State-owned Enterprises, Still a Major Force in the Chinese Economy and AbroadBy Antonio GraceffoShanghai Jiaotong University, China MBAPhD Candidate, Shanghai University of SportContact: Antonio_graceffo@hotmail.com

Table of ContentsIntroduction1. State-owned Enterprises (SOEs)2. Privately Owned Enterprises3. Mixed Ownership Firms4. SOE Performance 5. From Planned to Chinese style market economy6. State-owned Assets Supervision and Administration

Commission of the State Council (SASAC)7. Singaporean Temasek model8. Employment in Modern SOEs9. Employment in POEs10. Employee Turnover in China11. China and the WTO12. Foreign Direct Investment (FDI)13. Mergers and Acquisitions (M&A)14. Changes in Corporate governance15. The Banking Sector16. Corruption in SOEs17. Stock Market Listing18. Domestic Listing19. Hong Kong Listing20. Overseas listing21. Government Control of Stock Markets22. Outbound Investment by SOEs23. Conclusion24. Bibliography25. Abut the Author

Introduction

One of the world’s biggest hotel groups, with both five-star and budget hotels, JIN JIANG is a state-owned enterprise (SOE) of the People’s Republic of China (PRC) controlled by the Shanghai government. When one hears SOE one pictures large, gray, concrete buildings with thick black smoke pouring out of them. But, most of China’s SOEs are not oil or steel companies. They are companies, such as Jin Jiang,

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operating in many different sectors of the economy. They include restaurants, construction firms, and shopping malls. (The Economist)gromPrior to 1978 “capitalists were considered class enemies, and the economy was virtually closed to foreign trade and investment” (U.S.-China Economic and Security Review Commission) At that time, SOEs accounted for nearly 100% of non-agricultural employment. (Wu) Through the 1980’s and 1990’s until today, the private sector has grown in leaps and bounds. Consequently, as private sector employment has grown, SOE employment has decreased. In 1998 SOEs accounted for 60% of industrial employment. But by 2010 that percentage had dropped to 20%. (Zhang and Freestone) While that number is smaller than it was in 1978, 20% is still a significant percentage of China’s total workforce.

China’s amazing economic growth over the last 30 years could lead one to believe that the country has embraced capitalism and abandoned Communism. But actually, the Chinese government refers to their system as “socialism with Chinese characteristics” (U.S.-China Economic and Security Review Commission) Consequently, although China is moving toward a more market driven economy, the state-owned enterprises (SOE) still accounted for 40% of the GDP, as recently as 2011. (U.S.-China Economic and Security Review Commission) A significant component of China’s SOE reforms of the last several decades has been “grasping the big, and letting go of the small.”(Cao) This policy has lead to smaller SOEs being privatized, or sold off, as larger SOEs are encouraged, through acquisitions, to increase their size and importance, becoming global players. In fact, Chinese SOEs appear on both the Forbes Global 2000 (Dobson) and Fortune Global 500 (Cendrowski)

While China appears to be moving toward a market economy and repeatedly releases edicts and guidelines calling for SOE reform (Peng, Shi and Xu) and the reduction of government intervention in business, this hybrid, semi-liberalized, economic system still calls for the state to be heavily involved in business control and ownership. (U.S.-China Economic and Security Review Commission) The natural expectation would be that as China moves to a more market driven economy that SOEs would become dinosaurs, slowly falling into extinction. On the contrary, SOEs are still here and the Communist Party of China (CPP) still considers them to be very important. (U.S.-China Economic and Security Review Commission) "SOEs still dominate China’s economy. According to Credit Suisse, the total assets of non-financial SOEs represented 60% of Chinese GDP as the end of 2013." (Gov.uk)

As important as the SOEs are to the Chinese economy, they have been identified byboth foreign observes and Chinese economists as being a drag on the economy and animpediment to its development.

The SOEs have been criticized for their inefficiencies, over employment, and 2

mismanagement. They are accused of misusing resources, creating unfair competition, having easy access to government capital loans and loans from state banks that they fail to repay. “Indeed, 85 percent of loans in 2009 were issued to SOEs, because banks themselves are state-owned, and are directed to let credit flow to other state-owned businesses.” (Cary) This free flow of lending to SOEs makes it difficult for the privately owned companies (POE) to obtain financing, which many economists feel is impeding the development of the private sector of the Chinese economy. Michael Pettis, a professor of finance at Peking University in Beijing, said “the key to resolving the imbalances in the Chinese economy was ensuring a better allocation of capital.” This can be achieved by lending more to POEs rather than SOEs. (Bland)

SOE managers have been accused of corruption and asset stripping as party officials treated the SOEs as their personal piggy banks and fiefdoms. They also enjoy a monopoly in certain industries such as energy, power, steel, telecommunications and shipbuilding, giving them unfair advantage over private firms who may want to enter these sectors. SOEs are not limited to large, critical industries. They also include some restaurants, retailers, construction, metals, and real estate companies. The managers have been cited for holding lavish banquets and using state money to purchase other luxuries. The Central Commission for Discipline Inspection criticized SOEs for exploiting state-owned assets and using them as “a huge coffer for bribery,"’ (Gan and Huang) A 2013 Xinhua news agency reported that in the results of a National Audit Office audit of ten SOEs, the following violations were found: inaccurate accounting, incomplete financial statements, illegal practices and “poor management of investment decisions.” (News.xinhuanet.com)

As a result of incidences of corruption and inefficiencies resulting in low return on assets (Wang), the PRC government has made SOE reform a main priority. (Peng, Shi and Xu)

This paper will give a brief overview of the SOEs and government owned banks, and their history. Problems in SOEs will be examined, such as mismanagement, government controls, unpaid loans, and corruption. A brief overview of China’s privately owned companies (POE) will also be given. The paper will go on to explain the various reform programs taken by the Chinese government to make the SOEs more competitive in the global markets. Stock exchange listing of SOEs, both inside and outside of China will be addressed. And finally, outbound investment by Chinese firms will be covered. In the conclusion, it will be noted that China’s SOEs are still a significant force, driving China’s internal economy, and a powerful tool which China can use to enter into foreign markets around the world.

1. State-owned Enterprises (SOEs)

In 2014, there were 150,000 SOEs which accounted for 17 percent of urban 3

employment. (Curran) Prior to the economic reforms of 1978, the SOEs directly employed a higher percentage of the population and directly impacted the lives of more Chinese citizens. “Each SOE acted as a mini-society in providing life-time employment — the so-called 'iron rice bowl' — and some basic social services (clinics, schools, age pension equivalent) for its employees and their families. As a result, pre-reform SOEs were highly inefficient.” (Zhang and Freestone)

During the days of the planned economy, 1950 to 1984, there was no legal form of ownership, apart from state ownership. And the state could hire and fire SOE executives at any time. (Aivazian, Ge and Qiu) In the Communist model, the assets of the SOE belong to the people. Local governments are the stewards of those assets, seeing after the interest of the people. And managers are entrusted with the day-to-day operation of those assets, tasked with the ongoing duty to generate a return on assets. In this model, the mangers have no discretion regarding asset transfer. As a result, local governments tend to be highly involved in the operation of SOEs and give very little authority to managers. (Cooke)

The 1993 Corporation Law: divided SOEs into two categories: that of closely held corporations, including wholly state-owned corporations and foreign-invested corporations, and publicly held corporations, including listed and non-listed corporations. There are four organizational forms in the second category: limited liability companies, limited liability stock companies, employee shareholding cooperatives, and private enterprises. (Aivazian, Ge and Qiu)

Estimating the actual size of SOEs and their impact on the Chinese economy is difficult. When the government releases data on what percent of the GDP is attributed to SOEs, they often only count companies which are 100% owned by the state or where a majority of shares are owned by the state. But tracing the ownership of shares to ultimate ownership would give a very different picture. For example shares of private sector firms may be owned by SOEs, or may be investments by mixed ownership entities. (U.S.-China Economic and Security Review Commission)

“In 2004 China amended the constitution to grant the non-public economy a legal status in the socialist market economy.” (Chen) As the private sector developed, the SOE sector also became more market oriented and began to function as for-profit businesses. SOE productivity improved with the introduction of the incentive contract system of the mid 1980s. The new system gave the SOE more autonomy in decision making and allowed them to keep some of the profits. Bonuses were also paid to worker whose income increased under this system. (Aivazian, Ge and Qiu)

One of the ways of dealing with SOE reform was for the PRC government to corporatize some of the SOEs. Corporatization was a way for the Chinese government to retain ownership and control of the SOE, but with the benefit of having a CEO, CFO and other executives running the SOE more efficiently. Having these managers 4

in place resulted in a more efficient flow of information, which combined with an incentive system, resulted in higher profitability. (Aivazian, Ge and Qiu) From the 1980s until today, the system of managing the SOEs has become more and more streamlined, to increase efficiency. Changes have been made to reduce the bureaucracy in state-owned enterprises, to make them more nimble and competitive. (Zhang and Freestone)

In 1983, the Chinese government implemented the Contract Management Responsibility System (CMRS) followed by the 1993 implementation of the Modern Enterprise System (MES) both of which granted more autonomy to SOE managers, without the state giving up ownership. (Forrester and Porter, 1999; Scot, 2002 cited in Bai and Bennington). These two programs have decreased state intervention at the micro level. (Child, 1994; Harvie, 1999; Warner, 2001; Warner and Zhu, 2000 cited in Bai and Bennington)

Today, SOE managers enjoy a great deal of autonomy compared to their predecessors of only two decades before. “Enterprise managers have been given autonomy over pricing, investments, accounting, human resources, material supply and acquisition, and other decisions related to the enterprise operations, which were absent under the former planned economy (e.g. Child, 1987, 1999; Lin et al., 1996, 2001; Naughton, 1995 cited in Ralston et al.)

