit rate of municipal state-owned enterprises by 12%.³

To implement the reform, the September 1999 resolution reiterated that “the trade unions and the workers’ representative councils will fulfill their duties according to related laws and ordinances.” “All workers and staff should compete to excel in their jobs, labor discipline should be strict, and reward and punishment should be clearly executed.” Corporate reforms would be carried out, the resolution said, and more power would go into the hands of the directors and managers. It was stipulated that the party secretary of the enterprise would be allowed to concurrently hold the position of director-general, and the directorate would decide all key questions. At the same time, the directors and managers are allowed to receive “remuneration for their duties and contributions.” In other words, the income differentiation within the enterprises will widen.

Unemployment

There are discrepancies in the figures for the number of workers who have lost their jobs, i.e., been “made redundant,” as a result of these reforms. An article in the Lookout Weekly reported that, according to a source in the Social Security Bureau, in the first half of 1999, 7.42 million workers were made redundant, yet according to sample surveys by the Labor Security Bureau of more than 3,000 enterprises, the actual figures were much higher than those reported to the central government.⁴ One reason is that the local enterprises report fewer numbers of workers made redundant in order to evade some of their responsibilities in arranging for new jobs for these workers.

In a report to the Standing Committee of the National People’s Congress, Zhang Zaiji, director of the Social Security Bureau, admitted that of the 5.4 million workers from state-owned enterprises made redundant, 6%, that is around 300,000, did not received any basic living allowance, despite the fact that the state stipulates that redundant workers are eligible for a basic living allowance of 170 yuan a month as well as 83 yuan of social insurance to be paid by the state. The same article quoted some “specialists” as saying that the social security level is low. In middle and western China, where the system of social security has been established, the standard security is 70–130 yuan, yet the people covered by this security net account for only about one-third of the estimated total numbers. In addition, according to a survey of workers suffering from difficulties in enterprises located in various provinces and autonomous regions but directly under the central government, about 1.63 million people had their household per capita income lower than the local minimum living security level.

Workers’ Resistance

It is thus no surprise that workers go on the resistance to fight for their rights and benefits. Here are some recent reports from newspapers in Hong Kong on such incidents.

On the eve of the October 1 National Day, 200 retired or redundant workers from the Changchun Machine Factory took to the street in protest. In the whole year, the 300 retired workers from that factory had received only 120 yuan, which is only sufficient for one month’s living expenses. Two hundred retired workers from the Xincheng Motor Factory in Xian also took to the street for four days, protesting that four months of living allowance had been overdue.⁵

Two thousand workers from the Juchuan Industrial City in Pinghu Township, Shenzhen, went on strike on October 11 protesting that wages had been overdue for four months. The management made promises but went back on them, so after having resumed work, the workers went on strike again. After this had happened several times, workers paraded to the township government, and the management then paid workers half of June’s wages, and two more months of wages in another ten days. Workers then resumed work.⁶

A porcelain factory in Hechun Township, Lianjiang City, Guangdong, went up for auction, and several hundred workers demanded a refund of the shares they had invested in the factory. They had been promised these funds would be returned to them in 1998 in addition to six months of overdue wages. They rallied in the factory, chanting slogans. The police were called in to maintain order, and officials were called in to mediate. The workers said that if the matter could not be resolved, they might take more radical action. Two hundred workers from a light bulb factory in Nanhai City, Guangdong, also went on strike to protest that some workers had been laid off and their wages not paid, and some workers had been beaten by the factory security guards.⁷

A state-owned textile factory in Weinan City, Shaanxi Province, went bankrupt in 1998 and was auctioned off for 40 million yuan. However, no compensation was arranged for the workers, and in the past ten months, workers were paid only 100 yuan a month, on which they could not survive. From November 2, about a thousand workers blocked three main roads in that city, and the police clashed with them, arresting about ten workers and seriously wounding three women workers.⁸

Two hundred workers from a rubber factory in Changsha, the provincial capital of Hunan Province, had not received any wages for three months, and on the morning of November 26, they blocked a highway in Yaoling. Having been dispersed by the police, they gathered again in the afternoon and blocked major roads in Changsha, paralyzing the traffic. Since many state-owned enterprises are operating at a deficit, there are road-block demonstrations every week in Changsha, and residents said they are used to this.⁹

Financial Mismanagement

The financial sector is riddled with chaos and mismanagement, causing urban and rural residents to suffer huge losses from their savings. Many protests and demonstrations have been caused by this. For example, after the Beijing government ordered a rectification of the financial sector, in September alone there were over 50 cases of attacks by the people on government offices. On October 20, about 500 people blocked a railway.¹⁰

In Hunan Province, the provincial government ordered the freezing of 40 billion yuan, the savings of about 2 million peasants in rural cooperative funds, and  announced that peasants could only withdraw 30% of their savings now, and the rest only after three years. Since September, in the whole province, there had been at least 50 large-scale riots.¹¹

While income has decreased, expenses have been on the rise. Starting from the beginning of 2000, the rent for public housing in Beijing was to increase by 1.5 to 6 times. Expenses for rent alone were to increase by over 100 yuan. Some Beijing residents said, “We stride into the 21st century with a smaller stomach.”¹²

In the countryside, according to the renowned economist Hu Angang, writing in the Lookout Weekly, the number of people living below the poverty line, as defined by international standards and not Chinese official standards, amounted to 120 million. With peasants who work in the cities being sent back to the countryside because of the economic downturn, and in particular with the impact of China joining the WTO adversely affecting the sale of agricultural products by the peasants, more will join the ranks of the poor.

All these social contradictions are time bombs waiting to explode.

December 5, 1999