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State-owned Enterprises, Still a Major Force in the Chinese Economy and Abroad
By Antonio Graceffo
Shanghai Jiaotong University, China MBA
PhD Candidate, Shanghai University of Sport
Contact: Antonio_graceffo@hotmail.com
Table of Contents
Introduction
1. State-owned Enterprises (SOEs)
2. Privately Owned Enterprises
3. Mixed Ownership Firms
4. SOE Performance
5. From Planned to Chinese style market economy
6. State-owned Assets Supervision and Administration
Commission of the State Council (SASAC)
7. Singaporean Temasek model
8. Employment in Modern SOEs
9. Employment in POEs
10. Employee Turnover in China
11. China and the WTO
12. Foreign Direct Investment (FDI)
13. Mergers and Acquisitions (M&A)
14. Changes in Corporate governance
15. The Banking Sector
16. Corruption in SOEs
17. Stock Market Listing
18. Domestic Listing
19. Hong Kong Listing
20. Overseas listing
21. Government Control of Stock Markets
22. Outbound Investment by SOEs
23. Conclusion
24. Bibliography
25. Abut the Author
Introduction
One of the world’s biggest hotel groups, with both five-star and budget hotels, JIN
JIANG is a state-owned enterprise (SOE) of the People’s Republic of China (PRC)
controlled by the Shanghai government. When one hears SOE one pictures large, gray,
concrete buildings with thick black smoke pouring out of them. But, most of China’s
SOEs are not oil or steel companies. They are companies, such as Jin Jiang, operating

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in many different sectors of the economy. They include restaurants, construction firms,
and shopping malls. (The Economist)
grom
Prior to 1978 “capitalists were considered class enemies, and the economy was
virtually closed to foreign trade and investment” (U.S.-China Economic and Security
Review Commission) At that time, SOEs accounted for nearly 100% of
non-agricultural employment. (Wu) Through the 1980’s and 1990’s until today, the
private sector has grown in leaps and bounds. Consequently, as private sector
employment has grown, SOE employment has decreased. In 1998 SOEs accounted
for 60% of industrial employment. But by 2010 that percentage had dropped to 20%.
(Zhang and Freestone) While that number is smaller than it was in 1978, 20% is still a
significant percentage of China’s total workforce.
China’s amazing economic growth over the last 30 years could lead one to believe
that the country has embraced capitalism and abandoned Communism. But actually,
the Chinese government refers to their system as “socialism with Chinese
characteristics” (U.S.-China Economic and Security Review Commission)
Consequently, although China is moving toward a more market driven economy, the
state-owned enterprises (SOE) still accounted for 40% of the GDP, as recently as 2011.
(U.S.-China Economic and Security Review Commission) A significant component of
China’s SOE reforms of the last several decades has been “grasping the big, and
letting go of the small.”(Cao) This policy has lead to smaller SOEs being privatized,
or sold off, as larger SOEs are encouraged, through acquisitions, to increase their size
and importance, becoming global players. In fact, Chinese SOEs appear on both the
Forbes Global 2000 (Dobson) and Fortune Global 500 (Cendrowski)
While China appears to be moving toward a market economy and repeatedly releases
edicts and guidelines calling for SOE reform (Peng, Shi and Xu) and the reduction of
government intervention in business, this hybrid, semi-liberalized, economic system
still calls for the state to be heavily involved in business control and ownership.
(U.S.-China Economic and Security Review Commission) The natural expectation
would be that as China moves to a more market driven economy that SOEs would
become dinosaurs, slowly falling into extinction. On the contrary, SOEs are still here
and the Communist Party of China (CPP) still considers them to be very important.
(U.S.-China Economic and Security Review Commission) "SOEs still dominate
China’s economy. According to Credit Suisse, the total assets of non-financial SOEs
represented 60% of Chinese GDP as the end of 2013." (Gov.uk)
As important as the SOEs are to the Chinese economy, they have been identified by
both foreign observes and Chinese economists as being a drag on the economy and an
impediment to its development.