In the past SOEs reported directly to the central government. Today, they are controlled by the provincial and local government. (Zhang and Freestone) But, in spite of the party appearing to take a step back from managing the day-to-day operations of the SOEs, many SOEs have adopted the “‘one-man responsibility system’, under which the Party secretaries have become part of the management.” (Bai and Bennington)

These reformed, corporate SOEs remain a significant force in the economy. In 2013 there were 155,000 SOEs valued at approximately $17.4 trillion. (Zhu) The SOEs employ tens of millions of people. (Bland)

The SOEs dominate many sectors of the economy, including: automobiles, information technology, petrochemicals, aviation, insurance, energy, banking, railways, media, shipping, construction, metals, telecommunications, industrial chemicals, alternative and new energy technologies, new generation IT, biotechnology, new generation automobile technology, high-end equipment manufacturing, new energy sectors, and new and advanced material sectors. (LEE)

The new-style corporate SOEs have grown, through mergers and foreign direct investment (FDI) into some of the largest companies in China and around the world. The Industrial and Commercial Bank of China (ICBC) a banking SOE, for example, is the world’s largest bank, in terms of assets. (Bland) 5

One-hundred and Twenty-eight of the companies on this year’s Fortune Global 500 are US based companies, making the US the world leader among global companies. Coming in second, however, was China, with 98. The top 12 Chinese companies on the list are SOEs, including banks and oil companies. In fact, SOEs comprise 22 of the 98 companies. (Cendrowski)

According to CCTV commentator Feng Yu, SOEs were prominent among the Top 500 Chinese Enterprises for 2015. (Jingya) The largest SOEs are in the petroleum and energy sectors with SinoPec at the top, followed by China National Petroleum Corporation. State Grid, China's largest electric utilities company, ranks third. (Jingya) China Mobile, another SOE, is the world’s biggest phone company. (Wang)

For all of their impressive growth and immense size, the SOEs are still fraught with profitability issues. Testament to the problems inherent in SOE performance, “Of the 54 companies with the biggest losses last year, 16 were Chinese, the most of any country.” (Cendrowski)

2. Privately Owned Enterprises (POE)

In 1996, just below half of China's 689 million workers were employed in agriculture. At that time, the state sector was the next largest employer. SOEs tend to be important employers in inland and Northern provinces but less so in richer, coastal regions such as Jiangsu, Zhejiang, Fujian, Shandong, Guangdong and Guanxi. (Wu) At that time, there were almost no POEs for people to work in.

Private property only came under the law in 1999, when personal belongings were protected from nationalization. Private business people were denied Communist Party membership until 2002. Private assets and capital finally became legal in 2004. (IFC 2000: 10-19; Wang, 2004 cited in Ralston et al.) At one time, SOE was the only form of business, and virtually all businesses were owned by the government. Since the advent of private property, other forms of business ownership have also grown in importance. Company “ownership forms in China, include domestic privately-owned enterprises (POEs), foreign-controlled businesses (FCBs), and state-owned enterprises (SOEs).” (Ralston et al.) The management culture of the Chinese privately owned enterprises (POE) vs. foreign controlled businesses (FCB) are vastly different.

POEs have been increasing in both number and percentage of total GDP since economic reforms which enabled private citizens to engage in for profit activities. (Ralston et al.) Today, China’s private sector demonstrates high growth and productivity. (Ralston et al.) As private enterprises entered the market they faced a number of disadvantages as SOEs were given tax breaks, better access to information and natural resources, easier access to bank loans and were supported by local governments. (Ralston et al.) SOEs have dominated the fields of automotive, 6

pharmaceutical, electronics and petrochemical. (Ralston et al.) Entry into SOE dominated fields is difficult for POEs. Private sector firms are faced with “glass doors” or “glass ceilings.” In theory, they are allowed to invest in most sectors but SOEs dominate many sectors, “including mining, financing, banking, rail, aviation, telecommunication, media and education.” A state monopoly in these areas creates barriers of entry for private firms. (Song, Yang and Zhang)

Some of China’s POEs are small, family run businesses which developed out of a traditional Chinese clan culture, where the majority of the employees are related. Other POEs actually started as collectives, whether township or village enterprises (TVE), whereby the people operating the business were eventually allowed to take it over and run it as a POE, sometimes on a lease basis. (Ralston et al.)

POEs generally perform better than SOEs which is a considerable achievement considering all of the advantages that SOEs enjoy, such as easy credit and low cost raw materials. One reason why the POEs outperform SOEs is because of superior managerial oversigh. Not only are the POE managers real entrepreneurs, but because POEs obtain financing from banks, the banks fulfill an oversight function in the POEs, monitoring their management decisions. (Gong, Görg and Maioli)

3. Mixed Ownership Firms

In the early days of Foreign-controlled business (FCB) the government offered a number of incentives to convince foreign companies to invest in China. FCBs are generally large multinational corporations (MNC) which tend to operate according to the norms of western corporate culture. (Ralston et al.) Many of the FCBs function as joint-ventures whereby the foreign partner provides technology, experience and access to foreign markets, and the local partner contributes land and government and local connections. The FCBs tend to use more international accounting and western management styles. (Ralston et al.)

Tian and Estrin found that in mixed ownership companies, with a small percentage of state ownership, the state ownership has very little impact on the firm’s performance. In firms where the state owns a large percentage of the shares, however, the influence of the state ownership on performance is slightly positive. A firm with large state and private ownership has to provide incentives to motivate agents from both sides, which, seem to produce positive results. (Tian and Estrin)

4. SOE Performance

Evaluating the financial performance of SOEs is problematic because “the prices of inputs and outputs of SOEs are often set by the state and distorted, on the other hand, in addition to financial goals, SOEs also bear nonfinancial goals such as serving as social security providers for their employees.” (Kong, Marks and Wan) The general 7

theory on SOEs says that they will underperform because their decision making is not solely based on profit maximization, but also to meet certain political goals. (Tian and Estrin) From 1980 to 1995, the percentage of loss making SOEs roe from 19.2% to 33.5% . (Dong and Putterman) Even loss making SOEs don’t necessarily have to close their doors.

The SOEs, even if mismanaged, generally do not face the threat of bankruptcy, because of easy access to state credit. Government subsidies can help them remain in business. (Bajona and Chu) The experience of China’s SOEs largely confirms this theory. (Tian and Estrin) However, SOEs are not without their advantages. World class investor Warren Buffet, for example, likes certain Chinese SOEs. His investment company, Berkshire Hathaway made an investment of $500 million in PetroChina Co., in 2003, and sold it for more than $3 billion four years later. (Das) So, there are benefits to the SOEs and they can be very profitable. These advantages come from preferential treatment these companies receive in the home country. (Tian and Estrin)

Not all SOEs are profitable. In fact, SOEs often contain fundamentals flaws which will prevent them from being profitable. By maintaining surplus employees, or making decisions which are contrary to market demands, the SOEs rack up losses. (Bajona and Chu) SOE return on assets (ROA) have consistently fallen short of POE returns. “The average return on assets for state entities stands at a paltry 4.6%, compared with 9.1% for private companies”. (Wang) Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics estimates that the return on assets of SOEs is between a third and half that of POEs. (Curran)

Part of the reason why the SOEs have such low returns might be because of a conflict between their business role and their political role. SOE managers are faced with two sets of obligations, turning a profit and following government mandates. It seems, however, that when these two goals conflict, the SOE managers are meant to chose in favor of the government mandate. (U.S.-China Economic and Security Review Commission) The government has repeatedly said that it would not meddle in the affairs of the SOEs, and that the managers should run them as a business. “According to the Chinese government, they are not there to influence the decisions because all SOEs are supposed to be profit-driven now, like all other businesses.” (Tradecommissioner.gc.ca) The reality, however, seems to differ from the stated. “But there have been examples that whenever the state interest is not in complete overlap with the business interest, the state interest trumps the business decisions.” (Tradecommissioner.gc.ca)

One of the many political roles that SOEs play in the economy is as a vehicle for the transmittal of government stimuli, in the form of loans from state banks, to the greater economy. (Investment Adventures in Emerging Markets) This role may cause a conflict between earning a profit and following the party line.

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5. From Planned to Chinese style market economy

“ In 1978, capitalists in China were official “class enemies” but in 2001 they were welcomed into the Chinese Communist Party (CCP)” (Szamosszegi and Kyle)

In 1949, following the establishment of the People’s Republic of China, the Chinese government followed a Soviet style Communist economic system. By 1954, nearly all companies had been nationalized. (Fu) From 1954 through 1979, the beginning of the SOE reforms, nearly 100% of the industrial sector was dominated by large SOEs and collectives, with almost no POEs in operation. The administration of these firms was carried out by successive levels of government, rather than some sort of managerial hierarchy. The economy was a true command economy with the government providing financing, and controlling the prices of both inputs and outputs. Salaries were generally low, with managers earning only slightly more than workers. Employees had jobs for life with numerous health and welfare benefits such as free housing and education for their children. (Tian and Estrin) SOE output was sold to the government at prices set by the government. Nearly all SOE profits were turned over to the government. (Aivazian, Ge and Qiu)

The 1979 SOE reform began with the fang quan rang li policy, whereby SOEs were given greater autonomy and a share of the profits. In 1981, the "Economic Responsibility Policy" was introduced, whereby the firm could, after paying a share to the government, decide how to allocate the residual profits. These incentives had to be put in place to make SOE managers think in terms of earning profits. The incentive contracts applied to both managers and workers. (Bai and Xu)

From 1983 to 1987, a taxation system replaced the earlier profit sharing program.

