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Market-Oriented Reforms of China's Enterprises in Retrospect

Under the circumstances that China has joined the WTO and that the global economy is becoming more and more integrated, the international community is finding it ever more intriguing and interesting as to how market-oriented China's enterprises have become in their business operations after 24 years of reforms. For this reason, an objective and impartial assessment of the marketization of China's enterprises is of great significance both for promoting in-depth reforms of enterprises and for the international community to get a correct understanding of the market-oriented operation of China's enterprises.

Ⅱ. Market-Oriented Reforms of China's Enterprises in Retrospect

The market-oriented reforms of China's enterprises were initiated in December 1978 at the Third Plenary Session of the Eleventh National Congress of the Communist Party of China (CPC), and the development can be divided into three stages in the past 24 years since then.

(I)The Initiating Stage (1978-1984)

Before the reforms, almost all of China's enterprises were uniformly of the ownership by the whole people, that is, they were state-owned and state run. A small number of collectively owned enterprises did exist, but their managerial system was not essentially different from that of state-owned enterprises. Enterprises of any other ownership were non-existent at all. State-owned enterprises are not enterprises in the real sense, but are administrative institutions under the control of the Party and the government. These so-called "enterprises" are merely "production units" that are neither independent nor creative. They received production quotas from the government, which would purchase and sell the products on their behalf and the profits would also be allocated and distributed by the government in a unified way. Enterprises are highly reliant on the government. The operation mechanism of such enterprises was immobile and stiff with extremely low efficiency. Starting from such basic reality, the government put forward the idea of "delegating power and sharing profits" with enterprises for carrying out reforms.

By "delegating power and sharing profits" so that enterprises would enjoy expanded autonomy and receive material incentives, the government intends to bring forth the initiative of state-owned enterprises in production and operation. This mainly included: provided that the scheduled production quota is accomplished, the enterprise may work out supplementary plans according to the demand in market and arrange the production thereof at its own discretion; within certain limits, part of the products may be sold by itself at the prices set by the government; the responsibilities and rights of the State and enterprises respectively are confirmed in the form of an economic responsibility system, allowing enterprises to posses a certain amount of financial resources and economical benefits at its own disposal, so that the performance of the enterprises would directly affect the benefits of the staff and workers. In May 1984, the State Council confirmed that state-owned enterprises may enjoy autonomy in ten aspects, namely, production and operation programming, product sales, pricing, material procuring, use of funds, disposition of properties, structuring, personnel and labor, distribution of wages and bonuses and the utilization of a combination of powers.

(Ⅱ)The Exploring Stage (1984-1991)

In October 1984, the Third Plenary Meeting of the Twelfth National Congress of the CPC passed the Resolution on Reforming the Economic system, which called for "the whole people, collectives and individuals to go all out", and encouraged all sectors of the economy, whether owned by the whole people, the collectives or individuals, or with foreign funds, to cooperate with each other by means of establishing contractual joint-ventures, equity joint-ventures or associations. Small state-red enterprises were allowed to be "let out" or "contracted" to collective-or individually-owned enterprises. In 1987, the Thirteenth National Congress of the CPC further proposed that the joint-stock system as one of the forms for organizing properties might be tried out. The property rights of small state-owned enterprises may be transferred to collectives or individuals against remuneration. In December 1986, the Standing Committee of the Sixth National Congress passed the Enterprise Bankruptcy Law (Trial), which stipulates that enterprises in insolvency may apply for bankruptcy. In April 1988, the First Session of the Seventh National People's Congress passed the Enterprise Law. This is the first code law for state-owned enterprises since the funding of the People's Republic of China. This law stipulated 13 items of rights on the basis of generalizing the relevant rules, regulations and policies formulated by the government in an effort to invigorate enterprises since the initiation of the reforms. In addition, policies, rules and regulations for protecting the non-state owned sector such as the Interim Regulations for the Administration of Urban and Rural Individual Industrial and Commercial Businesses, the Law of Foreign Invested Enterprises and the Provisional Regulations of Private Enterprises were successively promulgated, providing legal guaranty for the development of the non-state owned sector.

Beginning from the Third Plenary Session of the Twelfth National Congress of the CPC, the central emphasis for reforming China's economic system was shifted from rural areas to urban areas, and the reform of state-owned enterprises was identified as the central link in the reforms. During this period, the most prominent aspect of reforms in state-owned enterprises was the distinguishing of government and enterprise roles, and appropriate separation of the right to own and the right to run (or "the separation of the two rights" ). The main measures for achieving this end was to promote the responsibility system of contracted operation, and to implement the system of leased operation in respect of some small state-owned enterprises.

