One important feature of China’s privatization process is that insider privatization prevailed, and that outsiders could hardly gain access to buying state enterprises. Why was a majority of small- and medium-sized public enterprises sold to the firms’ former managers (and workers)? How did the tightened regulatory environment affect local privatization in China? Building on insights into institutional change, I argue that the choice of a specific privatization strategy results from political compromises among local officials, workers, and managers of public enterprises under specific regulatory constraints. Local officials’ incentives for privatization and their reactions to the changing regulatory environment had a great impact on the dynamics of local privatization.
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According to the No.143 Policy issued by the State Economic and Trade Commission in 2003, industrial SOEs are small- and medium-sized, if they have fewer than 2000 employees, or if their annual sales are less than RMB300 million, or if their total assets are less than RMB400 million. Refer to “Standards Released for SOE Buyouts,” China Daily, April 15, 2005.
In order to avoid political and ideological backlash, Chinese officials at all levels couch the inflammatory label of “privatization” in politically safe terms such as “restructuring” (gaizhi), “ownership transformation” (suoyouzhi gaizao), or “transformation of ownership to a joint-stock system” (gufenzhi gaizao). The most frequently used term is “restructuring” (gaizhi), which refers to any structural change or ownership transformation of a firm, including leasing, corporatization, sales, bankruptcy, and mergers and acquisitions. In this paper, I focus on privatization, which is one of the forms of restructuring. For more details on restructuring, see .
As I will explain later in this paper, privatization strategies can be placed in two broad categories according to the identities of new owners: insider privatization and outsider privatization.
For example, William Megginson and Jeffery Netter (: 347) conclude, “Privatization increases profitability and productivity of firms: This consistency is perhaps the most telling result we report—privatization appears to improve performance in many different ways in many different countries.” Their positive assessment of privatization was echoed in the review of the Latin American privatization experience conducted by Alberto Chong and Florencio Lopez-de-Silanes .
Insider privatization is a second-best strategy from the perspective of economic efficiency. Ample empirical studies have shown that firms with outsider privatization are generally more likely to improve firm efficiency, increase productivity, and introduce corporate restructuring than firms with insider privatization. See for example, [8, 20].
Knight  notes, “State actors want to establish rights that further their own interests: an economic interest in revenues and a political interest in maintaining a level of aggregate growth sufficient to satisfy those social actors necessary to maintain power.”
Walder argues that the scope of asset appropriation in China is limited because the pace of privatization is so slow (2006: 906). My paper shows, however, that his argument is not applicable to the rapid privatization process of small- and medium-sized public enterprises in many localities, where asset stripping was a serious problem.
The SEZ was originally confined to a small district in Xiamen, and was expanded to the entire island in 1984. The other three SEZs were in Guangdong province—Shenzhen, Shantou, and Zhuhai. Hainan became the fifth SEZ in 1988. For SEZ policy with reference to Xiamen, see .
Sources of the data:  and Xiamen Statistical Yearbook, various years.
The public sector includes both the state and the collective sectors.
The poor performance of most small and medium SOEs can be attributed to three major factors—the withdrawal of the government’s financial commitment to these enterprises in the 1990s, their difficulties in securing loans from state banks, and their declining capability to generate profits amid fierce competition from the private sector .
There exist a few cases when workers supported privatization. For instance, in insolvent SOEs or in the SOEs that had partially or completely halted production for many years, workers might favor privatization because such SOEs could hardly offer them stable jobs while privatization would provide them with a sum of money as severance compensation.
Here is an extreme example of the salary disparity between the state and the private enterprises. A security guard of a SOE in Xiamen was paid RMB3,000 per month, whereas a similar job in a private enterprise was paid RMB600 per month. When the municipal government imposed a deadline for this SOE to restructure, former workers of the SOE put up fierce resistance and lodged complaints to the municipal government. Interview of a municipal official, Xiamen, December 9, 2005.
For more information on China’s inchoate social welfare system, see .