(Lok and 駱佩傑 .) Through 1992 the reforms gave increasing autonomy and

incentives to managers. It was at this time that the government began selling off smaller SOEs. (Fu) After the implementation of the 1993, Company Law, SOE reform was realized through corporatization of SOEs along western corporate lines. (Aivazian, Ge and Qiu) The Company Law was designed to force companies to let markets determine such aspects as pricing, and that “finances must be raised through banks and other creditors; firms must pay dividends to their shareholders; pay back interest and principal to their creditors, and tax to the government.” (Tian and Estrin) This replaced the earlier system whereby the government financed the firms directly.Under this new law, the Board of Directors, composed of the delegates of the largest shareholders, would elect and monitor the directors. However, in practice, a retired government official would usually serve as chairman of the board. (Tian and Estrin) This was not a privatization. Once again, the government maintained both its ownership of and ultimate control of the SOEs.

After the reforms of the 1990s, the economic climate changed dramatically. Property 9

rights were established. Many state assets became privatized and some SOEs became joint stock companies. The new owners of these firms had more decision making authority. They also shared in the profits of the firms, which provided incentives not present during the true communist days. (Tian and Estrin)Prior to 1993 employee associations and the enterprise branch of the Communist Party monitored the daily activities of managers. Since then, the law has expressly forbidden Communist Party officials from interfering in corporate governance. But since the government controls a large percentage of voting stock, it still exerts a great deal of control over companies by exercising voting rights. (Tian and Estrin)

The period 1993-2003 saw the end of lifetime employment and the “iron rice bowl” system. During this time, the government also enacted a policy of “grasping the big, and letting go of the small”, whereby smaller SOEs were sold off and larger SOEs were reformed.

From 2003 to the present western style capital management systems were put in place and the number of non-performing loans was decreased. (Cao)

Before 2003 it was hard for POEs to enter the market. Entry costs were high and POEs had less access to bank financing. SOEs, on the other hand, could obtain essentially non-performing loans from the state or from state controlled banks. (Cao) In 1997, ninety per cent of bank loans were granted to SOEs, although two thirds of these firms were losing money. (Wu) The SOEs were also heavily subsidized. (Cao) These factors combined to make the playing field extremely uneven, with a decided advantage going to the SOEs. After 2003, however, things changed dramatically. Entry costs dropped. Favorable loans to SOEs still existed, but the government subsidies had decreased dramatically. (Cao) Today, SOEs are still a large and important factor in the Chinese economy. The remaining SOEs are generally very large. (Cao)

In November 2013, the Chinese Communist Party’s Third Plenum announced the “mixed ownership economy,” concept, whereby SOEs would be partially privatized but the government could retain ownership control. The hope was that exposing SOE managers to market pressures would increase their efficiency. Other programs include the professionalization and marketization of SOE managers. (Lin, Li-Wen)

SOE reform is one of the most significant changes to occur in the Chinese economy. (Peng, Shi and Xu) The recent economic slowdown has brought scrutiny to the unbalanced allocation of resources between SOEs and POEs. (Fidelity World Wide Investments) As a result, the government has been focusing on SOE reform. “Evidence has shown that China's SOEs could cut staff by a third with no impact on output.” (Economist 1997) The obvious answer would be to fire these redundant workers and try to steer the SOE on a path of greater profitability. But fears of increasing unemployment may be one of the factors which is hampering the 10

government’s ability to reform the SOEs. (Wu)

In SOE reform the Chinese government has been careful to avoid the mistakes made by Russia, namely, trying to change too much, too quickly. (Steinbock) In the 1990s almost overnight, the former Soviet Union (USSR) changed from a centrally planned economy to a market economy. (Aven) “Russia’s economy descended into a death spiral” causing the national currency, the ruble to crash. (Stoner and McFaul) This swift conversion was accompanied by crime and corruption on such a scale that journalists dubbed the country “a collapsed and criminal state.” (Aven) Instead, of instantaneous change, China has implemented a series of policies of incremental change. “Much of Chinese success in the reform of state-owned enterprises can be attributed to pragmatic gradualism.” (Steinbock)

Since the economic reform there has been a decentralization of power from the central government to the local government, regarding matters of the economy. Now, local governments are under more pressure to see after their local economies, but at the same time, they are now able to share in the benefits and rewards of their local economies, which serves as an incentive for them to improve economic performance. (Jin, Qian and Weingast) This increased local control and responsibility for the economy is in keeping with the shift of SOE management and responsibility to the local or collective or village level enterprises. In the past, the central government appointed local government officials based on loyalty. Today, many of these appointments are based on the individual’s ability to successfully manage the local economy. Implementing these types of incentives, which were absent before the economic reforms have had positive results. “Across provinces and over time, stronger fiscal incentives imply better economic performance and faster structural change. Stronger fiscal incentives positively affect the development of the non-state enterprises” (Jin, Qian and Weingast)

The positive performance of POEs even influences the SOEs, leading to better performance. “Stronger fiscal incentives also induce more reforms in state-owned enterprises in terms of the increased shares of contract workers in the total state employment and bonuses in total employee wages.” (Jin, Qian and Weingast)

A recurring theme in both the reform of the SOEs and the economy as a whole is the conflicting concepts of POEs and SOEs existing in the same economy and of the SOEs pursuing profit but still fulfilling some political function. “In the transition from central planning to a market economy, however, SOE operations are complicated because liberalization forces and state influences coexist and jointly constrain.” (O’Connor, Deng and Luo) In spite of reforms, however, the SOEs still engage in counter-profit producing activities in order to fulfill other needs of the government. SOEs serve as the carriers of government sponsored economic stimuli in the case of financial crisis such as the global financial crisis of 2008. (Peng, Shi and Xu)

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6. State-owned Assets Supervision and Administration Commission of the State Council (SASAC)

Another step taken by the PRC government to reduce the conflicting interests of politics and profit and to remove the government from the daily operation of companies was the creation of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC). In 2003 SASAC was established to oversee state-owned assets of the enterprises, “enhance the management of the state-owned assets, increasing the value of state –owned assets, promote the government’s financial reform measures and the modern enterprise system, improves corporate governance, appoints and removes corporate officers, and evaluates the performance of the companies under its supervision.” (En.sasac.gov.cn) The SASACs are holding companies which hold the shares of SOEs on behalf of the state and are responsible for SOE reform. In fulfilling its various roles of improved asset management, the SASAC is meant to transition loss-producing SOEs into productive POEs or corporate style SOEs.

Multiple SASACs exist across various levels of government, overseeing SOEs from central down to provincial and local level. “There are approximately 300 SASACs in China. In addition to the central government SASAC, there are about 30 provincial SASACs overseeing provincially controlled SOEs, and scores of municipal SASACs supervising local SOEs.” (U.S.-China Economic and Security Review Commission)

Before the establishment of SASAC industries were managed by various government ministries. The financial sector was handled separately from other industries. The Ministry of Finance set up the Central Huijin Investment Limited to manage the state’s shares in financial institutions including China’s four largest banks. “Huijin became a wholly state-owned subsidiary of China Investment Corporation, the Chinese sovereign investment fund directly controlled by the State Council, in 2007.” (Fu) SASC functions as an owner, including executing voting rights, the selection of management, and rights to shares of profit distributions. “SASAC is also responsible for the oversight of state assets in these large entities, and has the authority to appoint, remove and evaluate directors, executives and supervisors of most of the Central SOEs,” (Fu)

The SASAC was established with two primary aims in mind. First, to reform and unify the management system of state assets, and second, to clearly demarcate the jurisdictions of central and local governments to ensure that they didn’t overlap or conflict. (Mattlin) The new Company Law says that SASAC wields ultimate power over the SOEs. (Mattlin)

The SASAC has failed to resolve the conflict between profit and politics. SASAC functions as both a regulator and an owner, which can cause obvious conflicts of interest, often ending in failure. As part of a crack down on asset stripping and 12

corruption SASAC put restrictions on ownership transfers, which seemed like a good strategy. On the other hand, the SASAC has been known to randomly reshuffle management, with chaotic results in SOEs. “while central government has a point in saying that SOE profits are not always reinvested in sound ways, there are no guarantees that a semi-governmental body with ambiguous goals and affected by political considerations will do a better job.” (Mattlin)

Under the administration of SASAC some SOEs have thrived, even becoming Fortune 500 companies. But the conflicting roles of the SASAC, both as regulator and owner, have been seen as an impediment to the further development of the SOEs. As a result, the 2014 government work report on SOE reform called for less government interference in the day-today operation of SOEs. The report stated the government’s goal of granting authority to SOE “board of directors to hire, evaluate and compensate senior managers.” (Fidelity World Wide Investments) To create fairer competitive environment for SOEs and POEs, the government said they would allow the markets to determine the allocation of resources, also, that SOEs would step away from certain sectors to give POEs a chance. (Fidelity World Wide Investments)

7. Singaporean Temasek model

While the PRC government has repeatedly announced that it would reform the SOEs, their plan does not involve simply privatizing all of the SOEs. Instead, several other options lie on the table, including the Singapore Temasek model. (The Economist)

The Chinese government determined to privatize the SOEs, following the Singaporean Temasek model. (Fu) Temasek Holding is a state-owned investment company in Singapore which creates alternative investment opportunities besides sitting on low-yielding U.S. Treasury bonds. (WSJ, 2007) By effectively managing capital, the state could focus on its investments and making sound, profit producing investment decisions, rather than getting bogged down in the day-to-day decision-making of SOEs. In keeping with the Temask model, “several state capital operating companies shall be established, and qualified SOEs shall be transformed into state capital investment companies.” (guoyou ziben yunying gongsi cited in Fu) This model calls for a three-tiered approach whereby SASAC would serve “as the regulator of state-owned assets, mid-tier state capital operating companies and state capital investment companies…fully-owned by SASAC, and the bottom tier Central SOEs and/or their subsidiaries.” (Fu)

The plan for implementation of the Singapore model is for both the government and the SASAC to step out of the daily decision making in the firms. Two Temasek-style firms will help setup to fund the SOEs and pressure them to increase profitability. SOEs will “cut perks for top executives, and give private capital more room to invest in SOE projects and offshoots.” (Huang) Under this new system the SOEs will have to increase profitability in order to attract investors. (Huang) Smaller SOEs will 13

merge into larger companies which can compete globally. Some of these mergers have resulted in new companies which have become the largest in the world, in their sector. “For example China Shipping is merging with COSCO to create one of the world’s largest shipping companies.” (Orr)

In spite of reforms, problems linger. The largest company on the Shanghai Composite index is PetroChina. Even this huge SOE has been the recipient of government subsidies in the form of stock purchases. In September of 2015, when PetroChina’s shares experienced a drop, the government funded the purchase of the shares to buoy the share price. (Curran)

8. Employment in Modern SOEs

In the pre-reform days SOEs accounted for nearly 100% of non-agricultural employment. Pay was extremely low, but companies provided employees with health and welfare benefits. These jobs were extremely secure, generally with lifetime employment and benefits, and were often referred to as “The iron rice bowl.” (He et al.) Social welfare expenses, such as pensions were born by large SOEs. (O’Connora, Chow and Wu) These benefit and pension programs, combined with over-employment decreased the profitability of SOEs.

