News Analysis: Bright Prospects for China's SOE Reform

At the ongoing session of the Ninth National People's Congress (NPC), Chinese Premier Zhu Rongji said that major progress has been made in reforming state-owned enterprises (SOE) and that the objective of turning around loss- making operations within three years is attainable.

Many NPC deputies held that the premier's assessment represents a "milestone summary" on SOE reform in the past 21 years and that it indicates the possibility of achieving the objective of SOE reform within the set time frame.

SOEs constitute the pillar of China's national economy, but a large number of them were suffering from losses. Since 1978, China has changed step by step rigid managerial mechanism found in SOEs under central planning and made SOEs better adapted to a market economy.

In 1998, the Chinese Government said it intended to help loss- making SOEs turn around within three years. Analysts say that the premier's announcement about the attainability of the objective in time indicates that the government has found a set of rules and laws with which to successfully deal with loss-making SOEs. Last September, the Fourth Plenary Session of the 15th Central Committee of the Chinese Communist Party (CPC) adopted a policy decision on SOE reform. The decision consists mainly of restructuring, operational mechanism change, adjustment of the product mix and technological progress.

In the past year, the government has formulated a series of specific measures involving investment, finance, securities, customs and foreign trade to help loss-making SOEs turn round. According to government's statistics, in all 14 key industries except defence production and coal mining, most SOEs have already become profitable or are about to do so.

Deputies from northeast China said that SOEs in three provinces in the region are beginning to show better economic performance. Their loss-reducing scale and profit growth have reached a new height.

Deputy Bai Chengqiang, general manager of Jilin Petrochemical Industry Corporation, said, "For many years my corporation for the first time made a profit, which is the largest since its existence. "

Economist Yu Zuyao, a member of the NPC Financial and Economic Committee, said that a major breakthrough achieved last year is the restructuring of the state-owned economic sector: the government began focusing its attention on a small number of key enterprises and major industries while freeing small- and medium- sized SOEs and encouraging non-state capital to enter more sectors.

He said that change of the product mix has been conducive to alleviating overcapacity resulting from redundant construction and to improving the overall quality of SOEs.

A striking characteristic of large- and medium-sized SOEs is their bloated payroll. On the other hand, competent managerial personnel are in short supply, he said.

This situation is changing now. Many SOEs are turning to the talent market to recruit managerial personnel. In Dalian and Beijing, incompetent managers of SOEs are being sacked, he said. Chen Qingtai, a member of the National Committee of the Chinese People's Political Consultative Conference (CPPCC), said that the significance of "turning-around in three years" lies in providing a series of solutions for problems that have been encountered on the road of SOE reform.

Chen, also a deputy director of the Research Center for Economic, Technological and Social Development under the State Council, said that the turning-around of loss-making SOEs has accumulated experience for enterprise restructuring and asset and labor flows. "This has laid a foundation for a fundamental solution later," he said.

NPC Deputy and Economist Li Qingyun from Beijing University maintained that progress in SOE reform has been mainly the result of government policies but, for SOEs themselves, the road to sustained profitability is still long.

Many NPC deputies and CPPCC members noted that with China's impending entry into the World Trade Organization, SOEs are facing challenges from multinational corporations and that they can find their way out only in continued, in-depth reform.

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