SOE links threaten china reform drive
By Willy Lam
The recent detention of senior executives of the China National Petroleum Corp (CNPC) has highlighted a major question about China's economic plans: Whether the Xi Jinping-Li Keqiang administration has finally decided to restructure the 110 or so yangqi, or state-owned enterprise (SOE) groupings.
Premier Li has also raised expectations that the economic-reform blueprint that is due to be endorsed by the Third Plenum of the Chinese Communist Party (CCP) Central Committee next month will address the issue of allowing privately owned firms to enter into sectors that have been monopolized by these national champions. After all, one of the key reform initiatives associated
with so-called "Likonomics" is the provision of a level playing field for both SOEs and non-state-sector enterprises.
The arrest of former China National Petroleum Corporation (CNPC) president Jiang Jiemin on September 1 could become a watershed reversal of the Chinese government's policy of nurturing "aircraft carrier-type" SOE giants, many of which have made it into the Fortune 500 List.
Jiang, who spent the bulk of his career in the oil industry, was the patron of four other CNPC executives detained in the summer, including deputy general managers Wang Yongchun and Li Hualin. Last March, Jiang was appointed chairman of the State Assets Supervision and Administration Commission (SASAC), a ministry-level department charged with overseeing the operations of all yangqi.
After Jiang's ouster, SASAC party secretary and vice-chairman Zhang Yi indicated that units under the commission should "forcefully implement structuring adjustments and transformation" as well as "further strengthen the supervision of state assets".
Given that Zhang is a former senior cadre in the CCP Central Commission for Disciplinary Inspection (CCDI) - which is China's highest-level anti-graft watchdog - his role seems to be to clean up the not only the mess in CNPC, but other SOE behemoths as well.
Much of the foreign and overseas-Chinese media reporting on the CNPC scandal has focused on the close relationship between Jiang, Li Hualin and former Politburo Standing Committee (PBSC) member Zhou Yongkang, who is a former general manager of the oil giant. Zhou is also seen to be an ally of the fallen former Politburo member Bo Xilai, who was sentenced to life imprisonment for alleged corruption and embezzlement last month.
Zhou's public "reappearance" - he was seen inspecting his alma mater, the China University of Petroleum, in early October - seems to lend credence to reports that the former PBSC member would not face criminal prosecutions. Yet Jiang's removal - and the large-scale purge of CNPC cadres - also coincided with a series of talks by Premier Li, deemed the most reform-oriented member of the current PBSC, on the need to overhaul a host of unwieldy yangqi, which CNPC perhaps best exemplifies.
Premier Li underscored the imperative of reforming yangqi as well as other large SOEs controlled by regional administrations in a series of meetings of the State Council, or cabinet, in the past few months. Li indicated at a regular State Council conference last month that private firms should be gradually allowed into several sectors dominated by yangqi, which include finance, oil and gas, electricity, railways, telecommunications and the exploitation of mineral and other resources.
At an earlier meeting, Li urged yangqi "to use reform-oriented methods and restructuring measures to solve existing problems". "They should raise their management levels [and] make more efforts in strengthening innovative ability," he added. "We should build up 'sunshine yangqi' so that they can boost the values of state assets and acquit themselves well of their social responsibilities."
In an internal talk earlier this year, Li reportedly cited CNPC, the China Petroleum & Chemical Corporation (or Sinopec), the Chinese National Offshore Oil Corporation, China Telecom and China Mobile as the five yangqi that required the most thorough reforms. "If we do not restructure [these enterprises] and bring about major changes, there might be serious consequences for which nobody would want to bear the responsibility," Li said.
Private entrepreneurs and advisers to Premier Li have been pushing for a speedier pace in reforming SOE groupings. At a Forum on Non-state Enterprises held in Beijing earlier this month, Peking University economist Li Yining argued that "SOEs should become real enterprises" and not adjuncts of the state. Li argued that SASAC should stop exercising direct control over the yangqi.
"Everything should be done according to laws and regulations," said Professor Li, who supervised Li Keqiang's doctoral thesis when the latter was a part-time Peking University student in the 1980s. "Private enterprises should compete with SOEs in an environment of equality." Beijing-based real estate mogul Ren Zhijiang, a vocal advocate of the rights of private enterprises, also accused SASAC cadres of "failing to supervise [SOE] enterprises [due to] their lack of knowledge about running businesses".
Yet it is apparent that there is a divergence of views within the CCP's highest echelons as to the extent to which the SOE conglomerates should be reformed or even privatized. This is evidenced by a plethora of articles in the official media that reflect the views of top-level cadres who support the continuation of the yangqi's privileged status.