According to “An Analysis on Urban Employment Situation in Xiamen in 2005,” about 28.61 percent of the total number of the registered unemployed in Xiamen (20,594) was in their 40s or 50s in 2005. The “4050,” as commonly referred to laid-off workers in the 40s and 50s, could not find suitable jobs due to their low skills and lack of competence. In comparison, there were 275,500 migrant workers employed by foreign-invested enterprises (FIEs) in 2005. FIEs preferred migrant workers because they asked for lower wages than native workers and because they were young and willing to endure hardship. The data is available online at the official website of Xiamen Statistical Bureau. http://www.stats-xm.gov.cn/staanis/tjfx00149.htm. For more information on the plight of laid-off workers, see [22,23], [2,3].
Interview with a district official in Xiamen, December 11, 2005.
Interviews with an official of the district economic and trade bureau in Xiamen (December 15, 2005) and the director of a district trade and development bureau (February 16, 2006).
The No. 3 Decree went into effect on February 1, 2004. The full text of the No. 3 Decree is available online at http://news.xinhuanet.com/zhengfu/2004-01/09/content_1267971.htm. I will further discuss the impact of this Decree on local privatization in the latter part of this paper.
Interview with the director of a district economic and trade bureau, December 15, 2005.
Interview with the director of a district economic development bureau, February 16, 2006.
Note that the data on the number of SOE employees may include a number of laid-off workers who did not severe their ties with their original firms and were not counted as unemployed. Source of the data: Shenyang Statistical Yearbook 2004.
Source of the data: Shenyang Statistical Yearbook 2004.
Source: 1998 Shenyang Statistical Manual (1998 Shenyang Tongji Shouce), p. 78. Published by Shenyang Statistical Bureau.
The goal of “Alleviating SOEs’ Poverty within Three Years (sannian tuokun)” was further elaborated by former president Jiang Zemin at the Fifteenth Party Congress in September 1997.
For instance, one SOE with a net asset valuation of RMB1 million could be sold at RMB100,000. Only later did the municipal government close this loophole by stipulating that the final selling price of a SOE could only be higher than its net asset valuation price.
Interview with the director of a district public asset and equity exchange in Shenyang, September 8, 2005.
The No. 15 policy issued by the Shenyang municipal government in 1997 stipulates, “If the seller has made proper arrangements for former employees of restructured public enterprises, the severance packages would not be handed out to individual employees, who would sign a new labor contract with restructured firms and their tenure of employment would continue (gongling lianxu jisuan).”
Interviews with local officials in Shenyang, August 2, August 5, September 10, 2005. Interview with the manager of a privatized SOE, August 5, 2005.
Interviews with the president of a privatized SOE (August 8, 2005) and the director of a district asset and equity exchange (August 12, 2005). Privatized firms normally did not buy the piece of land, but they bought the assets on the land and continued to use the land free of charge. The property rights of the land were thus fuzzy. As one district official commented, “If you sell all the assets on the land but withholding the use-right of the land, then the property rights of the assets on the land are not guaranteed.” This district official candidly admitted that there was a big loophole in the management of land resources in her district. According to her, lots of interested buyers of public enterprises were actually lured by the free use of the land. Interview with the director of a district asset and equity exchange, August 19, 2005.
See “Zhu Rongji zai liaoning kaocha shi qiangdiao tongyi renshi jianding xinxin qixin xieli zhashi gongzuo nuli shixian guoyou qiye gaige he tuokun de mubiao (Zhu Rongji Emphasizes Building Consensus, Strengthening Confidence, and Endeavoring to Achieve the Targets of SOE Reforms and Reliving SOE Difficulties),” Renmin ribao (People’s Daily), November 30, 1998.
The No. 89 Circular was jointly promulgated by the State Economic and Trade Commission, The Ministry of Finance, and the People’s Bank of China. The title of the No. 89 Circular is “The Circular on Several Issues Regarding the Sale of Small SOEs.”
Interview with the director of a district asset and equity exchange, August 19, 2005.
In an effort to reduce government meddling in the operation of SOEs, the supervisory bureaus at the municipal level such as the machinery bureau, the textile bureau, and the metallurgy bureau, were dissolved towards the end of the 1990s. The public enterprises originally under the supervision of these bureaus were either restructured or reassigned to the district governments.
In 2002, the number of days required for public listing was extended to 20 days.