The SOEs have been criticized for their inefficiencies, over employment, and
mismanagement. They are accused of misusing resources, creating unfair competition,

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having easy access to government capital loans and loans from state banks that they
fail to repay. “Indeed, 85 percent of loans in 2009 were issued to SOEs, because banks
themselves are state-owned, and are directed to let credit flow to other state-owned
businesses.” (Cary) This free flow of lending to SOEs makes it difficult for the
privately owned companies (POE) to obtain financing, which many economists feel is
impeding the development of the private sector of the Chinese economy. Michael
Pettis, a professor of finance at Peking University in Beijing, said “the key to
resolving the imbalances in the Chinese economy was ensuring a better allocation of
capital.” This can be achieved by lending more to POEs rather than SOEs. (Bland)
SOE managers have been accused of corruption and asset stripping as party officials
treated the SOEs as their personal piggy banks and fiefdoms. They also enjoy a
monopoly in certain industries such as energy, power, steel, telecommunications and
shipbuilding, giving them unfair advantage over private firms who may want to enter
these sectors. SOEs are not limited to large, critical industries. They also include some
restaurants, retailers, construction, metals, and real estate companies. The managers
have been cited for holding lavish banquets and using state money to purchase other
luxuries. The Central Commission for Discipline Inspection criticized SOEs for
exploiting state-owned assets and using them as “a huge coffer for bribery,"’ (Gan and
Huang) A 2013 Xinhua news agency reported that in the results of a National Audit
Office audit of ten SOEs, the following violations were found: inaccurate
accounting, incomplete financial statements, illegal practices and “poor management
of investment decisions.” (News.xinhuanet.com)
As a result of incidences of corruption and inefficiencies resulting in low return on
assets (Wang), the PRC government has made SOE reform a main priority. (Peng, Shi
and Xu)
This paper will give a brief overview of the SOEs and government owned banks, and
their history. Problems in SOEs will be examined, such as mismanagement,
government controls, unpaid loans, and corruption. A brief overview of China’s
privately owned companies (POE) will also be given. The paper will go on to explain
the various reform programs taken by the Chinese government to make the SOEs
more competitive in the global markets. Stock exchange listing of SOEs, both inside
and outside of China will be addressed. And finally, outbound investment by Chinese
firms will be covered. In the conclusion, it will be noted that China’s SOEs are still a
significant force, driving China’s internal economy, and a powerful tool which China
can use to enter into foreign markets around the world.
1. State-owned Enterprises (SOEs)
In 2014, there were 150,000 SOEs which accounted for 17 percent of urban
employment. (Curran) Prior to the economic reforms of 1978, the SOEs directly

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employed a higher percentage of the population and directly impacted the lives of
more Chinese citizens. “Each SOE acted as a mini-society in providing life-time
employment — the so-called 'iron rice bowl' — and some basic social services
(clinics, schools, age pension equivalent) for its employees and their families. As a
result, pre-reform SOEs were highly inefficient.” (Zhang and Freestone)
During the days of the planned economy, 1950 to 1984, there was no legal form of
ownership, apart from state ownership. And the state could hire and fire SOE
executives at any time. (Aivazian, Ge and Qiu) In the Communist model, the assets of
the SOE belong to the people. Local governments are the stewards of those assets,
seeing after the interest of the people. And managers are entrusted with the day-to-day
operation of those assets, tasked with the ongoing duty to generate a return on assets.
