China in Transition
Privatization of State-owned Enterprises Gathering Pace - Whither Chinese socialism?
Chi Hung KWAN
Consulting Fellow, RIETI
Contrary to what has taken place in Eastern Europe and Russia, one characteristic of China's economic reforms was said to have been its transition from a planned economy to a market-oriented one without privatizing state-owned enterprises and holding fast to public ownership, one of the foundations of socialism. However, contrary to the government's professed intention of maintaining public ownership, the privatization of state-owned enterprises has been steadily progressing in recent years.
Under a planned economy, not only did the government own most enterprises, it was directly involved in their management and these firms were "state-run enterprises" both in name and reality. However, as a result of decentralization and the separation of government and enterprise in the 1980s, the government's role stopped at being owner, and management independence at these enterprises increased dramatically. Against such a backdrop, from the early 1990s, the name "state-run enterprise" was changed to "state-owned enterprise." Even since then, from the mid-1990s, the government has proceeded to privatize state-owned enterprises in the name of its policy of "keeping the large and releasing the small" and the "strategic realignment of the state-owned economy." Under the former, privatization efforts focused on small and midsize firms, but the latter took the movement one step further by putting forward a plan under which state-owned enterprises, including large ones, would fully retreat from fields where they competed with the private sector.
Furthermore, starting with the full-fledged reform of the management system for state-owned assets that kicked off earlier this year, the privatization of large-scale state-owned enterprises under the jurisdiction of provincial governments will probably further accelerate. Up to now, provincial governments were only in the position to function as owner of state-owned enterprises on behalf of the central government, but now, they will become the true owners of these enterprises and will have the authority to dispose of the firms they oversee. The fact that they will be able to retain the income from the sale of state-owned assets has become a major incentive for provincial governments to promote privatization.
While the acceleration of privatization is bringing new vigor to the Chinese economy, it has also led to an uneven distribution of wealth because the process has not been conducted fairly. Traditional state-owned enterprises have low asset value because they perform poorly, but once improved profitability can be expected through better corporate governance as a result of privatization, their market value will increase. Therefore, if a person can acquire "unlisted" shares in a state-owned enterprise cheaply, he or she can expect to make large capital gains. However, such profits from privatization are inclined to find their way into the pockets of those in power, such as members of the Communist Party. The shares of many state-owned enterprises are being sold to managers, senior party members and government officials very cheaply - at times virtually for free. Furthermore, there is no end to the perpetration of illegal activities, such as bribery and embezzlement, by those involved in the privatization process. As a result of privatization, many Communist Party members are turning into capitalists, while many workers are falling victim to restructuring efforts and becoming proletarians.
The report on the fifth nationwide survey of private enterprises, released by the China Institute of Private Enterprise Study, plainly shows the changes brought about within the Communist Party through this privatization process. According to the report, reflecting the fact that many state-owned and collective enterprises had become private companies and that many of their managers were members of the Communist Party, the percentage of private enterprise owners who were party members rose to 29.9% in 2001 from 13.1% in 1993. Only 0.5% of that figure comprises private enterprise owners who joined the Communist Party after Jiang Zemin's "July 1 Speech" (delivered at the July 1, 2001, meeting celebrating the 80th anniversary of the party's founding) that officially allowed private entrepreneurs to join the party in line with the "Three Represents" theory. This shows that "admitting private entrepreneurs into the party" was only a confirmation of the fact that "many capitalists were already party members."
In this way, private enterprises in China have replaced state-owned enterprises as the main players in the nation's economy, and through the privatization process, the gap between rich and poor is widening further. These developments symbolize that the realities of the Chinese economy are becoming increasingly further removed from the principles of socialism, which dictate public ownership of production means and fair distribution of income. This year, China marks the 25th anniversary since its switch to market-opening reforms, put forth at the Third Plenary Session of the 11th Central Committee of the Communist Party of China in December 1978, but not only is it moving from a planned economy to a market-oriented one, it is also entering the final phase of its transition from socialism to capitalism.
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