Flatirons

Sunday, July 6, 2008

Restructuring Restructuring: State-Owned Enterprise Reform in the PRC (Conclusion)

[Fair warning: this is a post concerning Chinese law, and not about our experiences living in China. It is one of a series of posts concerning the modernization of State-Owned Enterprises in China. They are based upon a paper I wrote for a class in Economic Law that I recently completed in the Peking University LL.M. Program. I welcome any comments or questions.]

With predation and opportunism in mind, one must always consider the practical power of Chinese ministries in any study of Chinese law. Under the practical power model,
The existence of [an] agency and the scope of its powers may well be the subject of political negotiations, just as with agencies that owe their existence to legislation, but unlike agencies in the rule of law model, they are not subject to a concept of legitimacy. More importantly, there is no unified institutional mechanism and forum for resolving disagreements about the proper scope of an agency’s power. An agency’s powers are defined less by a concept of what it has a right to do than by what it has the actual capacity to do.
The study of the Modern Enterprise System is therefore “primarily the study of the activity of governmental and quasi-governmental bodies in the realm of industry and commerce.” This is a direct consequence of the fact that in China, “the legal rules that do exist are primarily regulatory, not enabling.” Even so, China is presently on course to limit the practical power of government agencies charged with overseeing state-owned property with a forthcoming State-Owned Assets Law. (Now called the Law of State-owned Assets of Enterprises)

The present draft of the State-Owned Assets Law consists of nine chapters and 76 provisions, but its exact contents are as yet known to the public. News reports and public government statements suggest that the new law will impose additional controls upon the use and misuse of state-owned property, providing for the punishment of both public officials and private citizens who misuse public property. In addition, the bill may also provide for accounting measures aimed at understanding the true extent of state-owned assets so that dividends can be compelled and calculated into government budgets. The draft also presently provides for a corporate governance regime that will impose certain rights and obligations upon individuals who manage state-owned assets and enterprises in a manner akin to the rights and responsibilities imposed upon directors and supervisors in private corporations. In sum, it appears that the National People’s Congress (NPC) will use the law to consolidate disparate provisions of scattered existing rules and regulations into a simplified and codified whole, while borrowing provisions and ideas from other existing laws like the Company Law and the Property Law.

What is most impressive about the current draft, however, is that it does not provide SASAC with supervisory authority over SOEs or SOAs. It also apparently includes provisions concerning the rights of SOE employees, perhaps reflecting the fact that labor contracts and unions play a critical role in the valuation of state-owned entities, and the fact that China’s leadership must balance reform efforts with the risk of social upheaval. Above all, however, the draft law finally provides for the definition of what actually constitutes a state-owned asset, a necessary step towards ensuring the efficient allocation of state-owned property rights within the Chinese economy.

What is troublesome, however, is that the drafters of the law have thus far avoided the question of what role SASAC and other organs will play in the future management and administration of China’s state-owned property. Indeed, during discussions of the bill within the drafting committee:
[T]he members didn’t speak of the core issue—the role of SASAC. This is because it is at a politically sensitive time. After the 17th Party Congress, no official would talk about this issue. And before the National People’s Congress and Chinese People’s Political Consultative Conference, the issue didn’t reach a consensus. As a result, the role of SASAC was avoided.
As Professor Li Shuguang correctly notes, the role of SASAC and other authorities is the central issue now facing China’s Modern Enterprise System; that is, what should be the role of those governmental agencies responsible for Controlling the Big and Releasing the Small, given the significant transaction costs created by them in the past and the political aspects of state ownership? Moreover, given that the State-Owned Assets Law will only govern “operating” state-owned property and not financial state-owned property, how should the legislation plan for the inevitable political struggle that will ensue when an even more comprehensive set of legislation emerges that places SASAC and the Ministry of Finance at political loggerheads? To proceed with further modernization, China must answer this question through careful planning an deliberations. After all, as Deng Xiaoping once said, economic reform “must be done in a determined fashion.”

Assuming that the core of the draft survives further revision, many of the problems with the Modern Enterprise System, at least in an economic sense, will be solved. Chinese law will finally provide a definition for the term “state-owned property.” SOEs will be managed more like modern corporations than arms of the State. And, hopefully, state-owned banks will discontinue the practice of subsidizing inefficient SOEs with the savings of the laobaixing. To be sure, such efforts will take a while, and in likelihood the new State-owned Asset Law will likewise involve its own political economies, but at least progress will move in the correct direction.

In all likelihood, however, official corruption with respect to those responsible for China’s state-owned assets will not end within the foreseeable future. Former Shanghai Party Secretary Chen Liangyu, once a member of the Politburo of the Central Committee of the CPC, went to prison on 11 April 2008 after a scandal involving the pension funds. He was the highest-level official to be sent to prison since Chen Xitong, the former Beijing Party secretary, was jailed 16 years earlier under similar circumstances. Some compared Chen Liangyu’s fall of grace of to that of former Beijing Party secretary and former Politburo member Chen Xitong, but the two differed in one important respect: where Chen Xitong accepted bribes in exchange for awarding construction contracts, leading to convictions for corruption and dereliction of duty, Chen Liangyu went to prison for embezzlement, misuse of official powers, and “unceremonious behavior.” Notably, Chen Liangyu’s conviction for misuse of official powers stemmed directly from his role in supervising the Shanghai Electric, an SOE.

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