China's state giants too big to play with
By Willy Lam
Promoting social equality and justice has been the single most oft-stated
commitment that the Chinese leadership has made to its people in the past year.
In an interview with China National Radio late last month, Premier Wen Jiabao
vowed to "render society more fair and just". This echoed his now-famous
statement at the National People's Congress last March, that "equality and
justice should shine more brightly than the sun". A leitmotif of the 12th
Five-Year Plan (2011 to 2015) is "inclusive growth", meaning all citizens
should be able to share equitably in China's spectacular economic development.
Yet nothing militates against the ideals of equality and justice
more than the special privileges - and humongous profits - enjoyed by the
nation's 129 centrally controlled state-owned enterprises (SOEs). There are
signs that in its last 20 months in office, the administration of President Hu
Jintao and Wen is determined to, in Chinese parlance, return the nation's
wealth - including that of the giant SOEs - to the people.
Yet the chances are high that given the SOEs' extraordinary economic and
political clout and sterling ties to the Chinese Communist Party (CCP)
leadership, these symbols of state capitalism will pull out all the stops to
safeguard their interests.
Thirty-three years after the beginning of the reform and open-door era, the
party-and-state apparatus still has a stranglehold over the economy. The 129
central-level SOEs, which are also called yangqi, enjoy monopolistic
status in areas including oil and gas; minerals and power generation; banking
and insurance; telecommunications and transportation; as well as aerospace and
While many of the 129 so-called "aircraft carrier" conglomerates are listed on
the Chinese - and in some cases also the Hong Kong and New York - stock
markets, the central government holds at least half of their shares.
Theoretically the yangqi are under the strict control of the
ministerial-level State Assets Supervision and Administration Commission
(SASAC). Members of the board of directors as well as senior managers of these
SOEs are appointed by SASAC in consultation with the CCP's Department of
In practice, many of these behemoths seem a law unto themselves. The
"state-within-a-state" status of yangqi is due to several factors. In
2009, their combined assets of 21 trillion yuan (US$3.17 trillion) account for
61.7% of the country's gross domestic product (GDP). In 2009, they contributed
1.15 trillion yuan ($173.45 billion) of taxes, or more than 17% of total intake
of central coffers.
Equally significant is the fact that the majority of chief executive officers
and top managers of the yangqi are senior party cadres, some of whom sit
on the CCP central committee as ordinary or alternate members. Moreover, a
disproportionately large number of "princelings" - a reference to the offspring
of party elders - are honchos of these gigantic state firms. For example, vice
governor of Shanxi province Li Xiaopeng, who is the son of former premier Li
Peng, used to head the China Huaneng Group, an energy conglomerate. Li's
sister, Li Xiaolin, dubbed China's "power queen", is chairwoman of China Power
The yangqi predominance is cutting against the grain of the public's
perception of socio-economic equality and justice. First of all, their earnings
are seen as obscenely large.
The 129 central SOEs made an estimated 1 trillion yuan ($150.83 billion) of net
profit in 2010, or 50% more than in 2009. In the first half of last year, the
four state-held commercial banks alone raked in an average of 1.4 billion yuan
($211.16 million) a day. While these behemoths do pay voluminous taxes, they
are not seen as having made substantial contributions to the well-being of
ordinary Chinese. Even the official media has called upon the yangqi to
share their wealth with the masses.
In an unusual commentary, the People's Daily pointed out that "people are
paying more attention to how are the profits [of SOEs] are being distributed
"When can the entire people enjoy the profits reaped by the state-held
enterprises?" asked the CCP's mouthpiece. Added the China Youth Daily: "With
profits of over 1 trillion yuan, yangqi should return their earnings to
the people on a larger scale". Moreover, while the SASAC has in recent years
laid down ceilings for the remuneration of top yangqi executives, the
average salary of SOE employees is at least five times that of staff in the
Partly in response to public outcry, the State Council on December 28 asked
most central-level SOEs to pay larger dividends to the government. From 2011,
the most profitable SOEs, including those in the oil and gas, tobacco,
telecommunications and energy sectors, will have to surrender 15% of their
post-tax profits to central coffers, up from the existing 10%. Furthermore, yangqi
in fields such as trade, construction, transport, mining and steel will be
obliged to dole out 10% of post-tax profits to the government, up from the
Much of the added revenues will supposedly be used to pay for expanded public
services, including social welfare. The small margins of these upward
adjustments, however, are unlikely to make a dent in the SOEs' lopsided share
of the economic pie.