The non-state owned sector made breakthrough advances in this period. Between the years from 1984 to 1991, the average annual growth rate of output by the state-owned industry was only 8.3 percent, while that of the non-state owned industry was as high as 23.9 percent, of which, the average rate for the collective-owned industry was 19.7 percent, for urban and rural individual industries, 45.4 percent; and for industries of other types of economy, the average was 47.3 percent. In 1991, the output of the non-state owned industry accounted for 43.8 percent of the total industrial output value, an increase by 12.9 percentage points compared to the 30.9 percent in 1984, or, an average increase of 5.1 percent annually. This reflected that the efficiency achieved by non-state owned enterprises from marketization was far higher than that of state-owned enterprises basically still under the administration of the government. Compared with state-owned enterprises, non-state owned enterprises were on the whole independent market entities, possessing relatively independent market rights and pursuing relatively independent economic benefits, and their behaviors were already typical of the market economy.

(Ⅲ)The Standardizing Stage (1992 to the Present)

A series of speeches by Deng Xiaoping on his inspection tour to the southern parts of China during the months of January and February in 1992 stroke the keynote for the marketization of China's economy. In July of the same year, the State Council issued and enforced the Rules for Shifting the Operational Mechanism of the Industrial Enterprises Owned by the Whole People, which, on the basis of the 13 rights stipulated in the Enterprise Law, further specified that enterprises were entitled to 14 rights: i.e. decision-making in production and operation, price-setting for products and labor, selling of products, material purchasing, import and export, investment decision, disposition of retained bonuses, disposition of property, decision on joint operation or mergers, labor employment, personnel management, distribution of wages and bonuses, internal structuring, and refusing apportioning, so that enterprises would become commodity producers and business operators that were adapted to the requirements of the market, that were independently operating according to law and responsible for their own losses and profits, that were capable of developing on their own and were self-disciplined. In October, the Fourteenth National Congress of the CPC made it explicit that the objective of China's economic reforms was to establish a system of socialist market economy. State-owned enterprises, collectively owned enterprises and other types of enterprises were all requested to enter the market, and to compete in the market so that only the fittest would survive. The dominating status of state-owned enterprises was to be displayed in participating fair competition in the market. The joint-stock system are effective in distinguishing government and business roles, in shifting the operation mechanism of enterprises and in accumulating funds, so relevant laws and regulations were to be urgently formulated or implemented, to realize an orderly and healthy transformation of state-owned enterprises into joint stock businesses. Thereby, the market entity Status of China's enterprises was officially confirmed, and China's enterprises entered a stage of standardized development.

In November 1993, the Third Plenary Session of the Fourteenth National Congress of the CPC passed the Decision on Several Issues for Establishing a Socialist Market Economy System by the Central Committee of the CPC, which stated that the "market was to play a fundamental role concerning the resources under the macro control by the State", that "the State was to create the conditions for all sectors of the economy to participate in the market competition on an equal footing, and enterprises from all sectors would be treated indiscriminately". State-owned enterprises were to fit in with the requirements of a market economy system in establishing a modern enterprise system with "clearly established ownership, well defined power and responsibility, separation of enterprises for administration and scientific management". From then on, the transformation of state-owned enterprises shifted its emphasis on delegating powers and sharing profits to putting more efforts in creating a new market-oriented enterprise system. In December of the same year, the Standing Committee of the National People's Congress passed the Company Law, which stated that companies funded by investing bodies of different ownerships were all equal by law. In 1997, the Fifteenth National Congress of the CPC further stated that "the non-public sector is an important component part of this country's socialist market economy", and the statement was incorporated into the Constitution amended in 1999. From then on, the status and the role of the non-state owned sector, especially the private sector, in China's economic structure were officially confirmed.

In September 1999, the Fourth Plenary Session of the Fifteenth National Congress of the CPC passed the Decisions of the Central Committee of the CPC on Several Important Issues in the Transformation and Development of state-owned enterprises, stating that the stock rights of state-owned enterprises were to be diversified and that companies with diversified investing bodies were encouraged in order that they were turned into companies in a standardized procedure. In April 2001, the State Economic and Trade Commission, the Ministry of Personnel and the Ministry of Labor and Social Security jointly issued the Opinions on Deepening the Reforms of the Internal Personnel, Labor and Distribution Systems of state-owned enterprises, stating the administrative ranks in enterprises were cancelled, the managers were no longer entitled to treatment according to their administrative ranks that were exclusive to the government officials. All the managers, except those to be controlled by the fund contributor or those to be elected or replaced according to statutory procedures, were to be employed from the survivors of open election contests, or to be recruited from all over the society.