After the liberalization of the economy and the entrance of private firms, employment was no longer a given. As a result, employment contracts first came into being in 1986. (O’Connora, Chow and Wu) SOEs began following the Modern Enterprise System (MES), in 1993, whereby SOE employment was no longer guaranteed for life. “A large number of once protected white-collar staff have been reallocated to lesser positions, and the size of bureaucracies reduced.” (Bai and Bennington) SOEs then introduced financial incentives such bonuses. The change from lifetime state-employment to contract SOE or POE employment was a slow, but steady progression. By 1990, only 10% of workers were on contract. (O’Connora, Chow and Wu) By 2009, the percentage of workers in the Pearl River Delta region covered by contract had reached 62%. (Freeman and Li) By 2005, 70% of all employment contracts, across the entire country including SOEs and POEs, were fixed term. Even in SOEs, the percentage of lifetime or open-ended contracts had dropped to 20%. (Li)

The fixed term contracts have been the cause of the majority of China’s employment disputes. They are also the cause of friction and dynamism in the China job market. Because employees do not enjoy a feeling of employment security, they are more likely to change jobs, frequently, as they perceive better opportunities arising elsewhere. (Li)

To be able to attract the best managers and employees, the SOEs will need to be able to pay market appropriate wages, something they were unable to do in the past. “However this has been tried in the past and has not been sustained. When SOE 14

executives are seen to be making a lot of money, paid for by state assets, political reaction has been very negative.” (Orr) A further problem of these increased payments to SOE managers is that offering more money to successful SOE managers doesn’t necessarily guarantee they will remain with the SOE. SOEs offer financial incentives and may still offer lifetime employment to certain key employees who are essential to the firm’s performance, due to training and experience. However, they may not remain, because these highly valuable employees are also the ones most coveted by the POEs. And so, if the POEs can offer them enough financial incentives, they will leave the SOE and move to a POE. (Li)

In spite of corporatization of SOEs, the Communist Part still remains influential in the modern SOE. In SOEs the state closely controls labor relations through the Communist Party, which oversees a system of policies, regulations, and ‘‘Party controls personnel’’. The Party can “intervene in enterprise decision making, including the appointing, firing, and promotion of divisional managers (Hassard et al., 1999 cited in O’Connor, Deng and Luo)

Party representatives with direct control over hiring and firing may make those decisions based on politics, rather than profit maximization. This reduces the benefits of delegating authority to competent managers. (O’Connor, Deng and Luo) “A survey shows that 92 per cent of the directors were members of the CCP which suggested a correlation between directors’ appointment and the power of the CCP over staff appointments.” (Hong Tan and Wang) Therefore it is questionable whether or not the directors can be called independent. (Hong Tan and Wang)

Over the years, SOEs have slowly changed their internal culture, approaching international norms, in order to be more competitive, globally. (Ralston et al.) As has been seen previously in this research, some of these changes include reducing staff, giving incentives and bonuses, increasing responsibility, and increasing pressure to turn a profit. All of these factors combine to make China’s job market extremely dynamic, with employees frequently leaving one company and joining another.

With the exception of some managers, SOEs tend to hire new graduates, rather than employees with experience at either foreign owned or POE companies. New SOE employees learn procedures and build relationships with coworkers and management, although job responsibilities “are not always clearly defined”. In 2010, the average employee turnover in SOEs was only 10%, while turnover at POEs was 18.5%. So, it can be seen that employee turnover in SOEs is much lower than in POEs. (Wang, P)

9. Employment in POEs

POE management structures are based on family or clan structures typical of the Chinese culture. But, given the smaller size of the average POE and the more competitive environment in which they must operate, they are more innovative, 15

entrepreneurial, and reactive than SOEs. (Ralston et al.)

Even with the changes and modernization in SOEs many of the old cultural aspects carry over. Company dynamics in China are such that Chinese leaders and employees are thought to be especially concerned about relationships and tend to preserve interpersonal harmony in organizations. Supervisors are to take care of their employees in the same manner that the family patriarch is to care for his family members, while employees should be devoted and loyal to the supervisor. (YI) SOEs represent the traditional, Chinese collective culture, whereby interpersonal relationships and harmony are considered important concerns. (YI)

The POEs operate differently, largely because of the influence of multinational corporation (MNC). For the first two and a half decades of foreign direct investment (FDI) in China, the preferred means for MNCs to enter the Chinese market was to engage in joint ventures (JV) with local companies. (Dickinson) In general, FDI and JV can bring Western management methods and experience and help promote industry growth. But in a transitional economy, where the state still has tremendous direct influence and control over industry, the transition from command economy to market economy can be hampered. (O’Connor, Deng and Luo)

SOEs and POEs differ in a number of ways. In a POE, decisions such as the number of employees to maintain are determined by the market. But in SOEs this number is mandated by the government. In return for creating and maintaining employment, SOEs receive subsidies from the government, including both “direct subsidies, such as cash payments used to cover production losses, and capital subsidies, or low-interest loans from state banks.” (Bajona and Chu)

The presence of SOEs, POEs, and MNCs all in the same system, have made China’s job market extremely dynamic. POEs generally pay better than SOEs. But even MNCs in China have found it difficult to retain qualified employees because they are in such demand. (Machwurth)

10. Employee Turnover in China

In the modern Chinese economy, employee turnover is very high. According to a poll by an international recruitment agency, “35% of staff workers in China have changed jobs in the past two to four years…and 10.4% in the past one year.” (Wantchinatimes.com) Another study found that the turnover rate for skilled workers is 20-25% (Deloitte Financial Advisory)

Employee turnover will generally be higher in industries dominated by FDI and JV firms. These will also be the industries where performance-based incentives are used to attract and retain the best and brightest candidates. (O’Connor, Deng and Luo)16

Through 2010 foreign companies were the companies of choice for top Chinese graduates. Since 2010, the employment climate has changed, with most grads preferring to work for domestic companies. But, many of these local Chinese companies are offering the bonuses and incentives once exclusive to foreign companies. “According to some reports, domestic firms looking to raid Western companies of experienced technical talent and executives are offering dramatic pay increases—often as much as 50%. “ (Schmidt) The SOEs are not offering such incentives.

MNCs are less likely to be influenced by trade unions, resulting in more frequent labor disputes. (Cooke) Employment pressure and job security are lower in MNCs and JVs, compared to SOEs, especially for older workers, who were used to having a lifetime contract, complete with retirement provisions. The highly competitive business climate in which the MNCs work also causes job uncertainty. For example, in 1997 Kodak and Fuji China became embroiled in a price war which resulted in 20,000 employees being made redundant. (Zhan, 2003 cited in Cooke)

The goal of the Chinese government economic reforms has been to become more market oriented, by adopting some, but not all of the Western management systems exhibited in foreign controlled businesses (FCB). (Ralston et al.) However, the reforms of “the Chinese government are evolutionary, not revolutionary.” The government seeks to streamline, to pare down the old dinosaurs, but not to completely eradicate the hierarchical culture. By thinning out the old companies, the new style SOEs can be more flexible in the modern transitional economy. (Ralston et al.)Thus, the hierarchical structure in the modern SOEs reflects both the Western and the Chinese styles.

11. China and the WTO

In 2001, when China was admitted to the WTO, the US and EU argued that because of the dominance the SOEs still had in the Chinese economy, China should be considered a non-market economy (NME). (Chen and Whalley) A market economy is one that depends “heavily upon market forces to determine levels of production, consumption, investment and savings without government intervention.” (Asycuda.org) According to the Legal Information Institute of Cornell University Law School, a country can be considered a market economy if: the currency is convertible, Wages are determined by bargaining between labor and management, if it allows joint venture and foreign investment, and exhibits reduced government control over raw materials, allocation of resources, and prices. (Chen and Whalley) Some countries felt that China did not match this definition.

It is actually hard to determine exactly how much of China’s economy is controlled by the government or the percentage of China’s GDP that is attributable to government controlled companies. SOEs can own shares in POEs and joint ventures (JV). The 17

government can own controlling interest in a company by buying its shares on the stock market. Also, that company can in tern purchase controlling interest in a company where the government owns no shares. The US and other observers feel that the influence the SOEs have over the Chinese economy violates the definition of market economy. But other countries have agreed with China. “Approximately 150 countries have granted China market economy status, while most OECD countries (EU member states, Japan, United States and India) still label China as a NME.” (Chen and Whalley)

In the end, China was willing to compromise. China agreed “China’s accession terms explicitly allow other WTO members to treat China as a NME under their domestic laws until 2016.” (Chen and Whalley)

In becoming a WTO member, China had to sign agreements to adhere to regulations related to “trade policy, such as tariff reduction, elimination of quotas, and improved accessibility to domestic markets by foreign competitors.” (Bajona and Chu) These agreements opened China further for FDI.

