The Three-year Reform and Difficulty Relief
Efforts for the SOEs Have Taken a Favorable Turn

State Economic and Trade Commission

January 25, 2000

The year 1999 was a crucial year for the three-year reform and difficulty relief for the state-owned enterprises (SOEs) in China and also a year when many policy measures have been implemented intensively, the workload is the heaviest and the effect achieved is the most distinct. Facing anfractuous internal and external economic environments, the Chinese government has taken a series of policy measures for boosting economic growth and improving the situation of the SOEs. The fourth plenum of the fifteenth CPC Central Committee has made decisions on some important issues concerning the reform and development of SOEs, thus providing a powerful momentum for the cross-century reform and development. Along with the improvement of macroeconomic environment and the pro-active implementation of various policy measures, the state-owned enterprises and the state holding industrial enterprises have taken a favorable turn in economic benefits remarkably and also reversed the situation of profit decline and deficit increase resulted from such factors as the Asian Financial Crisis. The three-year reform and difficulty relief efforts for the state-owned enterprises have taken a favorable turn.

-- Comprehensively applying various policy measures to effectively drive the reform and difficulty relief of the SOEs. Last year, the state has intensified the efforts on the implementation of enterprise merger and bankruptcy policies and pushed forward a series of important measures such as debt-to-equity swap and the increase of the interest subsidy for technical upgrade. Those measures have non only effectively boosted the economic benefits of the SOEs for a favorable turning in that year and also laid a solid foundation for achieving the objectives of the three-year reform and difficulty relief for SOEs and for the long-term development as well.

Mergers and bankruptcies are important measures to optimize enterprise structure and accelerate the process of enabling the efficient SOEs prosper and eliminating the inefficient SOEs. On the basis of summarizing the experience, we improved the methods on using the provisions for writing off the bank non-performing and bad debts last year, concentrating our efforts on priority sectors, mainly for the bankruptcies and shutdown of the state-owned large and medium deficit-ridden enterprises in the key sectors such as textile, coal, nonferrous metal, metallurgy, military industry and so on. As many as 435 large and medium-sized projects in total were arranged in three batches all the year around. Including the carried-over projects in 1998, more than RMB 70 billion of provisions for writing off the bank non-performing and bad debts would be required. Once those projects are completed, it may reduce as many as 860 large and medium-sized deficit-ridden enterprises on an accumulative basis. With the vigorous push and backing of local governments, the enterprises stepped up downsizing to improve efficiency. While intensifying the efforts on the bankruptcies and shutdown of large enterprises and the lay-offs, the Chinese government also paid great attention to maintaining social stability, further standardizing the procedures for workers to be laid-off, hiking the three social security standard lines (the basic living guarantee, unemployment insurance and the minimum living guarantee for the town dwellers for the laid-off workers of the state-owned enterprises) by a big margin. to ensure the basic living of these laid-off workers, employing all available means to promote the reemployment of the laid-off workers. Last year, there were 4.92 million SOE laid-off workers nationwide reemployed. Most of the laid-off workers that failed to achieve reemployment went to the reemployment centers and got their basic living allowance.

Debt-to-equity swap has been implemented in some large and medium SOEs which have marketable products and development prospect but have got into trouble due to heavy debts. This is an important measure to relieve the debt burden of enterprises and optimize assets-liabilities structure. According to the Suggestions on Some Issues Concerning the Implementation of Debt-to-Equity Swap approved by the State Council, the State Economic and Trade Commission (SETC), together with the economic and trade commissions in all provinces and related departments, has conducted thorough investigation and research, guided enterprises to develop debt-to-equity swap schemes to transform internal operation mechanism step by step while urging enterprises to reduce the debt burden. On this basis, following stringent screening, it has reviewed and recommended as many as 601 enterprises for debt-to-equity swaps and the amount planned for debt-to-equity swaps is expected to total RMB 459.6 billion. Most of those enterprises are the key enterprises and enterprise groups. Quite a few of them are the leading enterprises in their respective sectors. Financial assets management companies have assessed the recommended enterprises one by one independently. By January 24, 2000, 78 enterprises had signed debt-to-equity swap agreement, framework agreement or letter of intent with financial assets management companies or banks with the transaction value of more than RMB 112.2 billion. Most enterprises that go through debt-to-equity swap exercise can make up the deficits and get surpluses within the same year.