In this model, the mangers have no discretion regarding asset transfer. As a result,
local governments tend to be highly involved in the operation of SOEs and give very
little authority to managers. (Cooke)
The 1993 Corporation Law: divided SOEs into two categories: that of closely held
corporations, including wholly state-owned corporations and foreign-invested
corporations, and publicly held corporations, including listed and non-listed
corporations. There are four organizational forms in the second category: limited
liability companies, limited liability stock companies, employee shareholding
cooperatives, and private enterprises. (Aivazian, Ge and Qiu)
Estimating the actual size of SOEs and their impact on the Chinese economy is
difficult. When the government releases data on what percent of the GDP is attributed
to SOEs, they often only count companies which are 100% owned by the state or
where a majority of shares are owned by the state. But tracing the ownership of shares
to ultimate ownership would give a very different picture. For example shares of
private sector firms may be owned by SOEs, or may be investments by mixed
ownership entities. (U.S.-China Economic and Security Review Commission)
“In 2004 China amended the constitution to grant the non-public economy a legal
status in the socialist market economy.” (Chen) As the private sector developed, the
SOE sector also became more market oriented and began to function as for-profit
businesses. SOE productivity improved with the introduction of the incentive contract
system of the mid 1980s. The new system gave the SOE more autonomy in decision
making and allowed them to keep some of the profits. Bonuses were also paid to
worker whose income increased under this system. (Aivazian, Ge and Qiu)
One of the ways of dealing with SOE reform was for the PRC government to
corporatize some of the SOEs. Corporatization was a way for the Chinese government
to retain ownership and control of the SOE, but with the benefit of having a CEO,
CFO and other executives running the SOE more efficiently. Having these managers
in place resulted in a more efficient flow of information, which combined with an

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incentive system, resulted in higher profitability. (Aivazian, Ge and Qiu) From the
1980s until today, the system of managing the SOEs has become more and more
streamlined, to increase efficiency. Changes have been made to reduce the
bureaucracy in state-owned enterprises, to make them more nimble and competitive.
(Zhang and Freestone)
In 1983, the Chinese government implemented the Contract Management
Responsibility System (CMRS) followed by the 1993 implementation of the Modern
Enterprise System (MES) both of which granted more autonomy to SOE managers,
without the state giving up ownership. (Forrester and Porter, 1999; Scot, 2002 cited in
Bai and Bennington). These two programs have decreased state intervention at the
micro level. (Child, 1994; Harvie, 1999; Warner, 2001; Warner and Zhu, 2000 cited in
Bai and Bennington)
Today, SOE managers enjoy a great deal of autonomy compared to their predecessors
of only two decades before. “Enterprise managers have been given autonomy over
pricing, investments, accounting, human resources, material supply and acquisition,
and other decisions related to the enterprise operations, which were absent under the
former planned economy (e.g. Child, 1987, 1999; Lin et al., 1996, 2001; Naughton,
1995 cited in Ralston et al.)
In the past SOEs reported directly to the central government. Today, they are
controlled by the provincial and local government. (Zhang and Freestone) But, in
spite of the party appearing to take a step back from managing the day-to-day
operations of the SOEs, many SOEs have adopted the “‘one-man responsibility
system’, under which the Party secretaries have become part of the management.”
(Bai and Bennington)
These reformed, corporate SOEs remain a significant force in the economy. In 2013
there were 155,000 SOEs valued at approximately $17.4 trillion. (Zhu) The SOEs
employ tens of millions of people. (Bland)
The SOEs dominate many sectors of the economy, including: automobiles,
information technology, petrochemicals, aviation, insurance, energy, banking,
railways, media, shipping, construction, metals, telecommunications, industrial
chemicals, alternative and new energy technologies, new generation IT, biotechnology,
new generation automobile technology, high-end equipment manufacturing, new
energy sectors, and new and advanced material sectors. (LEE)
The new-style corporate SOEs have grown, through mergers and foreign direct
investment (FDI) into some of the largest companies in China and around the world.
The Industrial and Commercial Bank of China (ICBC) a banking SOE, for example,
is the world’s largest bank, in terms of assets. (Bland)

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One-hundred and Twenty-eight of the companies on this year’s Fortune Global 500
are US based companies, making the US the world leader among global companies.