12. Foreign Direct Investment (FDI)

Early restrictions within China’s command economy structure prohibited foreign direct investment (FDI). Following the economic reforms of the 1970s, FDI was allowed, but strictly controlled. At that time, FDI was required to be in conjunction with a local partner. And, it was restricted to four Special Economic Zones (SEZs). By the mid 1980s the laws were further relaxed as the government began courting FDI with tax incentives. Wholly foreign-owned enterprises were permitted, as were joint ventures and companies which brought new technology to China. (Girma, Gong and Görg)

In the 1980s many of the FDI investors were overseas Chinese, with the investments themselves coming from Hong Kong, Macao, Taiwan, Japan, Korea and Southeast Asia. (Cooke) In the 1990s the FDI, coming largely from the Pacific Rim countries, was small scale and involved low levels of technology. Today, the FDI comes from MNCs involved in large-scale strategic operations. (Cooke)

Large company acquisitions have to be approved by the Ministry of Commerce (MofCom). SASAC chair Li Rongrong named seven strategic sectors in which the Chinese government believes it must retain 100% control of the corresponding SOEs, for the purpose of national security. These companies happen to be some of the largest and most profitable. They include: defense, power generation and distribution, oil and petrochemicals, telecommunications, coal, aviation and shipping. (Mattlin) Foreign companies would be restricted from owning stakes in these companies but may be allowed to own stakes in “downstream” or value-added product production. (Mattlin)18

Sometimes, the incentives and benefits given to FDI are exploited by local companies. This results in “round tripping,” (Song, Yang and Zhang) “Round tripping” is when a domestic Chinese company forms an offshore holding company which then buys shares in a domestic Chinese company, in order to benefit from being a foreign direct investment. (Chao and Xu)

FDI has become an important component of the Chinese economy. (Girma, Gong and Görg) In 2014, China became the world’s largest recipient of foreign direct investment. (Mathew) This is in part due to foreign companies wanting to gain access to cheap labor as well as cashing in on China’s exceptional economic growth. FDI is one of the main factors driving this economic growth, which is why attracting FDI has been a main focus of the government’s reform programs, beginning in 1978, with the open-door policy. (Cooke)

While FDI in the 1980s took the form of joint ventures with local companies, today, acquisitions are one of the main strategies for FDI. In becoming a member of the WTO, China had to allow increased access to FDI, which often takes the form of mergers and acquisitions (M&As). M&As require a lot of investigation into the firms which could be considered sensitive in China. (Cooke)

13. Mergers and Acquisitions (M&A)

Recently, there has been a lot of merger activity as the Chinese government pushes smaller SOEs to merge, in order to compete with MNCs. (Deloitte Financial Advisory) Other merger activity comes from MNCs merging with local companies. As China’s ascension to the WTO has created investment opportunities for MNCs many of these mergers occur in sectors which were previously blocked for FDI. (Deloitte Financial Advisory)

In 2003, the State Restructuring Regulations established the procedures for SOE restructuring, the M&A Regulations soon followed. (Cooke) M&A firms in China have existed for approximately twenty years, for the purpose of bailing out ailing SOEs. (Cooke) The original focus of Chinese M&A activity was to allow underperforming SOEs to be acquired by foreign MNCs who in addition to bringing much needed financing and world famous brands, would bring improved management, technology and efficiency to the firms. This type of corporate structure would also allow the government to maintain control over foreign companies operating in China. Allowing these joint ventures also has a capacity building effect whereby local companies can acquire skills and training from the foreign partner. Allowing MNCs into an industry reduces the government’s control of that industry. (Cooke)

M&A negotiations in a Chinese business culture are extremely inefficient and involve 19

a large number of people and multiple meetings. Before a recent merger, Chinese insiders said that the Chinese company held ten internal meetings, each involving a dozen people, before even meeting the would-be foreign partners. Over 170 people/times were involved on the Chinese side, but the MNC only sent two representatives. And the MNC senior manager only attended a few of the more important meetings. The two representatives of the MNC knew exactly what they wanted from the negotiations. They had an agenda, and in the end, they won the necessary concessions. All of the cost of entertaining, hosted dinners, drinking sessions, and gifts were born by the Chinese side. The reason “why so many people were involved from the Chinese side is that nobody wants to take responsibility for the decision in case it goes wrong and yet everybody (especially those from the local government) wants to be involved and have a say in it.” (Cooke)

Mergers and acquisitions are still fairly new in China, often resulting in failures because of poor strategic planning or problems with quality control or intellectual property rights. Alternatives to mergers and acquisitions include: joint venture, organic growth and franchising. (Deloitte Financial Advisory) All of these methods have been used in China and may be better alternatives for some companies. Mergers and acquisitions in China have becoming extremely costly and problematic. For one thing, collecting data about the acquisition target may be extremely difficult as firms lack experience with mergers, data may be falsified, or firms may simply not want to reveal company information. Even determining the value of the company proves problematic as many companies use nonstandard accounting procedures. There may be lack of clarity of ownership and licensing restrictions. If the company is deemed to be in a strategic industry, the data may be sensitive and may not be shared even to other departments of the same company. (Deloitte Financial Advisory) There is a lack of transparency in Chinese firms, particularly when the data could be considered state secrets. (Cooke) Statutes of limitation rules related to tax debts are unclear and it would be possible to inadvertently buy a tremendous tax liability.

Local governments are highly involved with the SOEs and also maintain a balance across industries and regions. M&A activity with a MNC will disturb this balance. In some cases, local governments may under-quote the value of a poor performing SOE just to offload it. As MNCs enter the local market they drive up the cost of employment. MNCs also dilute the local talent pool by attracting the better, more qualified workers, which further decreases the performance of the local SOEs.(Cooke)

14. Changes in Corporate governance

In many of the privatized firms, the government remains the majority shareholder, which defeats the purpose of privatization. The reason the firms were privatized in the first place was that the state recognized that it was not good at company management. Unfortunately, however, even after privatization the state maintains a large enough 20

percentage of stock that it still controls the operations of the company, which negates the advantage of private management and ownership. The Bureau of State Asset Management (BSAM) monitors the listed SOEs but the BSAM officials are government employees paid a standard civil servants’ wage. Their compensation is in no way tied to the performance of the firms they oversee, so there is no incentive for them to ensure that the SOEs maximize profit. (Hong Tan and Wang)

Good corporate governance is still not prevalent in the Chinese stock market. “Many SOEs are debt-ridden enterprises ‘repackaged’ for listing and continue to becontrolled by their parent companies, who having successfully seen to their IPO, looktowards them as cash cows for ready milking.” (Hong Tan and Wang) This statement demonstrates two very serious concerns. The first is the concept of “window dressing” intentionally making the company look financially better than it is, in order to make it more attractive for sale. Next, is the obvious conflict of interest that exists in the partial privatization of SOEs. The goal of a publicly traded SOE is not always profit maximization.

SOE managers are often motivated by goals apart from earning profits. “High ranking officials are often appointed as the top managers of SOEs, while high profile managers of SOEs are often appointed as government officials.” (Song, Yang and Zhang) The goals will often be a mix of economic and political. (Song, Yang and Zhang) The firms don’t fear bankruptcy and the politically minded SOE managers

may lack entrepreneurship. (Lok and 駱佩傑 .) Separating the SOEs from the

government and implementing private sector managers would solve many of these problems. Privatizing some SOEs while corporatizing others, creates two conflicting systems in a single economy. The Chinese government refers to their hybrid system as

“socialism with Chinese characteristics.” (Lok and 駱佩傑.)

The Chinese culture, political system and business management system are all in the shape of a pyramid. The pyramid structure of a Chinese SOE creates inefficiencies and inaccuracies in information transfer. Information has to pass through several layers of management before reaching the top. Along the way, it may be in someone’s self interest, either financial or political, to misreport the information or fail to forward the message all together. (Fan, Wong and Zhang) The system of having state asset management companies, rather than local governments, manage SOEs creates one more layer of management which information has to pass through, making the transmittal even less efficient. (Fan, Wong and Zhang)

To improve accounting, disclosure and corporate governance in general, in 1994, the Chinese government passed the PRC Company Law of 1994, which combined with the Securities Law of 1999 were instrumental in the early stages of securities regulation. Since then, The China Securities Regulatory Commission (CSRC) has 21

published Code of Corporate Governance for Listed Companies to evaluate corporate governance. Furthermore, the CSRS and other agencies have created laws and regulations governing “disclosure, mergers and acquisition, accounting, related party transactions, independent directors and securities litigation,” (Hong Tan and Wang)

In this new free-market system the accounting practices and management style of many SOEs became outdated. Western style accounting systems were slowly introduced. And those “SOEs that face higher market competition make greater use of Western management accounting/controls.” (O’Connora, Chow and Wu) But not all companies follow the disclosure laws or corporate governance laws. “In China, there has been a huge gap between law and reality with regard to corporate disclosure.” (Hong Tan and Wang)

Currently, the purpose of financial reporting and disclosure in China seems to be to serve the needs of the tax authorities as opposed to the shareholders. Add to this that the financial data is often falsified to attract investors, and the system of disclosure and transmittal of information becomes very unreliable, even prosecutable. As was the case with Yinguangxia (Hong Tan and Wang)

China’s First Blue-Chip Stock was a firm called Yinguangxia. From 1999 to 2000 Yinguangxia’s share price nearly tripled, making it the highest ranking stock on the Shenzhen Exchange. When news leaked that Yinguangxia had forged their financial data the share price plunged. This caused a trading frenzy across China’s entire stock market, with many individuals and institutions losing large sums of money. This was really China’s first major case of securities law violations. The Chinese security laws clearly state that firms must make clear, accurate, and timely disclosure of financial data. Such a blatant case of fraud shook the confidence of Chinese investors who were new to the whole concept of having a stock exchange in their country. The case called into question the accounting standards of the company and how best to calculate and record corporate value, losses, and gains (Sipf.com.cn) Since the Yinguangxia case, corporate governance ‘has become the primary concern of China’s regulatory agencies. (Hong Tan and Wang)

