China to Modernize Private Enterprises

Modern enterprise systems are not only urgently needed by State-owned enterprises but also by private enterprises, according to an official from the State-owned Corporation Property Researching Centre under the Ministry of Finance.

The government has made it a fixed policy to implement a modern enterprise system in State-owned enterprises. "However, most State-owned enterprises are not going forward but rather backwards on this track," Wen Zongyu, deputy director of the Centre, said at the recent China Economic Forum organized by the Chinese Academy of Social Sciences.

There is a worldwide trend for enterprise system innovation nowadays.

The United States' ongoing economic boom, the longest since the end of World War II, should largely be attributed to the new enterprise system its high-tech companies adopted in the 1980s. The system has enabled them to make the best use of human resources, said Wen.

Instead of products, technology and financial strength, an efficient enterprise system will become the most decisive competitive edge by which one company can survive international competition.

Thanks to the overemphasizing of ownership problems and Chinese characteristics in economic reform over the past two decades, modern enterprise systems remain far away from most Chinese businesses, Wen said.

First, unlike most US high-tech companies where shares are widely held and usually no shareholder has more than one fifth of the total, the State holds 50 to 70 per cent of State-owned enterprises' shares.

And most private enterprises are either solely owned individual corporations or family companies.

Such similar unitary ownership determined that China's private enterprises would suffer the many troubles State-owned enterprises faced.

Second, US companies can turn to the capital market to raise funds quickly for expansion or technical transformation, but China's domestic enterprises cannot.

In spite of existing huge debts, State-owned enterprises have relied heavily on bank loans for their revamps. And private enterprise, generally, can only acquire needed funds through capital accumulation by themselves or by borrowing from relatives.

Third, while US companies adopted a distribution system rewarding both money capital and human capital, China's enterprises still implement a money-capital-based distribution system.

The former, regarded as a fundamental part of the modern enterprise property system, has stimulating management initiatives. The latter has speeded up the drain of talented workers from State-owned enterprises and private enterprises.

Under such circumstances, domestic enterprises can hardly survive international competition, said Wen.

Hence, State-owned enterprises should be transformed into stock companies, and private enterprises should also reform their closed ownership system, he said.

A modern ownership system, the core of the modern enterprise system, is an institutional pre-condition for Chinese enterprises' participation in international competition.

An options-based income system for entrepreneurs should be first introduced to promote the establishment of a modern enterprise system in State-owned enterprises, Wen said.

Currently, most State-owned enterprises are not run by professional managers but by officials appointed by the government.

They tend to act more for authorities at the higher level than for the shareholders.

They also care more about their long-term interests after leaving the office than about their present wages because their personal spending can be well covered by enterprise expenditures.

To change the fact that managers have little incentive to work hard, an options-based income system will do well, which will give entrepreneurs more income for longer service and better performances.

Meanwhile, the government should differentiate between the appraisal of entrepreneurs from that of officials, Wen said.

The criterion of a qualified entrepreneur is whether he or she can maximize the interest of the shareholders with lawful operation.

High salary and stock options should be offered to entrepreneurs according to their human worth to the company.

Government officials' income should not be raised in the same way, because their wages are provided by taxpayers.

Workers will be hired through legal contracts, and they can become one of the owners of the enterprise by holding shares.

The severity of unemployment lies not in workers' loss of jobs but their lack of means of livelihood.

If workers can hold more enterprise shares that account for a considerable portion of their income, they will be exposed to less difficulties when they are out of a job. And the country's unemployment can thus be better addressed, said Wen.

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