Coming in second, however, was China, with 98. The top 12 Chinese companies on
the list are SOEs, including banks and oil companies. In fact, SOEs comprise 22 of
the 98 companies. (Cendrowski)
According to CCTV commentator Feng Yu, SOEs were prominent among the Top 500
Chinese Enterprises for 2015. (Jingya) The largest SOEs are in the petroleum and
energy sectors with SinoPec at the top, followed by China National Petroleum
Corporation. State Grid, China's largest electric utilities company, ranks third. (Jingya)
China Mobile, another SOE, is the world’s biggest phone company. (Wang)
For all of their impressive growth and immense size, the SOEs are still fraught with
profitability issues. Testament to the problems inherent in SOE performance, “Of the
54 companies with the biggest losses last year, 16 were Chinese, the most of any
country.” (Cendrowski)
2. Privately Owned Enterprises (POE)
In 1996, just below half of China's 689 million workers were employed in agriculture.
At that time, the state sector was the next largest employer. SOEs tend to be important
employers in inland and Northern provinces but less so in richer, coastal regions such
as Jiangsu, Zhejiang, Fujian, Shandong, Guangdong and Guanxi. (Wu) At that time,
there were almost no POEs for people to work in.
Private property only came under the law in 1999, when personal belongings were
protected from nationalization. Private business people were denied Communist Party
membership until 2002. Private assets and capital finally became legal in 2004. (IFC
2000: 10-19; Wang, 2004 cited in Ralston et al.) At one time, SOE was the only form
of business, and virtually all businesses were owned by the government. Since the
advent of private property, other forms of business ownership have also grown in
importance. Company “ownership forms in China, include domestic privately-owned
enterprises (POEs), foreign-controlled businesses (FCBs), and state-owned enterprises
(SOEs).” (Ralston et al.) The management culture of the Chinese privately owned
enterprises (POE) vs. foreign controlled businesses (FCB) are vastly different.
POEs have been increasing in both number and percentage of total GDP since
economic reforms which enabled private citizens to engage in for profit activities.
(Ralston et al.) Today, China’s private sector demonstrates high growth and
productivity. (Ralston et al.) As private enterprises entered the market they faced a
number of disadvantages as SOEs were given tax breaks, better access to information
and natural resources, easier access to bank loans and were supported by local
governments. (Ralston et al.) SOEs have dominated the fields of automotive,
pharmaceutical, electronics and petrochemical. (Ralston et al.) Entry into SOE

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dominated fields is difficult for POEs. Private sector firms are faced with “glass doors”
or “glass ceilings.” In theory, they are allowed to invest in most sectors but SOEs
dominate many sectors, “including mining, financing, banking, rail, aviation,
telecommunication, media and education.” A state monopoly in these areas creates
barriers of entry for private firms. (Song, Yang and Zhang)
Some of China’s POEs are small, family run businesses which developed out of a
traditional Chinese clan culture, where the majority of the employees are related.
Other POEs actually started as collectives, whether township or village enterprises
(TVE), whereby the people operating the business were eventually allowed to take it
over and run it as a POE, sometimes on a lease basis. (Ralston et al.)
POEs generally perform better than SOEs which is a considerable achievement
considering all of the advantages that SOEs enjoy, such as easy credit and low cost
raw materials. One reason why the POEs outperform SOEs is because of superior
managerial oversigh. Not only are the POE managers real entrepreneurs, but because
POEs obtain financing from banks, the banks fulfill an oversight function in the POEs,
monitoring their management decisions. (Gong, Görg and Maioli)
3. Mixed Ownership Firms
In the early days of Foreign-controlled business (FCB) the government offered a
number of incentives to convince foreign companies to invest in China. FCBs are
generally large multinational corporations (MNC) which tend to operate according to
the norms of western corporate culture. (Ralston et al.) Many of the FCBs function as
joint-ventures whereby the foreign partner provides technology, experience and
access to foreign markets, and the local partner contributes land and government and
local connections. The FCBs tend to use more international accounting and western
management styles. (Ralston et al.)
Tian and Estrin found that in mixed ownership companies, with a small percentage of
state ownership, the state ownership has very little impact on the firm’s performance.