Another “window dressing” scandal was the firm Baiwen which was found to be faking its financial data. (Hong Tan and Wang) Zhengzhou Baiwen was converted from an underperforming SOE to a shareholding company which was listed in 1996. In 1999, after three years of losses, Baiwen faced bankruptcy. But rather than being allowed to fail, the company was rescued through a deal brokered with the Zhengzhou city government. Details of the case are widely published but the final outcome was that the court supported a buyout of the company by Sanlian and the restructuring of the company in such a fashion that the majority shareholders “had gone scot-free whilst the vast number of A-shareholders (ie minority shareholders) had to suffer loss by transferring their shares to Sanlian for free” (Green and Ho)

22

15. The Banking Sector

Prior to the 1970s all banks were state-owned and played a very small role in financing companies or driving the economy. The leading bank was the People’s Bank of China (PBC), which held about 80% of all deposits and accounted for 93% of all lending. Since that time, as China made its economic ascension, average wages and average wealth in China increased, as did bank deposits. Banks gained in importance as citizens reportedly deposited from 50-75% of their wealth. (Cull and Xu)

In 1978, the government separated the People’s Bank of China from the Ministry of Finance. Over the next year, other banks were created, including the Agricultural Bank of China (ABC), the Bank of China (BOC), and the People’s Construction Bank of China (PCBC). The People’s Bank became the central bank in 1983. The Industrial and Commercial Bank (ICBC) took over the role of accepting deposits and granting loans to businesses, accounting for half of all of China’s lending, making it the largest bank in the country. (Cull and Xu) Once carved from the same government mold, the big four have evolved into giant commercial banks which compete with each other. (Lin and Zhang) A much smaller but up and coming bank is the Bank of Communications (BoCom) which may become the fifth major player. (Dobson and Kashyap)

Changes in the banking rules allowed for the entry of new types of financial institutions, many of which were joint stock banks whose shareholders were SOEs or local governments. During the 1980s three smaller banks, Everbright, Hua Xia, and Min Sheng opened, as did several regional banks. At this time, other types of credit institutions were established, such as “credit cooperatives, trust and investment companies, finance companies associated with enterprise groups, financial leasing companies, securities companies, and credit rating companies.” (Cull and Xu)

In the 1980s, bank employees earned only slightly more than government employees. By the late 1990s, because of bonuses bank employees received for increasing bank profitability, their income levels rose to about three times those of government employees. This bonus system is thought to have improved the bank’s motivation to decrease the number of non-productive loans, where these types of cuts were politically possible. By the 1990s the government still mandated what percentage of loans banks could give to the various sectors, but bank employees now had some discretion, within a narrow band, to select profitable loans and reject potentially nonperforming ones. (Cull and Xu) Chinese banks began asking the kinds of questions and conducting the kinds of analysis of potential borrowers which were standard in more developed economies, such as asking about the products produced, geographic location, past history of profit and loss and so on. Even with this new discretionary freedom, banks were still sometimes forced by local governments to make nonperforming loans to SOEs. This extra level of bank scrutiny was thought to 23

have had a positive impact on the corporate governance of SOEs. SOEs who borrowed from banks, as opposed to depending on direct government bailouts, tended to be more productive. (Cull and Xu) This increased productivity continued into the 1990s. But, as the weight of bailouts became a more difficult burden for the government to bear, they put pressure on banks to ease their lending restrictions. Under newer, softer restrictions, the positive correlation between bank credit and improved performance evaporated. (Cull and Xu)

Today, the Big Four state-owned banks sit at the top of a three tier system. The second tier contains 12 national-level domestic joint-equity banks, and the bottom tier is made up of 100 city-level commercial banks. Other financial institutions now exist, such as foreign funded banks, local credit cooperatives, trust and investment companies, finance companies, and leasing companies. (Lin and Zhang)

ABC is riddled with nonperforming loans and may face serious problems in the near future. (Dobson and Kashyap) “The Big Five banks show few signs of properly accounting for credit risk in the pricing of their loans, and they continue to show a substantial bias toward lending to state-owned and politically connected borrowers.” (Dobson and Kashyap)

China’s banking sector is still largely dominated by state-owned banks which do most of the corporate financing as the corporate bond market being very small. The lack of bond financing in China qualifies China as the least developed bond market in Asia. (Dobson and Kashyap) China’s state-owned banks are sometimes used to funnel money to ailing SOEs. Firms with close political connections will find it easier to obtain credit as well as lucrative contracts for government projects. (Firth, Lin and Wong) The SOEs were not only inundated with debt as well as failing to turn a profit, but they often also distorted their performance reporting, showing that they earned phantom profits, which resulted in a tax debt. The banks would then make loans to the SOEs, bailing them out. (Dobson and Kashyap) This accounts for the large percentage of nonperforming bank loans which banks are forced to carry. (Firth, Lin and Wong) The SOEs didn’t repay the loans and eventually, some of the banks needed a government bailout. (Dobson and Kashyap)

Most of China’s banks are still owned by the public sector, the central, provincial, or local governments. Their financial books still carry many nonproductive loans, made to SOEs. (Caprio et al.) These banks are under the control of bureaucrats who use the banks to further their own political and personal agendas, such as providing jobs and to bailing out failing businesses. Banks often fulfill the role of overseer, monitoring the activities of the firms they lend money to. But in the case of the state-owned banks, this role is compromised. (Firth, Lin and Wong)

As a condition of ascending to the WTO, China had to open its banking industry to foreign competition. Beginning in 2003, in preparation for this new competition, 24

China has been improving the competitiveness of its banking industry. The performance has improved a great deal but still has a number of problems. (Dobson and Kashyap) Unemployment is a serious concern of the Chinese government. Demand for more jobs comes from China’s 260 Million Migrant Workers (Song), as well as workers downsized from recently privatized or restructured SOEs. (Dobson and Kashyap) Between 1993 and 1997 about 10 million SOE workers were made redundant. In 1997, the 15th National Congress of the Chinese Communist Party pledged to lay off an additional 4.3 million SOE employees. (Chen, 1999) Concerns about unemployment hamper the government’s reform efforts with both SOEs and the banks which provide funding to the SOEs allowing them to keep employment numbers high.

Research has shown that both foreign ownership and private ownership improve the performance of banks after privatization. (Lin and Zhang) A s6tudny conducted in 2006 showed that China’s big four state banks underperformed foreign join-equity banks and banks capitalized by foreign funds. (Lin and Zhang)

Public sector banks have performed poorly compared to private sector banks if Measured by nonperforming loans and return on assets. “Public sector banks have also demonstrated a poor collection record with their borrowers, especially in bad economic times, and thus tend simply to "roll over" their loans.” (Caprio et al.)

Rather than pushing for privatization of banks the Chinese central government has left the state ownership structure in place but taken a more hands-off approach to bank operations, allowing the banks to function more like a corporation. As a result the performance of state-owned banks has increased tremendously in the last five years with the percentage of non-performing loans dropping significantly. (Caprio et al.)

16. Corruption in SOEs

In accordance with the anti-corruption campaign under President Xi Jinping, within the first 10 months after the 18th Party Congress nearly 80 senior SOE executives were investigated by the Disciplinary Commission of the Central Party Committee. (Fu) President Xi’s anti-corruption campaign is considered to be the most impactful such campaign in PRC history. In total, more than 100 top SOE executives would be detained. Some of the SOEs whose executives were named include PetroChina, China Southern Airlines, China Resources, FAW and Sinopec. (Anderlini) Many of the private sector firms included retired senior government officials on their boards, which created opportunities for bribery and other forms of misconduct. Over 40,700 officials have resigned, in order to avoid being implicated, or have been removed from SOEs. (Yibing)

In a larger organization, such as an SOE, a government agency, acting as owner, may sit atop a pyramid shaped hierarchical structure. Below the owner is a manager who 25

may have some decision making authority in order to carry out the daily operations of the company, without involving the owner. According to agency theory, an owner can allow a manager more and more authority, to allow the business to run efficiently, until the manager has so much authority that he begins acting in his own, and not the owner’s best interest. At that point, the owner would step in and take control away from the manager. A fundamental problem facing an SOE, however, is that there is no physical owner. (Fan, Wong and Zhang) This departure from the standard agency model may help to explain two points; first, why there is so much corruption in SOEs and second, why SOEs often fail to perform financially.

This is not to suggest that government has no control over the SOEs. Obviously in the case of direct SOEs they can fire a manager. In the case of corporatized SOEs they can exercise voting rights and restructure the management. (Fan, Wong and Zhang) It is more a question of motivation and volition. A faceless state-owner would be less likely to step in and protect its rights as owner than would a private individual or board.

17. Stock Market Listing

The Shanghai Stock Exchange (SSE) was founded on November 26th, 1990 (Krishnamoorthy) SSE opened with 8 companies listed. The Shenzhen Stock Exchange (SZSE) followed shortly after. A mere decade later, the two exchanges had 1,088 firms listed. (Wang, Xu and Zhu)

Prior to the 1990s, State-owned enterprises (SOEs) were wholly owned by the Chinese government. After that, as part of the “grasp the large and let go of the small’’ strategy (O’Connor, Chow and Wu) the government began listing and selling off some of the smaller SOEs. (Ralston et al.) Some of the larger SOEs were corporatized, and turned into shareholding companies. (Wang, Xu and Zhu) Once listed, depending on share class, the shares could be bought by virtually anyone, from SOEs to private individuals or other privately held companies. (O’Connor, Chow and Wu)

As the economy increased in both size and liberalization, the stock market became a more and more important source of funds for companies wishing to expand or take on large projects. As a result, more accounting transparency was needed, as this was a requirement for listing on an exchange. And so, more western accounting and management practices were adopted. (O’Connor, Chow and Wu)

Listing on a stock exchange is one of the methods of privatizing SOEs, as shares will be sold to private citizens and companies, which will become the new owners. After initial public offering (IPO) state-owned firms often underperform, but one reason why this might be true is because pre IPO they inflated their profitability to appear more desirable. (Wang, Xu and Zhu)26

Most IPOs in developed countries occur when a privately held company becomes large enough to go public. But in China, most IPOs are of state-owned companies moving toward privatization. But the resulting company will have a mix of state and non state shareholders. In neither the SOE or the publicly traded corporation is the owner a manager. Before the IPO the owner is the state. After the IPO the owners become the shareholders, which may or may not be the state or organizations controlled by the state. Either way, a management structure is hired, and put in place to operate the company in the stead of the owners. In this instance, the agency model applies.