In order to quicken the pace of the technical advance and industrial upgrade of enterprises, last year, the state took out RMB 15.3 billion of funds by issuing state treasury bonds for interest subsidizing for the key technical renovation programs of enterprises. To obtain loans with subsidized interest, the enterprises must submit their programs and the State Economic and Trade Commission, together with the related departments screened the programs strictly according to the requirements on quality, variety, benefit and export expansion and focusing on metallurgical, textile, petrochemical, nonferrous metal, machinery, information, papermaking and other industries and environment protection, new and high-tech technological industrialization, selecting the outstanding and supporting the stronger, and inclining to the old industrial bases such as the Northeast China and the middle and western areas appropriately. As many as 647 technical transformation programs have been determined in three lots all the year around, with a total investment of RMB 171.8 billion, of which the interest subsidy from the Ministry of Finance reached RMB 12.76 billion. These programs, when put into operation, are expected to effectively advance the adjustment of the product mix of key sectors and the improvement of the competitiveness of enterprises.

Last year, the state continued to crack down upon smuggling. The banks cut deposits and loan interests once again. Some more enterprises were listed on the stock markets. All these played an important role in helping the SOEs reform and difficulty relief efforts.

-- Aggregate supply control has achieved initial success and the efforts on the shutdown or suspension of the ''five kinds of small enterprises'' have been carried out in all-round way. Oriented by market, intensifying the aggregate supply control over some important products is an urgent matter to improve the relationship between demand and supply, adjust economic structure and improve economic efficiency. After some efforts, the textile sector had cut down 9,060,000 backward cotton textile spindles by the end of last year on an accumulative basis, one year ahead of the schedule to realize the cut-down and ink-wiping objective basically. The coal sector produced 980 million tons of raw coal, down 11.9% on that of 1998. The severe contradiction of oversupply in the coal sector has been relieved to some degree. The aggregate supply control over petrochemical industry has been basically achieved and the demand and supply of crude oil, product oil and main petrochemical products are balanced on the whole. By the end of last year, 31,000 small coal-mines with illegal operations and irrational layout had been banned and shut down. As much as 9,750,000 tons of small furnace productive capacity, 13,000,000 tons of steel-making capacity and 18,290,000 tons of steel rolling capacity had been cut down. 40,000,000 tons of small cement capability and 15,000,000 weight boxes of small glass capacity had been shut down. Small thermal power plants with a capability of 5,740 MW have been shut down in the past two years on an accumulative basis. By the end of November 1999, 70 small refineries had shut down and approximately 5,600 refineries with indigenous methods banned. The efforts on closedown and suspension of small sugar refineries, small saccharin refineries and small paper mills are also being carried out in steps.

-- New progress has been achieved for market tapping and market order has been improved considerably. Aiming at the new circumstances of increased market constrains, we intensified the efforts on tapping domestic market, especially the rural market last year. Through vigorously developing chain operation, agency system, materials circulation, distribution and delivery as well as other new marketing patterns and organizing industrial and commercial enterprises to jointly carry out marketing activities, the circulation of commodities has flourished. By such measures as increasing tax refund rate for export, encouraging enterprises to expand their direct export, and advancing overseas processing trade and so forth, we have turned back the declining trend of export. The export for the whole year increased by 6.1%. Those measures have played very active roles in bringing along economic growth. Last year, we rationalized the import and export management regime for important industrial products and further improved the supervision and management over processing trade and carried out antidumping investigations over a small number of products that were imported at below-cost duping rate and had a serious impact on relevant domestic industries. In addition, we have also further standardized and rectified the market order of key products in petrochemical, coal, machinery, electric engineering and other sectors, strengthened and improved the trade self-discipline through such intermediary organs as trades and associations.

-- The work of separating the functions of the government from those of the enterprises has been carried out smoothly and enterprise strategic restructuring has taken significant steps. Party and government organizations have separated themselves from the economic entities they established and from the directly affiliated enterprises they managed. The Army, the armed forces and judicial organs no longer undertake commercial activities. This is a very important step to adapt to the demand of developing the socialist market economy and separating the government from enterprises. After the Party and government organizations of the Central Authorities separated themselves from the enterprises they established and managed, most disposal schemes have already been implemented and put into place. The take-over and disposal of the operating enterprises established by the army, the armed forces and the judicial organs have been completed on the whole. According to the guideline of ''seizing the large enterprises and setting free the small enterprises'', we further quickened the pace of enterprise strategic restructuring last year. In the area of ''seizing the large enterprises'', on the basis of establishing oil and petrochemical groups and Baoshan Steel Group, we also established ten largest military industrial groups and three largest nonferrous metal groups in succession. The establishment of four largest information industrial groups is still under way, of which the establishment scheme of China Mobile Communication Group Company and China UNICOM Co., Ltd. restructuring scheme have been approved by the government and put into implementation. Among 520 key enterprises of the State, 346 enterprises have established technology development centers initially. After the restructuring of 242 scientific research institutions affiliated with the administrations of the State and under the management of the State Economic and Trade Commission, 80% of them have joined enterprises and enterprise groups. In the area of ''setting free the small enterprises'', we placed our emphasis on the standardization of the reform form such as selling the state-owned small enterprises, leasing and stock cooperatives as well as the construction of the service system for the medium and small-sized enterprises. More than 70 guarantee agencies were formed in 28 areas, raising more than RMB 4 billion of guarantee funds. This has relieved the contradictions of ''financing difficulties and loan difficulties'' for the medium and small-sized enterprises to a certain degree.