In firms where the state owns a large percentage of the shares, however, the influence
of the state ownership on performance is slightly positive. A firm with large state and
private ownership has to provide incentives to motivate agents from both sides, which,
seem to produce positive results. (Tian and Estrin)
4. SOE Performance
Evaluating the financial performance of SOEs is problematic because “the prices of
inputs and outputs of SOEs are often set by the state and distorted, on the other hand,
in addition to financial goals, SOEs also bear nonfinancial goals such as serving as
social security providers for their employees.” (Kong, Marks and Wan) The general
theory on SOEs says that they will underperform because their decision making is not

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solely based on profit maximization, but also to meet certain political goals. (Tian and
Estrin) From 1980 to 1995, the percentage of loss making SOEs roe from 19.2% to
33.5% . (Dong and Putterman) Even loss making SOEs don’t necessarily have to
close their doors.
The SOEs, even if mismanaged, generally do not face the threat of bankruptcy,
because of easy access to state credit. Government subsidies can help them remain in
business. (Bajona and Chu) The experience of China’s SOEs largely confirms this
theory. (Tian and Estrin) However, SOEs are not without their advantages. World
class investor Warren Buffet, for example, likes certain Chinese SOEs. His investment
company, Berkshire Hathaway made an investment of $500 million in PetroChina Co.,
in 2003, and sold it for more than $3 billion four years later. (Das) So, there are
benefits to the SOEs and they can be very profitable. These advantages come from
preferential treatment these companies receive in the home country. (Tian and Estrin)
Not all SOEs are profitable. In fact, SOEs often contain fundamentals flaws which
will prevent them from being profitable. By maintaining surplus employees, or
making decisions which are contrary to market demands, the SOEs rack up losses.
(Bajona and Chu) SOE return on assets (ROA) have consistently fallen short of POE
returns. “The average return on assets for state entities stands at a paltry 4.6%,
compared with 9.1% for private companies”. (Wang) Nicholas Lardy, a senior fellow
at the Peterson Institute for International Economics estimates that the return on assets
of SOEs is between a third and half that of POEs. (Curran)
Part of the reason why the SOEs have such low returns might be because of a conflict
between their business role and their political role. SOE managers are faced with two
sets of obligations, turning a profit and following government mandates. It seems,
however, that when these two goals conflict, the SOE managers are meant to chose in
favor of the government mandate. (U.S.-China Economic and Security Review
Commission) The government has repeatedly said that it would not meddle in the
affairs of the SOEs, and that the managers should run them as a business. “According
to the Chinese government, they are not there to influence the decisions because all
SOEs are supposed to be profit-driven now, like all other businesses.”
(Tradecommissioner.gc.ca) The reality, however, seems to differ from the stated. “But
there have been examples that whenever the state interest is not in complete overlap
with the business interest, the state interest trumps the business decisions.”
(Tradecommissioner.gc.ca)
One of the many political roles that SOEs play in the economy is as a vehicle for the
transmittal of government stimuli, in the form of loans from state banks, to the greater
economy. (Investment Adventures in Emerging Markets) This role may cause a
conflict between earning a profit and following the party line.
5. From Planned to Chinese style market economy

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“ In 1978, capitalists in China were official “class enemies” but in 2001 they were
welcomed into the Chinese Communist Party (CCP)” (Szamosszegi and Kyle)
In 1949, following the establishment of the People’s Republic of China, the Chinese
government followed a Soviet style Communist economic system. By 1954, nearly all
companies had been nationalized. (Fu) From 1954 through 1979, the beginning of the
SOE reforms, nearly 100% of the industrial sector was dominated by large SOEs and
collectives, with almost no POEs in operation. The administration of these firms was
carried out by successive levels of government, rather than some sort of managerial
hierarchy. The economy was a true command economy with the government
providing financing, and controlling the prices of both inputs and outputs. Salaries
were generally low, with managers earning only slightly more than workers.
Employees had jobs for life with numerous health and welfare benefits such as free
housing and education for their children. (Tian and Estrin) SOE output was sold to the
government at prices set by the government. Nearly all SOE profits were turned over
to the government. (Aivazian, Ge and Qiu)
The 1979 SOE reform began with the fang quan rang li policy, whereby SOEs were
given greater autonomy and a share of the profits. In 1981, the "Economic
Responsibility Policy" was introduced, whereby the firm could, after paying a share to
the government, decide how to allocate the residual profits. These incentives had to be
put in place to make SOE managers think in terms of earning profits. The incentive
contracts applied to both managers and workers. (Bai and Xu)
From 1983 to 1987, a taxation system replaced the earlier profit sharing program.
