Economic Transformation for Grow th
Box 3.3. China’s experience in reforming SOEs: promoting private sector The SOE reform has historically lagged behind other economic reforms in China. In part this was because of their paramount importance in the economy has requested a more gradual and cautious approach in reforming measures. Therefore, before the mid-1999s, SOE reform was focused on revitalization through giving incentives and increased autonomy to individual enterprises. But these measures were limited in that they neither modified corporate governance nor significantly restructured business. It was not until the financial performance of SOEs had deteriorated considerably that a need for imminent SOE reform became apparent to policy makers. Since the mid-1990s, SOE reform has been a priority area, with most practical measures focused on improving efficiency and to catching up with market-oriented changes that have taken place in other areas of economy. The major strategy of reforms was the principle of “attaining the larger, releasing the smaller”- which concentrated on revitalizing the larger SOEs, while smaller SOEs were dealt with aggressively through buy-outs or allowing restructuring. This diversification of ownership was also called “partial privatization” as private domestic and foreign shareholders were becoming shareholders of “corporatized” SOEs, along with the state and state-controlled bodies. Moreover, the corporate restructuring of SOEs was implemented along with the financial restructuring of state-owned commercial banks. The proportion of SOEs in the industrial sector has been continuously decreasing as a result of restructuring policies and rapid growth of companies modeled in other forms of ownership. Between 1998 and 2006, the proportion of industrial output accounted by SOEs has decreased from 49.6 percent to 31.2 percent, proportion of value added—from 57 percent to 35.8 percent and the proportion of total assets from 68.8 percent to 46.4 percent. Source: OECD (2002), China in the World Economy, The Domestic Policy Challenges.
B. Performance of SOEs during the Past Decade While SOEs, on average, have been profitable, their performance has varied significantly across sectors.37 The most profitable sectors are ones that have been able to capture rents arising from processing mineral resources such as oil refineries and the chemical sectors. These are sectors reliant on underpriced energy resources from Russia. Similarly, sectors with favorable export markets—such as food industry and the production of construction materials—have also performed well during the last five years. At the same time, nontradables sectors exhibit average returns on assets below other sectors. Notable variance in SOE performance exists among firms within vertically integrated enterprises. Most SOEs are organized as vertical conglomerates that comprise a large final output assembly plant and include many smaller producers of intermediary goods. Vertical integration has contributed to 37 The profitability of SOEs has to be interpreted with caution. Measures of performance based on net revenue (or profits) and value of assets refer to
distorted prices and do not reflect true opportunity costs.
Chapter 3. Transforming the State Owned Enterprise Sector
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