Interview with the director of a district asset and equity exchange, August 19, 2005.
I conducted interviews in five restructured enterprises in Shenyang. Three of them were bought by individual former managers. The fourth enterprise was bought by two management members and one long-term business client at RMB21 million in 2004. The fifth enterprise was sold to 27 management members and 3 friends of the management members at RMB22 million in 2003.
Interview with the director of a development and reform bureau, August 17, 2005.
The amount of FDI absorbed in Shanghai grew rapidly from USD177 million in 1990 to USD6.5 billion in 2004, about a 36-fold increase in 15 years (data from Shanghai Economic Yearbook, 2003: 187; 2005: 130). The spectacular growth of FDI has greatly facilitated Shanghai’s transition from a planned to a booming market economy.
Source of the data: 2005 Shanghai Statistical Yearbook, p. 73.
According to 2001 Shanghai shi guoyou zichan fazhan baogao (The Development Report of Shanghai Municipal State Owned Assets) (Table 3.7), the increase of state assets from 1995 to 2000 is attributed to four major factors. First, since 1995 the central government has invested RMB135 billion in Shanghai, which constituted 43.7 percent of the total growth of state assets in Shanghai. Second, strengthened management of state assets has enabled an increase of RMB66.5 billion over the years. Third, the appreciation of the existing state assets accounted for 19.5 percent of the growth of state assets in Shanghai. Fourth, the profits from state enterprises accounted for 15.4 percent of the growth of state assets in Shanghai.
For instance, in 2000, 65.4 percent of operational state assets in Shanghai were in large SOEs, and the net profits earned by large SOEs were RMB22.07 billion in that year, which accounted for 81.5 percent of the total profits earned by SOEs in Shanghai. The data is from 2001 Shanghai shi guoyou zichan fazhan baogao (The Development Report of Shanghai Municipal State Owned Assets). The report was prepared by Shanghai SASAC (guoziban).
To protect the identities of my sources, I have used a ficticious name for the district where I conducted fieldwork in Shanghai.
According to a district official of the Minghe District (interview, October 25, 2005), employee shareholding was prevalent during the initial stage of restructuring, but the practice was discarded due to problems in operation. Some SOEs were closed if they were incapable of operating on a daily basis, if their business was shrinking, or if they were incapable of paying salaries to workers.
Interview with an official of the Minghe state asset management bureau. October 25, 2005.
Interview with an official of the Minghe district, October 13, 2005.
For instance, a worker who had been working at a SOE for 10 years by 2003 with an average monthly salary of RMB1,500 in 2002, received a monetary compensation of RMB15,000, if the SOE was privatized in 2003.
Interviews with three officials of the Minghe state asset management office (October 26, 2005 and November 5, 2005).
The three audit reports refer to a personnel arrangement report (renyuan anzhi zhuanxiang), an audit upon the departure of managers (jingyingzhe liren shenji), and a report for asset audit (zichan shenji).
For instance, the asset valuation report is valid for one year and could be extended up to seven months before 2004. But after 2004, more procedures were introduced to the process of privatization, and the validity period can no longer be extended. SOEs that fail to be restructured within one year must pay for a second asset valuation, increasing the transaction costs of privatization.
Interviews with an official of the Minghe state asset management office (October 26, 2005). The costs of privatization include fees for audit reports, asset valuation, lawyers, and asset transfer.
Refer to “Jinfang guoqi gaige pilaozheng (Be Aware of SOE Restructuring Fatigue),” Shanghai guozi (Shanghai State Assets) 2005 (12): 30–33.
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The author acknowledges the financial support of the Social Science Research Council and the Institute of Humane Studies for her field research in China from 2005 to 2006.
This paper draws on materials in Jin Zeng and Kellee Tsai, “The Local Politics of Restructuring State-Owned Enterprises in China,” a forthcoming book chapter.
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Zeng, J. Political Compromises: The Privatization of Small- and Medium-Sized Public Enterprises in China. J OF CHIN POLIT SCI 15, 257–282 (2010). https://doi.org/10.1007/s11366-010-9112-4
- Regulatory Constraints
- Political Compromises
- Insider Privatization