(Lok and 駱佩傑.) Through 1992 the reforms gave increasing autonomy and
incentives to managers. It was at this time that the government began selling off
smaller SOEs. (Fu) After the implementation of the 1993, Company Law, SOE
reform was realized through corporatization of SOEs along western corporate lines.
(Aivazian, Ge and Qiu) The Company Law was designed to force companies to let
markets determine such aspects as pricing, and that “finances must be raised through
banks and other creditors; firms must pay dividends to their shareholders; pay back
interest and principal to their creditors, and tax to the government.” (Tian and Estrin)
This replaced the earlier system whereby the government financed the firms directly.
Under this new law, the Board of Directors, composed of the delegates of the largest
shareholders, would elect and monitor the directors. However, in practice, a retired
government official would usually serve as chairman of the board. (Tian and Estrin)
This was not a privatization. Once again, the government maintained both its
ownership of and ultimate control of the SOEs.
After the reforms of the 1990s, the economic climate changed dramatically. Property
rights were established. Many state assets became privatized and some SOEs became
joint stock companies. The new owners of these firms had more decision making

10. 10
authority. They also shared in the profits of the firms, which provided incentives not
present during the true communist days. (Tian and Estrin)
Prior to 1993 employee associations and the enterprise branch of the Communist
Party monitored the daily activities of managers. Since then, the law has expressly
forbidden Communist Party officials from interfering in corporate governance. But
since the government controls a large percentage of voting stock, it still exerts a great
deal of control over companies by exercising voting rights. (Tian and Estrin)
The period 1993-2003 saw the end of lifetime employment and the “iron rice bowl”
system. During this time, the government also enacted a policy of “grasping the big,
and letting go of the small”, whereby smaller SOEs were sold off and larger SOEs
were reformed.
From 2003 to the present western style capital management systems were put in place
and the number of non-performing loans was decreased. (Cao)
Before 2003 it was hard for POEs to enter the market. Entry costs were high and
POEs had less access to bank financing. SOEs, on the other hand, could obtain
essentially non-performing loans from the state or from state controlled banks. (Cao)
In 1997, ninety per cent of bank loans were granted to SOEs, although two thirds of
these firms were losing money. (Wu) The SOEs were also heavily subsidized. (Cao)
These factors combined to make the playing field extremely uneven, with a decided
advantage going to the SOEs. After 2003, however, things changed dramatically.
Entry costs dropped. Favorable loans to SOEs still existed, but the government
subsidies had decreased dramatically. (Cao) Today, SOEs are still a large and
important factor in the Chinese economy. The remaining SOEs are generally very
large. (Cao)
In November 2013, the Chinese Communist Party’s Third Plenum announced the
“mixed ownership economy,” concept, whereby SOEs would be partially privatized
but the government could retain ownership control. The hope was that exposing SOE
managers to market pressures would increase their efficiency. Other programs include
the professionalization and marketization of SOE managers. (Lin, Li-Wen)
SOE reform is one of the most significant changes to occur in the Chinese economy.
(Peng, Shi and Xu) The recent economic slowdown has brought scrutiny to the
unbalanced allocation of resources between SOEs and POEs. (Fidelity World Wide
Investments) As a result, the government has been focusing on SOE reform.