Generally, privatization through the sale of shares should decrease state control of a company. But, in the case of China, as shares could be owned by the state and legal persons, controlled by the state, the state remains, effectively, the majority shareholder of most listed firms. (Wang, Xu and Zhu) Shleifer and Vishny (1994) have found that the interference of government shareholders in joint stock companies is often at the expense of profitability because many of their decisions are motivated by political gain or cronyism. This is one reason why Chinese SOEs generally demonstrate higher profitability after listing. (Tian and Estrin) Many of the listed SOEs are now profitable and their management and accounting standards are similar to those of western companies but the government still exerts a lot of control over them. (Tian and Estrin)

Chinese SOEs going public creates additional agency problems. Once a company goes public the shareholders become the owners and are thus entitled to a share of the profits. The agent is still the management team, who, according to agency theory, will eventually work in their own interest, possibly to the detriment of the owners, if the owner doesn’t step in and protect his interests. (Gibbons) When the state was the sole owner, the motivation for the state to step in was higher than it is in the diluted ownership of a publicly traded SOE. By the same token, the private shareholders, as minority owners, may fail to exercise their rights to step in and control the agent. Theoretically, the conflict between agent an owner can increase after an IPO and result in lower performance. (Wang, Xu and Zhu) In the case of Chinese state-owned enterprises going public, it is not hard to imagine this conflict arising. As there is a mix of state and public shareholders, the state may still retain significant control through majority voting rights.

Under the old system, SOEs were not used to having to contend with such factors as investor demands, public access to corporate information, disclosure, competition for capital, or even competition. O’Connor, Chow and Wu found that the degree to which SOEs used western accounting methods decreased as government control increased. Research has also found that even partial privatization, whereby the public is permitted to purchase some percentage of shares, even if the state remains the majority shareholder, has a positive effect on SOEs. The stock market fulfills a 27

monitoring role, overseeing the corporate governance of the listed firms. Also, the market rewards well-performing companies through increased share prices, which can translate into increased wealth for the stakeholders, including management. (Aivazian, Ge and Qiu)

All stock market listings of Chinese companies have to be approved by The China Securities Regulatory Commission (CSRC), which seems to favor SOEs for listing, over POEs. In fact, as recently as 2007, 80% of listed companies were SOEs. (Mattlin)

The State Planning Commission regulates the listing of PRC companies on the Shanghai and Shenzhen, as well as the Stock Exchange of Hong Kong (SEHK) and international exchanges, and limits the number of shares issued. The two share classes include A-Shares, denoted in RMB and only sold to domestic investors, and B-Shares, denoted in US or Hong Kong Dollars, and sold to foreign investors. Some A-Share firms are also permitted to issue B-Shares. H-Shares are those listed on the SEHK and N-Shares are listed on the New York Stock Exchange. Many of the H-Share firms listed on the SEHK are also listed as A-Shares in the PRC, but are not permitted to issue B-Shares. A-Share firms are required to comply with PRC GAAP, but B-Shares with the IASC. NYSE and SEHK listed firms must comply with the prevailing accounting standards. (Ferguson, Lam and Lee)

18. Domestic Listing

PRC firms listed on the Shanghai and Shenzhen Exchanges tend to disclose very little information beyond what is required by law. There are a number of theories why this is true. One suggests that the firms lack the sophistication and experience with financial reporting, as the first PRC accounting standards were only introduced in 1992. (Ferguson, Lam and Lee ) Another theory says companies fear giving away too much information to competitors or to the tax authorities.

Publicly traded companies in China issue two classes of shares; A-Shares, denominated in RMB and only sold to domestic investors, and B-Shares, also detonated in RMB, but sold to foreign investors. H-Shares are sold in Hong Kong and N –Shares in the US. (Wang, Xu and Zhu)

There are five types of share ownership: state-owned, legal person or institutional, employee-owned, individual-owned, and foreign owned. State and institutionally owned shares cannot be sold on the stock exchange. Their sale requires the permission of the China Securities Regulatory Commission (CSRC). “State shares are held by government bodies such as state asset management agencies, or …wholly state-owned investment companyies” Legal persons can include SOEs or companies controlled by SOEs. (Wang, Xu and Zhu) Non-government shareholders can include “another domestic industrial company; b) investment fund, securities companies and other 28

investment firms; c) foreign investors; d) family or individual investors.” (Tian and Estrin)

Profit is one of the metrics for delisting. But since the establishment of the Chinese stock market until 2002, although a number of firms should have qualified for delisting based on profits, only six companies had been delisted. Many of the loss-making SOEs that should have been delisted have been protected by the government. (Hong Tan and Wang) This government protection of listed firms seems like a violation of a market economy and more in line with the old style command economy.

19. Hong Kong Listing

The Stock Exchange of Hong Kong SEHK is the source of much of PRC firm’s foreign capital investment. (Ferguson, Lam and Lee) SOEs may issue H-shares on the SEHK to raise cash to support welfare and pensions. (McGuinness and Ferguson)

Lack of management experience, corruption, over employment and over compensation, government interference, and lack of disclosure have all been cited as concerns of potential H-Share investors. “In addition to H-Share firms’ lack of prior history, important investor concerns include management quality, the potential for asset stripping or misappropriation, de-capitalization through excessive wage increases, and the role of the government as a major shareholder.” (Ferguson, Lam and Lee)

In order to list in Hong Kong Chinese SOEs have to meet certain voluntary disclosure requirements. Disclosing information is not something the SOEs are used to, but they do it in order to get financing. The cost of disclosure could be increased political or competitive pressure. Lack of disclosure is often attributed to firm management worrying that too much disclosure could leave the firm vulnerable to competitors or regulators. The benefit to complying with the disclosure requirements however will be greater access to capital and more international exposure for the company. In the case of H-Share firms, since they operate in industries of strategic importance to the PRC government, they are less vulnerable to competition. One theory suggests that the PRC government carefully selects the firms that will list internationally as a way of showcasing the success of the Chinese economic system. In this way, firm disclosure becomes a kind of PR for the country. (Ferguson, Lam and Lee)

Red Chips are PRC companies incorporated internationally and listed on the SEHK. (Chinadaily.com.cn) In order to maintain their listing, Red Chips are expected to fulfill SEHK disclosure requirements. (Chinadaily.com.cn) Currently, “Red chip companies are generally not allowed to trade on the Chinese A-share market on the Shanghai Stock Exchange or the Shenzhen Stock Exchange.” (Chinadaily.com.cn) According to the rules of the SEHK, non-Red Chip, PRC firms may sell H-Shares. Red Chips, however, are incorporated in Hong Kong, although they are largely 29

controlled by PRC state shareholders. They often have significant business interest in Hong Kong, functioning as subsidiaries of PRC firms and are frequently unaffected by government reforms in the PRC. They are also barred from listing on the PRC domestic exchanges. (Ferguson, Lam and Lee)

20. Overseas listing

There are numerous reasons why high profile Chinese companies, such as Baidu and Sina chose to list overseas. First some companies working in technology or other sensitive sectors may not be eligible to list in China. So, they restructure their companies, using a variable interest entity (VIE) structure. (Fong) First a Wholly Foreign-Owned Enterprise (WFOE) is established in China, which then contracts with the VIE, which invests in the restricted sector. (Millman) Other companies list overseas because they don’t meet China’s financial requirements. Some find the listing procedure time consuming and poorly defined. Finally, firms may list overseas in order to avoid having the Chinese regulatory agencies overly-involved in the operations of the company. (Fong)

Additional political and economic factors also motivate companies to list overseas. The "going out" strategy of the Chinese government encourages the largest SOEs to list on overseas stock exchange. (News.xinhuanet.com) Among the economic motivations for Chinese SOEs to list overseas are: to find funding, support growth, and expand product markets. The political reasons include: circumventing government regulations, to showcase China’s economic power, and “to implement national economic objectives by grooming a selected group of firms for global competition.” (Hung, Wong and Zhang)

Overseas listing provides the firms several other advantages as well, such as meeting the disclosure and corporate governance requirements of overseas stock exchanges will result in “higher board professionalism, better accounting disclosure, and greater investment efficiency for these firms.” (Hung, Wong and Zhang) This concept is known as the bonding hypothesis, basically that corporate efficiency and performance will improve when a company lists overseas, particularly in the US, because the company will be forced to comply with US listing regulations. (King and Segal)

The Chinese government strictly controls the number of firms that can list, either in China or overseas, and listing requires a number of government approvals. (Hung, Wong and Zhang)

21. Government Control of Stock Markets

While the Chinese government has given up apparent control of many former SOEs, by selling shares to the public, in cases where they still retain 51% their degree of control may not be reduced at all. In China, it appears that minority shareholders do 30

not take a unified stand against the decisions or influence taken by the majority shareholder. (Tian and Estrin)

As recently as 2002 the PRC government owned an average of 45 percent of shares on the market. Since government shares can’t be sold, this reduces the liquidity of the entire stock market. (Hong Tan and Wang) Hostile corporate takeovers don’t really happen in China because most of the shares are non-tradable. As a result, acquisitions are negotiated. (Hong Tan and Wang)