The day after news broke about Jiang's detention, CCTV came out with a commentary defending the yangqi system. The article claimed that the CNPC scandal "has nothing to do with its monopoly status" and that there are many industries that could only be handled by state-controlled conglomerates. "It's not as though anyone can get into the oil business," the commentary said.
Equally significant was a series of five commentaries carried by the conservative Economic Daily. The articles warned advocates of privatization that weakening SOEs was tantamount to shaking up the foundation of the socialist state. "The purpose of SOE reforms is not to abolish them but to make them better," it said. The paper praised President Vladimir Putin for re-nationalizing Russia's oil and gas operations "so that petroleum has once again become the pillar and foundation of the revival of Russia".
A closer look at the backgrounds of Central Committee members endorsed at the 18th CCP Congress suggests that there will be no lack of yangqi supporters at the plenum.
A record number of serving or former CEOs of SOE conglomerates were picked as Central Committee members last November. In addition to then-president of CNPC Jiang, a former president of Bank of China, Xiao Gang, made it to the party's ruling council. So did three former yangqi CEOs who were recently appointed as provincial governors: Fujian governor Su Shulin, who is a former Sinopec president; Shandong governor Guo Shuqing, who used to run China Construction Bank; and Hebei governor Zhang Qingwei, who headed the Commercial Aircraft Corporation of China Ltd (COMAC).
Also inducted into the Central Committee were the chief executives of four defense-industry and aerospace giants: Lin Zuoming of China Aviation Industry Corporation; Xu Dazhe of China Aerospace Science and Industry Corporation (CASIC); Ma Qingrui of China Aerospace Science and Technology Corp (CASC); and Zhang Guoqing of China North Industries Group Corporation (NORINCO). Last April, Norinco's Zhang, whose company is China's largest importer and exporter of weapons and firearms, was appointed deputy party secretary of the directly administered city of Chongqing.
Equally significant is the fact that a number of sixth-generation (6G) cadres (meaning those born in the 1960s) who have risen to top positions in SOE conglomerates also joined the Central Committee as alternate or second-tier members. While alternates members cannot vote, they will be allowed to join the debate on economic reform at the upcoming plenum. Sixty, or 35%, of the 171 alternate Central Committee members are 6G officials - and at least seven of them have close affinities with yangqi or regional SOE giants.
These 6G rising stars include Zhang Qingwei's successor as COMAC president Jin Zhuanglong, aged 49. A much-decorated aerospace engineer, Jin became deputy general manager of CASAC, a major contractor for China's space programs, in 2001, when he was barely 37 years old. The mammoth China Shipbuilding Industry Corp (CSIC), a yangqi with 46 shipbuilding-related enterprises and 28 research institutes, is represented by naval engineers Jin Donghan, 52, and Ma Weiming, 53. Jin, who is chief engineer at CSIC's 711th Research Institute, and Ma, a top professor at the Naval Engineering University, are credited with having invented state-of-the-art propelling systems for a range of warships and submarines.
In his now-famous internal speech last December, General Secretary Xi attributed the demise of the Communist Party of the Soviet Union (CPSU) to the fact that the military "stood idly by" as "traitors" such as Mikhail Gorbachev and Boris Yeltsin plotted to overthrow the party. Conservative cadres such as Xi seem also convinced that in addition to the military, the CCP needs to maintain control over key sectors of the economy so as to ensure its status as China's "perennial ruling party".
Since early this year, a number of official media have run commentaries on the imperative of "the CCP running the economy" or "the party imposing tighter control on cadres" working in enterprises. At another forum on private enterprises held in August, tycoon Ren laid into the concept of the CCP controlling the economy. "If the party is managing the economy, it will not be possible for Likonomics to exist," he said. Chinese and foreign observers interested in the future of China's economic reform will no doubt scrutinize next month's Third Plenum communique for clues about the degree to which the party-state apparatus is ready to retool some of the biggest companies in the world.
Dr Willy Wo-Lap Lam is a Senior Fellow at The Jamestown Foundation. He has worked in senior editorial positions in international media including Asiaweek newsmagazine, South China Morning Post, and the Asia-Pacific Headquarters of CNN. He is the author of five books on China, including the recently published Chinese Politics in the Hu Jintao Era: New Leaders, New Challenges. Lam is an Adjunct Professor of China studies at Akita International University, Japan, and at the Chinese University of Hong Kong.