The official excuse for granting yangqi special dispensations is that
these so-called national champions will one day develop into multinationals
that will spearhead the advancement of the entire economy. It is true that 54
central-level SOEs, such as the three oil-and-gas monopolies and the four
state-held commercial banks, made the Fortune 500 list in 2010, up from 43 a
Yet while these Chinese giants have overtaken globally known multinationals in
size, they have demonstrated neither efficiency nor innovativeness. As SASAC
vice-chairman Huang Shuhe admitted in December, "The question of a number of yangqi
being big but not strong has not been resolved ... Their ability to create
value still lags behind world-class enterprises by a large margin".
Instead of setting new standards in innovation and productivity, many
state-held conglomerates have taken advantage of their huge war chests to make
a killing in the red-hot real-estate market. A key reason behind China's
feverish property sector is that companies including yangqi are hoarding
land and engaging in blatant speculation. To combat irrational exuberance in
real estate, Beijing last March ordered 78 central-level SOEs to quit the
property sector. So far, only nine have done so. Just last month, the CITIC
Group doled out 6.3 billion yuan ($950.23 million) for a prime Beijing site. It
was the largest single land transition in the capital for 2010.
That increasing members of the middle and professional classes, not to mention
white-collar and migrant workers, can no longer afford sky-high apartment
prices has exacerbated the masses' sense of social inequality.
Equally significant is the fact that Beijing has no plans to open up numerous
lucrative sectors that are monopolized by yangqi to the private sector,
which is the country's largest provider of employment. According to Nanjing
University social scientist Shen Kunrong, a major reason behind the inequitable
distribution of national income is "the existence of monopoly and unequal
competition" as manifested by the SOEs' privileged status. For famed economist
Li Yining, "equal competition should be the basis for considering the question
of whether SOEs or private firms should advance or retreat."
The Peking University professor pointed out that non-state companies still
suffer from discrimination in securing bank loans or in applying for public
offerings in China's two stock markets. The sorry state of the non-state sector
is illustrated by a simple statistic. In 2009, the combined earnings of just
two yangqi, China Mobile and China National Petroleum Corp - 218.55
billion yuan - exceeded by 600 million yuan the total profits of China's 500
most viable private companies.
For reasons including rendering itself less susceptible to anti-dumping
lawsuits, Beijing has the past few years been lobbying both the United States
and the European Union to grant the country "full market economy status". This
issue likely figures in discussions that President Hu is holding with American
officials during his much-anticipated state visit to Washington this week.
The fact of the matter remains, however, that the role of key SOEs is set to
grow for the rest of this decade. Since the global financial crisis, the
Chinese economy has been dominated by the trend of guojin mintui, or
SOEs making headway while private firms are beating a retreat. From 2005 to
2009, the assets of SOEs nationwide shot up from 25.4 trillion yuan to 53.5
trillion yuan, while their aggregate sales rose from 14.2 trillion yuan to 24.2
SASAC minister Wang Yong noted that the period of the 12th Five Year Plan would
be "a seminal stage for the reform and development of state firms ... SOEs will
continue to play a major guiding role in the national economy," he indicated.
SASAC and other party-and-state departments have grandiose plans for nurturing
at least 50 yangqi into globally competitive multinationals by the early
2020s. There are also worries among party leaders that eroding the basis of
Chinese-style state capitalism could jeopardize the CCP's hold on political
As Minister Wang pointed out, SOEs were not only "an important pillar of the
national economy" but also "an important foundation of the CCP's ruling party
Despite the populist language of the 12th Five Year Plan, for the party
leadership there seems little question that the perpetuation of the CCP's
perennial ruling-party status is much more important than abstract concepts
such as equality and justice.
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.