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The SOE reform in China
Zhou Dayong
Summer semester 2003
Europa-University Viadrina,Germany

Abstract:
The essay tries to study the process of the state-owned enterprise (SOE) reform in China. Chinese economic reform resulted in significant influences on all social aspects, SOEs as an especially economic sector suffers a change both in internal management as well in the outside economic environment. I try to discuss in the essay, that the Chinese SOE reform has made large progress, however, SOE can’t conquer many problems by itself, the resolution of SOE lies in elimination of SOE by a further reform including property transition and construction of a fairer market.


Outline
1. History of the SOE reform in China
2. The main problems left in the reform
3. The reasons of SOE problem behind
4. Argue of some reform plans and suggestion
5. Conclusion


1. The history of the SOEs reform in China
1.1 the establishment of SOE
In 1949, the Chinese Communist Party (CCP) came into power in Mainland China. One goal of the CCP was to lead China into a modern socialism society. In economic scale, it meant mainly industrialization. According to CCP’s policy, the form of industrial organization must be based upon state owned enterprises. The state-owned industrial system was set up by two ways. One was the new enterprise after the liberation. At the end WWII, most industrial sectors in China, such as communication network, transportation and power industry were destroyed and had to be rebuilt, at the same time, military industries and financial sector e.g. banking system was directly nationalized from the former control of Gongmin Party. Another way was transformation from the private ownership to state-owned enterprises. The private properties were regulated under state management, in some cases, for instance in commercial scale, the former private enterprises were bought by local government gradually. Till 1952, about 83% of industrial companies were controlled by the state; a socialism economic system was announced established. (Fig 1)
1.2 The reform began from 1978
Until Chinese economic reform began in 1978, public ownership in forms of state-owned and collectivized were only legal ownership of property. In industrial sector, the enterprises were controlled respectively under central or local governments, the latter made decisions for the enterprises, the enterprises were not profit seeking economic entities, they were simply workshops to execute centrally set policies.
In 1970s, the discontent of economic situation accumulated constantly, because the defects of central planning system became obviously more and more. Around 1978, the rural reform took place from grass roots and spread quickly, till 1982, the collectivized people commune had to be abolished. In company with the reform, the free market in a certain degree was developed. At the same time, the problem of lack of autonomy in SOE, which led to low efficiency, was also taken into account. Therefore, from 1978 on, the Communist Party, under the leading of Deng Xiaoping, put hand to solve the SOE problem. From 1978 to 1984, the efforts of the reform concentrated on giving the SOEs more autonomy by allowing them increased authority over the allocation of their profits, and limited production autonomy. The rest profits could be used either to finance increased investments or to pay bonuses to employees. Besides, administrative control over SOEs was decentralized to local governments. But as the prices were still centrally determined and SOEs did not realize the cost of their fixed and working capital, the reforms did not improve much the resource allocation or the utilization of capital. (1)

1.3 Contract is the main form in the second phase.
From 1985 to 1992 was the second phase of the SOE reform. The policy named Zhenqi Fenkai (separating government from enterprises), the central government decided to turn SOEs into truly independent production and management entities, and stipulate that enterprises must take responsibilities for their own profits and losses by means of contracts and leasing. The common practice was: the enterprises sign a manage contract with the responsible authorities. Under the contract, enterprises were not only allowed to retain the extra profits after they had fulfilled the contracted quotas, but also allowed to arrange their own manage including dismiss or enroll personnel. By the end of 1987, about 80% of state-owned industrial enterprises adopted the contracts system. In 1991, over 90% of the previously contracted enterprises signed the second round of contracts. Meanwhile, based on the first round contract practice, the content of the contract was improved; the authority introduced more rational norms to examine the fulfillment of contract. A multiple index system was formed, which included economic efficiency index, development potentiality index and management index etc.
During this period, the practice of shareholding reform appeared as well. This new creature was adopted at first by village enterprises, which come from the former collective enterprises. The village enterprises were always short of capital, so they raised money from the village residents. Along with the reform moved forward from countryside to cities, the shareholding system was also introduced into SOE reform. Early in April 1984 Chinese reform committee organized a seminar to discuss the exploitation of shareholding in SOE reform. That conference drew a conclusion that shareholding system is a rational way to restructure the collective and state owned enterprises in cities. In July the same year, the first shareholding company after Chinese liberation—Beijing Tianqiao department store (shareholding) came onto horizon. Till 1991, there were already 709 stat

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