Some investors wish to capitalize on China’s tremendous growth, but also want to avoid companies that are controlled by the government. Investment funds are one way that investors have found to achieve these two goals. WisdomTree China would be an example of one such fund. WisdomTree China is an ex-State-Owned Enterprises Fund (CXSE) which allows investors to invest in a wide array of PRC stocks, excluding SOEs. (Yahoo Finance) WisdomTree’s CXSE allows investors to invest in China’s dynamic POE sector, avoiding government owned companies which they feel are influenced by goals other than maximizing profits. (Yahoo Finance)

WisdomTree CXSE is a way of owning PRC stocks without owning the government run companies. (Greenberg) The state is an owner in almost all Chinese companies which have been listed. So, even with WisdomTree it is difficult to completely avoid government ownership. To qualify for inclusion in WisdomTree a company must have less than 20% government ownership. Because WisdomTree doesn’t invest in companies with large percentage of state ownership, the fund tends not to invest in banks or energy stocks, two industries almost completely dominated by the government. Instead, the fund includes a lot of technology firms, internet firms like Alibab, Baidu, JD.com and Ctrip.com, and US firms listed in China. (Greenberg)

22. Outbound Investment by SOEs

One of the reasons for Chinese SOEs to expand overseas is to make them larger and less of a target for liquidation under China’s policy of cutting the smallest SOEs. (Fu)

To compete in the global economy, the Chinese government has adopted a “going out” strategy investing in foreign countries. (Song, Yang and Zhang) Much of China’s overseas investment is carried out by SOEs. “By the end of 2009, China’s 108 central government-owned SOEs had invested in 5901 foreign firms,” accounting for nearly 38% of total profits for SOEs (SOASAC, 2010, cited in Song, Yang and Zhang) Many of these acquisitions are in the fields of minerals and energy to guarantee China’s access to raw materials. (Song, Yang and Zhang) Chinese SOEs dominate certain global sectors. In fact, the international raw material sector is dominated by China, purchasing commodities used for the production, which fuels China’s economy. The SOEs are in a better position to invest abroad than are privately owned firms, as the SOEs have better access to bank loans. (Song, Yang and Zhang)31

Through mergers and acquisitions, some Chinese SOEs are the largest companies in their sector, in the world. However, their names remain virtually unknown outside of China. The Chinese companies with global recognition are all POEs. And they include Alibaba, Tencent, Baidu and Xiaomi, all of which are too small to make the Fortune Global 500 list. (Cendrowski) Chinese some Chinese SOEs have grown so large that they are now purchasing companies in foreign countries. For example, state-owned oil company CNOOC Ltd., the world’s largest energy explorer, took over the Canadian firm Nexen. In 2012, China was rated by UNCTAD as one of the top twelve outbound investors in the world. (Dobson)

Chinese outbound investment includes construction projects in the USA. “China Construction America, Inc. (CCA) is a wholly owned U.S. subsidiary of China State Construction Engineering Corporation Limited (CSCEC)…listed on the Shanghai Stock Exchange.” (U.S.-China Economic and Security Review Commission) SASAC is the primary owner of CSCEC. In 2009, when the company went publicly, it was the largest IPO in the world. (U.S.-China Economic and Security Review Commission)

China’s SOEs, whether on an outbound or inbound basis, are involved with countries in both the developing and developed world. For example, 400 Canadian businesses currently operate in China, making China Canada's second-largest export market. Some Canadian companies have entered into joint ventures with Chinese SOEs. Once such company is Bombardier, the Quebec-based aerospace and rail transportation firm. (Tradecommissioner.gc.ca)

Chinese outbound investment can be found everywhere and in every sector. Chinese SOEs even invest in energy projects in Africa. (Tan-Mullins) Some African energy projects include The Gibe III dam in Ethiopia, Kajbar dam in Sudan, and the $729 million Bui project in Ghana. (Hackley and Westhuizen)

The PRC government is considering investing in renewable energy geothermal energy, and infrastructure in Wes Sumatra, Indonesia, where other Chinese firms are already working on microhydro power plants (PLTMH), road infrastructure and agribusiness. Additional Chinese companies have invested in energy, agriculture and tourism. (The Jakarta Post) In 2015, after the US Iran nuclear deal lifted sanctions, Sinopec Group, parent of Sinopec Corp and China National Petroleum Corp was read to start producing at the Yadavaran oilfield. (Aizhu)

So far, this paper has demonstrated that historically, the SOEs were large, inefficiently run enterprises, which operated in a domestic market where they often had a monopoly. Risk analysis wasn’t something they had to worry about as they often enjoyed a monopoly advantage. The lack of competition also meant they didn’t have to focus too much on advertising or marketing. The lack of competition meant they didn’t have to be concerned with advertising or marketing. They were given 32

preferential access to raw materials and when all else failed, and it frequently did, they simply obtained direct aid from the government or preferential loans, which they weren’t expected to pay back. Expanding into foreign markets has been a bumpy ride for Chinese SOEs.

The PRC’s aggressive outbound investment strategy has been met with some resistance. China has been repeatedly criticized for “buying up the world.” Developed countries which are receiving large amounts of Chinese SOE outbound investments often raise security concerns related to having a foreign government controlling domestic assets. (Dobson)

Once the SOEs left the comfort and privilege of their home market, they faced challenges and obstacles they were ill prepared for. This resulted in a number of their overseas investments failing. For example, 12 of the highest profile overseas investments by Chinese Investment Corporation (CIC), China’s largest sovereign wealth fund reported losses. (Yibing) It is clear that Chinese outbound firms are facing a steep learning curve as far as complying with international trade rules and regulations. (Dobson) Disclosure and due diligence seem to be two areas where Chinese companies have opinions which differ from western industry norms.

State secrecy laws sometimes prevent disclosure and due diligence, as well as impede fair competition for foreign companies against SOEs. One example would be the Rio Tinto case where Australian steel executives were charged with espionage, bribery and stealing state secrets. The steel industry is one of the key industries which the Chinese government closely guards and they felt that stealing secret information in that sector undermined national security. (Areddy) In the Rio Tinto case, the charges of bribery were eventually accepted by the company, and the employees were fired. It remains unclear whether bribery or simple due diligence was the actual reason for the case being brought in the first place. Either way, Rio Tinto stands as a cautionary tale about how difficult it can be in China to obtain or to disclose company data.

China maintains a strict battery of laws against unfair competition, secrecy, and bribery, but in the case of SOEs, many outsiders feel the enforcement is selective. “China’s Criminal Law and Anti-Unfair Competition Law are the basis for the state’s corruption and bribery legal regime.” (Silk and Ashley) These laws, in part, involve state secrets and make it illegal to attempt to get an “improper benefit” A company who holds classified commercial data would be considered to have an “improper benefit.” The normal disclosure and due diligence related to listing can result in state secrets, data from SOEs, being leaked. PRC companies listing abroad, for example in the US, may be forced to violate state secrets laws in order to comply with US listing requirements. This may hamper the ability of a PRC firm to expand into the US. (Silk and Ashley)Despite bumps in the road, failings, and setbacks, China SOEs are some of the top outbound investors in the world. In China, the SOEs account for 69% of outbound 33

stock investments. In 2013, The Industrial and Commercial Bank of China (ICBC) and China Construction Bank, which were numbers one and two on the Forbes Global 2000. In 2012 alone, according to The China Entrepreneur Research Institute Chinese companies expanded into 117 countries. (Dobson)

23. Conclusion This paper has given a brief history and overview of the SOEs, of both, their problems and strengths. It has also looked at POEs, MNCs, bank, and other types of companies which operate in the Chinese economy. The findings are that SOEs, on average, have lower employee turnover, but also lower return on assets than POEs. The problems inherent in the SOEs include corruption, over capacity employment, non-performing loans, political constraints and unprofitability. The strengths of the POEs, however, are preferential access to artificially low-priced raw materials, easy credit availability, monopoly and sector protection, and sheer size. While the number of SOEs in China have decreased, as have their employee numbers, the SOEs are still a driving force, accounting for a significant percentage of Chinese total GDP and making up the bulk of China’s stock exchange listed firms. SOEs are also an incredibly powerful vehicle which China can employ to expand into foreign countries, and secure raw materials, energy, and foreign markets. For all of their problems of low return on assets and high government intervention, the modern, corporatized SOEs are some of the largest firms in the world. And this trend, if China’s SOEs growing in size and importance, both at home and globally seems to be the trend of the future.

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25.About the Author

Brooklyn Monk, Antonio Graceffo is a lecturer at Shanghai University. He is also a PhD candidate at Shanghai University of sport, writing his dissertation on comparative forms of Chinese wrestling, in Chinese, with expected graduation in June of 2016. He is expected to graduate his China MBA, from Shanghai Jiaotong University, in January, 2016. Antonio is the author of the books, “Warrior Odyssey”, “The Monk from Brooklyn,” and several others. He has published hundreds of articles in the fields of linguistics: second language acquisition, as well as martial arts. Antonio is the host of the web TV show, “Martial Arts Odyssey,” which traces his ongoing journey through Asia, learning martial arts in various countries.

The Monk from Brooklyn, the book which gave Antonio his name, and all of his other books, the book available at amazon.com. His book, Warrior Odyssey, chronicling Antonio Graceffo’s first six years in Asia, including stories about Khmer and Vietnamese martial arts as well as the war in Burma and the Shan State Army, is available athttp://www.blackbeltmag.com/warrior_odysseySee Antonio’s Destinations video series and find out about his column on http://www.blackbeltmag.comTwitterhttp://twitter.com/BrooklynmonkfacebookBrooklyn Monk fan pagehttps://www.facebook.com/pages/Brooklyn-Monk/152520701445654?fref=tsBrooklyn Monk on YOUTUBEhttp://www.youtube.com/user/brooklynmonk1

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Brooklyn Monk in Asia Podcast (anti-travel humor)http://brooklynmonk.podomatic.com

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