-- The construction of a modern enterprise system is deepened constantly and enterprise management has been strengthened. According to the requirements of establishing a modern enterprise system, we continuously boosted the construction of the modern enterprise system on the basis of the experiments conducted in the past years. Most of the 520 key enterprises of the State have conducted corporate system reform initially. All provinces have carried out active exploration in such areas as establishing and perfecting corporate governance structure, rationalizing internal relationship, deepening internal reform, strengthening enterprise management, conducting effective supervision over enterprises and so on. On the basis of further carrying out the activities of learning from Handan Steel Company, we also summarized and propagated the experience of Shandong Weifang Yaxing Group in purchase and marketing parity management last year and worked out the interim regulations on materials purchase management for the state-owned industrial enterprises. Through learning from Handan Steel Company and Yaxing Group, many enterprises strengthened internal management and reduced their production and operation costs. At the same time, we intensified the efforts on the training for enterprise operators and managers, especially those of key difficulty relief enterprises, trained the chief executive officers (CEOs) of 2,187 key difficulty-relief enterprises and played active and driving roles for enterprises to relieve difficulties.

Last year, we continued to clean up rampant charges, fines and levies upon the enterprises. In addition, we took further steps to strip the enterprises of their social obligations. All these measures helped relieve the social burden upon the enterprises.

After the concerted efforts of all provinces, departments and a great number of enterprises, an obvious effect has been achieved in national industrial production, market circulation and the reform and difficulty relief of the state-owned enterprises. In 1999, The added value of industry throughout the country increased by 8.9%, exceeding the expected goal of 8%. The marketing rate of industrial products reached 97.16%, up 0.56% on that of 1998. The total volume of retail sales for social consumables was expected to increase by 10%, exceeding the expected target of 9%. In particular, economic performance took a dramatic turn for the better. It is primarily estimated that the profits realized by the state-owned enterprises and the state holding industrial enterprises for the year of 1999 would top RMB90 billion, up by about 70% On the previous year ( the official figures will be announced soon by the State Statistics Bureau).

The economic profitability in most localities was better than that of the previous year. Among the 30 provinces nationwide (municipalities and regions excluding Tibet), 26 localities increased their profitability, reduced deficits or made up the deficits in different degrees. The important difficulty relief areas in the three provinces in Northeast China have taken a favorable turn by a great deal. Heilongjiang province increased its profit by 125.6%. Jilin and Liaoning provinces made up deficits and got surpluses in September and October last year respectively and ended the situation of successive deficit. 

Most sectors improved their profitability. As the breakthrough point for the three-year difficulty relief, the textile industry achieved a profit of RMB 800 million all year around while accomplishing the tasks of both spindle and staff reductions on the whole, thus ending the deficit situation that had lasted for as long as 6 successive years. The petrochemical industry kept its good development tendency continuously and achieved a profit of RMB 30 billion for the whole year, doubling that of the previous year. The economic performance in other sectors have also been improved considerably. The economic performance in light industry, machinery, electronics, medicine, metallurgy was improved remarkably. The building materials and nonferrous metal industries reversed the situation of deficit-making as well. 

Key enterprises have made great progress in making up deficits and getting surpluses. By the measures of mergers and bankruptcies, restructuring and consolidation, debt-to-equity swaps, reinforcing management, as many as 6,599 state-owned and state holding large and medium-sized industrial enterprises in deficit by the end of 1997 have been reduced by over 3,100. 

The economic performance of enterprises has taken a favorable turn obviously, albeit only initially and due to various reasons.  However, it shows the good prospect of the reform and development of the state-owned enterprises, further boosting the morale and increasing the people’s confidence in achieving the objectives of the three-year difficulty relief. 

The main problems that existed in 1999 were insufficient effectual demand, outstanding irrational structure, still large deficit scale and deficit amount of SOEs, huge quantity of tied-up funds and loan in arrears, poor enterprise management and severe situation of safe production. Some in-depth contradictions and problems in the reform and development of the state-owned enterprises need to be solved urgently. The task remains formidable to realize the objectives of the three-year reform and difficulty relief for the state-owned enterprises. 