“Evidence has shown that China's SOEs could cut staff by a third with no impact on
output.” (Economist 1997) The obvious answer would be to fire these redundant
workers and try to steer the SOE on a path of greater profitability. But fears of
increasing unemployment may be one of the factors which is hampering the
government’s ability to reform the SOEs. (Wu)

11. 11
In SOE reform the Chinese government has been careful to avoid the mistakes made
by Russia, namely, trying to change too much, too quickly. (Steinbock) In the 1990s
almost overnight, the former Soviet Union (USSR) changed from a centrally planned
economy to a market economy. (Aven) “Russia’s economy descended into a death
spiral” causing the national currency, the ruble to crash. (Stoner and McFaul) This
swift conversion was accompanied by crime and corruption on such a scale that
journalists dubbed the country “a collapsed and criminal state.” (Aven) Instead, of
instantaneous change, China has implemented a series of policies of incremental
change. “Much of Chinese success in the reform of state-owned enterprises can be
attributed to pragmatic gradualism.” (Steinbock)
Since the economic reform there has been a decentralization of power from the central
government to the local government, regarding matters of the economy. Now, local
governments are under more pressure to see after their local economies, but at the
same time, they are now able to share in the benefits and rewards of their local
economies, which serves as an incentive for them to improve economic performance.
(Jin, Qian and Weingast) This increased local control and responsibility for the
economy is in keeping with the shift of SOE management and responsibility to the
local or collective or village level enterprises. In the past, the central government
appointed local government officials based on loyalty. Today, many of these
appointments are based on the individual’s ability to successfully manage the local
economy. Implementing these types of incentives, which were absent before the
economic reforms have had positive results. “Across provinces and over time,
stronger fiscal incentives imply better economic performance and faster structural
change. Stronger fiscal incentives positively affect the development of the non-state
enterprises” (Jin, Qian and Weingast)
The positive performance of POEs even influences the SOEs, leading to better
performance. “Stronger fiscal incentives also induce more reforms in state-owned
enterprises in terms of the increased shares of contract workers in the total state
employment and bonuses in total employee wages.” (Jin, Qian and Weingast)
A recurring theme in both the reform of the SOEs and the economy as a whole is the
conflicting concepts of POEs and SOEs existing in the same economy and of the
SOEs pursuing profit but still fulfilling some political function. “In the transition from
central planning to a market economy, however, SOE operations are complicated
because liberalization forces and state influences coexist and jointly constrain.”
(O’Connor, Deng and Luo) In spite of reforms, however, the SOEs still engage in
counter-profit producing activities in order to fulfill other needs of the government.
SOEs serve as the carriers of government sponsored economic stimuli in the case of
financial crisis such as the global financial crisis of 2008. (Peng, Shi and Xu)
6. State-owned Assets Supervision and Administration Commission of the State
Council (SASAC)

12. 12
Another step taken by the PRC government to reduce the conflicting interests of
politics and profit and to remove the government from the daily operation of
companies was the creation of the State-owned Assets Supervision and Administration
Commission of the State Council (SASAC). In 2003 SASAC was established to
oversee state-owned assets of the enterprises, “enhance the management of the
state-owned assets, increasing the value of state –owned assets, promote the
government’s financial reform measures and the modern enterprise system, improves
corporate governance, appoints and removes corporate officers, and evaluates the
performance of the companies under its supervision.” (En.sasac.gov.cn) The
SASACs are holding companies which hold the shares of SOEs on behalf of the state
and are responsible for SOE reform. In fulfilling its various roles of improved asset
management, the SASAC is meant to transition loss-producing SOEs into productive
POEs or corporate style SOEs.
Multiple SASACs exist across various levels of government, overseeing SOEs from
central down to provincial and local level. “There are approximately 300 SASACs in
China. In addition to the central government SASAC, there are about 30 provincial
SASACs overseeing provincially controlled SOEs, and scores of municipal SASACs
supervising local SOEs.” (U.S.-China Economic and Security Review Commission)
Before the establishment of SASAC industries were managed by various government
ministries. The financial sector was handled separately from other industries. The
Ministry of Finance set up the Central Huijin Investment Limited to manage the
state’s shares in financial institutions including China’s four largest banks. “Huijin
became a wholly state-owned subsidiary of China Investment Corporation, the
Chinese sovereign investment fund directly controlled by the State Council, in 2007.”
