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Partial privatisation and the role of state owned holding companies in China

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Abstract

China has never agreed to full privatisation of its state-owned enterprises (SOEs). This essentially means a dual role for the government—as a shareholder of privatised SOEs and a regulatory authority of the corporate sector. This begs the question—how does the government avoid being caught in the awkward state-first condition where political-economic interest overrides the commercial interest as its exercises both the shareholder and regulatory roles? This paper argues that a positive way forward is to establish state-owned holding companies (SOHs). As shareholders representative of the government, the SOHs serve to monitor the performance of partially privatised firms and see that the state receives its fair share of return. In China, the State-Owned Assets Supervision and Administration Commission (SASAC) assumes the role of the SOH. However, the relationship between the central government and SASAC is ambiguous with evidences suggesting SASAC’s commitment to political-economic goals. To play the role more effectively, this paper argues that SASAC must function independently of the government. SASAC must demarcate the government’s role as a shareholder and a regulator with SASAC assuming the role of a shareholder representative of the government.

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Notes

  1. It should be mentioned that the pace of privatisation in China differs across sectors. Health care, for example, went through rapid and extensive privatisation in the mid 1980s through the 1990s, but slowed down from 2005 after complaints of dramatic decline in service quality and accessibility to health care by for vulnerable population surfaced (Tam 2010). The state, on the contrary, retained the control of the financial sector, restricting in practice the power of the Board of Directors and other corporate governance mechanisms as popularized in the west (Nolan 2010).

  2. This was formulated by Zhu Rongji who was then deputy prime minister in charge of China’s economic reform. Known as zhuada fangxiao (grasping the big and letting go of the small), the strategy entails cultivating large enterprises and developing them into large multi-owner multinational big firms while allowing the small and medium sized SOEs to face market forces.

  3. Sappington and Stiglitz (1987) proposed the fundamental theorem of privatisation, insisting that with imperfect information where the state can never assess correctly the private bidders to become its agents, there can be a basis for public provision particularly when complex tasks are involved. In such circumstances, government intervention is more likely to take place, and the transaction costs of such intervention tend to be lower in integrated transactions which privatisation may find less easy to yield.

  4. As at the end of 2002, the Chinese government effectively owned more than 70% of shares of all listed companies in Shanghai and Shenzhen (Zhang 2006) although this figure fell to around 50% following the success of ‘share conversion’ reform (Ma 2008). Introduced in May 2005, the share conversion reform listed companies were offered the opportunity to devise their own plans to convert non-tradable state-owned assets into tradable shares. Ma (2008: 209) reported that close to 900 listed companies had completed the share conversion process by April 2006, effectively lowering the share of state ownership of China’s listed companies to around 50% (ibid: 210).

  5. Chinalco failed to get what it wanted. Rio Tinto eventually stuck a deal with Australia’s BHP Billiton in June 2000 to raise US$5.8 billion by forming a joint venture. Yao and Sutherland (2009) argued that China’s bid failed primarily because of economic reasons, and not political ones given that the joint venture led to greater cost savings and larger market share in the metal industry (BHP was the world’s third largest producer or iron ore and second of copper).

  6. According to Adrian Leftwich (1999), a developmental state is characterized by (1) a determined developmental elite, (2) relative autonomy of the state from society, (3) a powerful, competent and insulated economic bureaucracy, (4) a weak and subordinated civil society, (5) the effective management of non-state economic interests and (6) repression, legitimacy and performance. Today, Singapore is often regarded as an economic success, having transformed from a low-income economy in the 1960s to being described as an economic miracle. Its real Gross Domestic Product (GDP) has grown at an average of 10.5% (1961–2009), with the real per capita GDP rising from S$1,567 in 1965 to S$51,656 in 2009 (at current market price). The city state has been labelled as quintessential development state where the state’s legitimacy is derived from its ability to develop the country economically.

  7. Such cultural embeddedness, however, need not necessarily lead to weak corporate governance. As Singapore’s Lee Kuan Yew once argued, while it is one’s responsibility to look after family members and friends, one has to do so using his/her ‘private purse’ rather than the ‘public treasury’. The problem is not with the notion of close personal ties per se nor the basic Confucian teachings, but how family members and friends are taken care. Lending one’s car to a relative is perfectly alright, but it would not be much more difficult to accept if the company car is lent to the relative for personal use.

  8. For the financial year ended in March 2010, Temasek’s TSR fell marginally to 16% since inception. It is worth noting that TSR does not consider merely the performance of Singaporean GLCs but also investments by the THL outside of Singapore. Strictly speaking, TSR measure could not explain whether the THL has led to better corporate governance and performance of the GLCs. The GLCs could have achieved a high TSR because of some variables other than corporate governance.

  9. Empirically, Ang and Ding (2006) compare the financial and market performance of Singaporean SOEs with non-SOEs and find that the former has higher valuations and better corporate governance standards than a control group of non-SOEs. The authors suggest that the higher standards of corporate governance in SOEs is attributed to effective monitoring role of Temasek, including the appointment of Board members, limiting the tenure of Board members to 6 years and fostering non-duality status. Based on a study of 30 Singaporean SOEs covering the period 1964–1998, Feng et al. (2004) find no evidence that the SOEs under-performed as compared to non-SOEs of matching size. SOEs were found to perform as well as the market and industry averages even before share issue privatisation took place. The authors attribute the results to the fact that Singaporean SOEs have all along been competing with foreign companies, which compelled the SOEs to become more efficient than typical SOEs.

  10. The Shin Corp-Temasek Holdings deal was sealed in January 2006, of which Temasek would purchase 49% direct controlling interest in Shin Corp for US$1.9 billion. The deal has been seen as a catalyst to the fall of Thaksin. The deal was made just a few days after the telecommunication law was changed, to allow foreign entities to own 49% of the local companies as opposed to the old limit of 25%. The integrity of the family was undermined because the deal was structured in such a way that it allowed the former premier’s family members to avoid paying any taxes on profits from the sale.

  11. Temasek’s strategy to counter nationalism, The Straits Times, 23 November 2007.

  12. Ho Ching makes first public comment on Shin deal, Today, 15 November 2006.

  13. In various occasions, Ho Ching puts across the message that Temasek is tasked to maximize the shareholders interest with the shareholders being the citizens of the country and not the government of the day (see, for example, Ho 2004, 2009).

  14. While Temasek is a registered company under the Companies Act, it is exempted from disclosing its audited consolidated financial statements to the public except its owner, the Minister for Finance Temasek has yet to provide the auditor’s report or a detailed balance sheet in its Annual Reports (first released in October 2004). There is also no disclosure of the directors’ compensation or the companies comprising the subsidiaries and associates in which Temasek has some effective ownership.

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The author is indebted to three anonymous referees for helpful comments.

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    Choon-Yin Sam

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Sam, CY. Partial privatisation and the role of state owned holding companies in China. J Manag Gov 17, 767–789 (2013). https://doi.org/10.1007/s10997-011-9190-5

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