The year 2000 is a year at the turn of the centuries and also the decisive year for realizing the objectives of the three-year reform and difficulty relief for the state-owned enterprises. We must make persistent efforts and go all out to realize the objectives of the three-year reform and difficulty relief for the state-owned enterprises in an all-round way. Firstly, most state-owned large and medium-sized deficit-ridden enterprises should shake off red ink. In addition to the coal industry and the military industry, which shall make continued great efforts to reduce deficit, most trades such as machinery, metallurgy, petrochemical, light industry, textile, building materials, tobacco, nonferrous metal, electric power, electronics, gold, medicine sectors and so forth shall make up deficits and get surpluses on the whole or continuously increase profits. Most provincial (region and municipality) state-owned and state holding industrial enterprises shall make up deficits and get surpluses on the whole or continuously increase profits. Most state-owned and state holding large and medium-sized industrial deficit-ridden enterprises shall make up deficit and get surpluses or eliminate deficits. Key enterprises and old industrial bases shall further increase their economic performance. Secondly, most key state-owned large and medium enterprises shall build up modern enterprise system preliminarily, especially the state-owned and state holding enterprises among 520 important enterprises of the state. All qualified ones shall conduct corporate system reform according to the standards, build up business entity harnessing structure satisfying the requirements of modern enterprise system, transform operation mechanism, quicken the pace of technological progress and strengthen enterprise management. Thirdly, economic operational quality and performance shall be further improved. The industrial added value throughout the country shall be increased by 8-9%. The total volume of the actual retail sales for social consumer goods shall be increased by about 9%. The state-owned and state holding industrial enterprises shall achieve a profit with a big positive margin than they did in 1999 and the amount of loss for the deficit-ridden enterprises shall be reduced by a large margin.

At present, various policy measures on the reform and difficulty relief of the state-owned enterprises have been mostly unveiled and those measures have formed a complete set of system on the whole. The key problem now is to practically carry through the policy measures and bring those measures into play to the most extent through enhancing management. This year, the priority will be on the following work .

First, to carry out the aggregate supply control continuously and effectively and keep the balance between demand and supply on the whole. Focusing on the three sectors including coal, steel and sugar refinery, we shall cut down the excessive output, phase out backward capabilities and intensify the efforts on shutting down and suspending ''five kinds of small enterprises''.

Second, to vigorously tap urban and rural markets and actively expand export. We shall optimize export product mix, promote the diversification of export market, improve import regulation and control, effectively use foreign funds, rectify the market order, crack down on counterfeiting with severity, continue to cleanup fees and charges to relieve the burden on the enterprises.

Third, to adjust and optimize assets-liabilities structure and reduce the debt burden of enterprises step by step. We shall intensify the efforts on enterprise bankruptcy and closedown, prioritize the use of provisions for writing off bank non-performing and bad debts and wipe out some more deficit sources. For each of the enterprises to be declared bankrupt or to be shutdown, we shall take careful steps draw up staff settlement schemes to ensure social stability. We must make great efforts on the organization and implementation of debt-to-equity swaps, strictly hold the screening, standardize operations and enhance supervision and inspection to ensure the debt-to-equity swaps achieve the expected target. 

Fourth, to quicken technical progress and improve the technological innovative capabilities of enterprises. Centering on variety, quality, benefit and export expansion, we shall use new and high-tech to reconstruct traditional industries, put the priority on a group of flagship programs that can represent the industrial level and boosting industrial upgrade. We shall carry out strict responsibility system for the technical upgrade projects through holding the screening stringently, reinforcing supervision, preventing expanding capacity in the name of technical upgrade to ensure the quality of the projects. We shall speed up the construction of technological innovative system centered on enterprises. All key enterprises of the state must build up technology development center. We shall energetically advance the combination of production and scientific research in different forms and accelerate the transformation of scientific achievements into productivity.

Five, to devote great efforts to boost the construction of the modern enterprise system and make all efforts to transform enterprise operation mechanism towards market. All qualified state-owned enterprises in the key enterprises of the state must institute modern enterprise systems and be reformed into standard corporations. We shall further deepen the internal reform of enterprises to form a mechanism under which the employees can enter or exit, the operators can move up or down, and the incomes can rise or fall.

Six, to further reinforce enterprise management and improve the entire quality of enterprises. Centering on financial cost management, we shall concentrate out efforts to do a good job of the cost, fund and quality management. Concentrated training shall be conducted for the chief executive officers (CEOs) of the key enterprises of the state group by group. We shall intensify the assessment and supervision over the business managers of enterprises. 

Seven, to intensify the efforts on the work of ''seizing the large enterprises and setting free the small enterprises'' and drive the reform of medium and small-sized enterprises. We shall adopt various forms to set free and reinvigorate the state-owned medium and small-sized enterprises, standardize the operations and pay attention to the actual effect. Combining ''setting free the small enterprises'' with ''supporting the small enterprises'', we shall encourage the development of the medium and small-sized enterprises, in particular the scientific and technological enterprises, establish and perfect the socialized service system and provide services to the medium and small-sized enterprises in all aspects.

Eight, to promote fair competition among enterprises of different types of ownership and guide the healthy development of the non-public sector. We shall create a fair competition environment for enterprises with different types of ownership, enhance the guidance, supervision and management, and guide the enterprises to operate according to law.