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Rejuvenation of Industrial Base Paves Way for SOE ReformAfter being mired in a mounting deficit only two years ago, the Northeast China Pharmaceutical Group Company realized 14.24 million yuan in profit for January this year, almost four times the figure for the same month in 1999.At the same time, state-owned enterprises (SOEs) and holding companies of SOEs in the province registered 1.31 billion yuan in profit by the end of last year, putting an end to their loss- making record since 1995. These widespread better performances and favorable growth momentum in the state industries in Liaoning, a traditional industrial base in China, during the past two years shows that SOE reform has succeeded, and in turn promises an easier path to the central government goal of getting most large- and medium- sized SOEs out of financial difficulty by next year. "Liaoning is bound to realize the goal of basically turning around the state sector by the end of this year," pledged provincial Governor Zhang Guoguang. By the end of 1999, the province had reduced the number of large- and medium-sized SOEs in the red to 35.5 percent of the total, down from the 51 percent at the end of 1998. China pledged in 1997 to extricate most of its loss-making SOEs from difficulty and get them on the road toward profitability by this century's end. SOE reform in Liaoning, home to about one- tenth of China's large- and medium-sized SOEs, is seen as pivotal to the reform drive. If the SOEs in Liaoning can be transformed into efficient and profitable firms, the national goal of turning around the state sector will surely be met, according to Premier Zhu Rongji. Two years ago, the state-sector industries were faced with unprecedented and formidable difficulties as a result of mounting debt, increasing over-staffing, and heavy social responsibilities, according to Wang Huabin, a former provincial official in charge of SOE reform in Liaoning. Two years later, however, the old industrial base stands a much better chance of restoring its former glory as it successfully dealt with the upsurge in unemployment which resulted from painful restructuring efforts, and managed to turn most of its SOEs into viable firms with modern enterprise mechanisms. "The state industries in Liaoning have bottomed out," provincial governor Zhang Guoguang said. "But we need to work harder for at least another ten years to completely rejuvenate the SOEs as a whole." Liaoning aims to further eliminate deficit-ridden SOEs this year, bringing the loss-making SOEs to below 30 percent of the total. Meanwhile, most of large- and medium-sized SOEs expect to establish modern enterprise mechanisms which will enable them to better adapt to market competition. Economists have pointed out that although greater efforts must be made to turn around the remaining deficit-ridden enterprises, the social environment today is more favorable for the deepening of SOE reform because there is less government intervention in the business operations of state firms, and the booming non-state sector, which already accounts for one-half of the provincial economy, is helping to ease pressures on the state sector. Successful industrial restructuring, along with state policy incentives such as special loans and debt-to-equity swaps, are also expected to further facilitate SOE reform in the region. Most important of all, the SOEs there have finally come to recognize the importance of gaining a greater market share to survive competition. "A bigger market share should come before the goal of greater profitability," said Han Shuqi, president of a petrochemical company in Liaoning. The improving picture in Liaoning's state sector actually epitomizes a promising national picture: last year, China's state sector made profits of 96.7 billion yuan, up 77.7 percent over 1998.
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