This stage of the transformation of state-owned enterprises featured the establishment of modern enterprise system (with the joint-stock system being the priority option). By the end of 1994, there were already 33,000 joint stock enterprises all over China, with 78.4 percent of them finding the operation mechanism remarkably changed after transformation, enjoying economic benefits far higher than the national average. Encouraged by the success in the transformation, in November 1994 the State Council picked 100 large state-owned enterprises for trial implementation of the modern enterprise system, staging the prelude for the transformation of system on a large scale among state-owned enterprises. In the large state-owned enterprises undergoing trial transformation, investing institutions or government departments authorized by the State or other investors were entitled to shareholders' rights in proportion to the shares held. The contributors were not allowed to withdraw the funds, but the enterprise property may be legally transferred. Enterprises as independent market entities were no longer reliant on the government, nor were they eligible to administrative ranks. Within the enterprise, decision-making, implementation and supervision powers were independent of each other, with their powers and responsibilities clearly defined and mutually restraining. The company administration was established consisting of the general meeting of the shareholder, the board of directors, the board of supervisors and the managerial staff, each of them performing their respective duties in effectively exercising the decision-making, supervisory and implementation powers. The managerial staff members no longer kept the status of government officials, the managing personnel was to be designated by the Board, and the enterprise and the employees were entitled to choose each other. In respect of the financial and accounting system, the General Principles of Business Finance and the Accounting Standard for Enterprises that are basically in consistence with the international standard were implemented throughout the country. Enterprises must take out old-age pension, medical, and unemployment and industrial injury insurance policies for the employees. Since the pilot enterprises took to the standardized approach right from the beginning, the transformation achieved considerable success. On the basis of successful experience, the transformation continued with its in-depth development. By the end of 2001, among the 2710 pilot enterprise groups picked up by the State Council and the Localities, the parent companies of 1994 of them transformed into companies, accounting for 73.6 percent of the total; among the 520 state key enterprises owned by the State or with the State as the controlling shareholder, 430 enterprises transformed into companies, accounting for 82.7 percent of the total. During this period, the transformation of other state-owned enterprises was continuously deepened in all dimensions, and a mechanism for state-owned enterprises to exit was gradually taking shape.

With state-owned enterprises being transformed into companies, the company stock listing was constantly expanding in size and the relevant rules and regulations were being refined constantly. From 1992 to 2001, the number of listed companies rose from 53 to 1160; the fund raised annually rose to 125.234 billion yuan from the initial 9.409 billion yuan, with the fund raised in the year 2000 reaching as high as 2103.08 yuan; the ratio of the market stock price and the GDP rose from 3.93 percent to 45.37 percent. During this period, regulations and laws including the Opinions on Standardizing the Joint Stock Limited Companies, the Provisional Regulations on the Administration of Issuing and Trading of Stocks, the Securities Law of the People's Republic of China and the Criterion Governing the Listing Companies were successfully issued, forming important guaranty for the standardized operation of the listed companies.

The confirmation and protection of the market entity status of the non-state owned sector by the policies and Laws of the State brought about the rapid development of the non-state owned sector in this period. This development was not only represented in the growth rate, but also in the wide range of the areas affected. In growth rate, between the years from 1991 to 2001, the average annual growth rate of the state-owned industries and industries with the State as the controlling shareholder was 17.3 percent, while the average annual growth rate of output by the non-state owned industry reached 24.3 percent, of which, the non-public industries (including individually owned enterprises, joint stock enterprises, and enterprises funded by foreign or Hong Kong, Macao and Taiwan investors) achieved the average annual output growth rate of 35 percent. In 2001, the output of the non-state owned industrial enterprises reached 78.3 percent of the total industrial output, or, 32.5 percentage points higher than the 45.8 percent in 1991, or an average annual increase of 5.51 percent. In wideness of aspects affected, the non-state owned sector had infiltrated to most fields of the national economy. The non-state owned sector even partially entered some of the industries monopolized by the State, such as banking and postal delivery.

To sum up, China's enterprises, after 24 years of reforms and development, have made breakthrough in the market-oriented development. There is no doubt that China's enterprises have realized transition to market economy and the performance of China's enterprises is already market-determined.

(China.org.cn November 7, 2003)

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