(Fu) SASC functions as an owner, including executing voting rights, the selection of
management, and rights to shares of profit distributions. “SASAC is also responsible
for the oversight of state assets in these large entities, and has the authority to appoint,
remove and evaluate directors, executives and supervisors of most of the Central
SOEs,” (Fu)
The SASAC was established with two primary aims in mind. First, to reform and
unify the management system of state assets, and second, to clearly demarcate the
jurisdictions of central and local governments to ensure that they didn’t overlap or
conflict. (Mattlin) The new Company Law says that SASAC wields ultimate power
over the SOEs. (Mattlin)
The SASAC has failed to resolve the conflict between profit and politics. SASAC
functions as both a regulator and an owner, which can cause obvious conflicts of
interest, often ending in failure. As part of a crack down on asset stripping and
corruption SASAC put restrictions on ownership transfers, which seemed like a good
strategy. On the other hand, the SASAC has been known to randomly reshuffle

13. 13
management, with chaotic results in SOEs. “while central government has a point in
saying that SOE profits are not always reinvested in sound ways, there are no
guarantees that a semi-governmental body with ambiguous goals and affected by
political considerations will do a better job.” (Mattlin)
Under the administration of SASAC some SOEs have thrived, even becoming Fortune
500 companies. But the conflicting roles of the SASAC, both as regulator and owner,
have been seen as an impediment to the further development of the SOEs. As a result,
the 2014 government work report on SOE reform called for less government
interference in the day-today operation of SOEs. The report stated the government’s
goal of granting authority to SOE “board of directors to hire, evaluate and compensate
senior managers.” (Fidelity World Wide Investments) To create fairer competitive
environment for SOEs and POEs, the government said they would allow the markets
to determine the allocation of resources, also, that SOEs would step away from certain
sectors to give POEs a chance. (Fidelity World Wide Investments)
7. Singaporean Temasek model
While the PRC government has repeatedly announced that it would reform the SOEs,
their plan does not involve simply privatizing all of the SOEs. Instead, several other
options lie on the table, including the Singapore Temasek model. (The Economist)
The Chinese government determined to privatize the SOEs, following the
Singaporean Temasek model. (Fu) Temasek Holding is a state-owned investment
company in Singapore which creates alternative investment opportunities besides
sitting on low-yielding U.S. Treasury bonds. (WSJ, 2007) By effectively managing
capital, the state could focus on its investments and making sound, profit producing
investment decisions, rather than getting bogged down in the day-to-day
decision-making of SOEs. In keeping with the Temask model, “several state capital
operating companies shall be established, and qualified SOEs shall be transformed
into state capital investment companies.” (guoyou ziben yunying gongsi cited in Fu)
This model calls for a three-tiered approach whereby SASAC would serve “as the
regulator of state-owned assets, mid-tier state capital operating companies and state
capital investment companies…fully-owned by SASAC, and the bottom tier Central
SOEs and/or their subsidiaries.” (Fu)
The plan for implementation of the Singapore model is for both the government and
the SASAC to step out of the daily decision making in the firms. Two Temasek-style
firms will help setup to fund the SOEs and pressure them to increase profitability.
SOEs will “cut perks for top executives, and give private capital more room to invest
in SOE projects and offshoots.” (Huang) Under this new system the SOEs will have
to increase profitability in order to attract investors. (Huang) Smaller SOEs will
merge into larger companies which can compete globally. Some of these mergers have
resulted in new companies which have become the largest in the world, in their sector.

14. 14
“For example China Shipping is merging with COSCO to create one of the world’s
largest shipping companies.” (Orr)
In spite of reforms, problems linger. The largest company on the Shanghai Composite
index is PetroChina. Even this huge SOE has been the recipient of government
subsidies in the form of stock purchases. In September of 2015, when PetroChina’s
shares experienced a drop, the government funded the purchase of the shares to buoy
the share price. (Curran)
8. Employment in Modern SOEs
In the pre-reform days SOEs accounted for nearly 100% of non-agricultural
employment. Pay was extremely low, but companies provided employees with health
and welfare benefits. These jobs were extremely secure, generally with lifetime
employment and benefits, and were often referred to as “The iron rice bowl.” (He et
al.) Social welfare expenses, such as pensions were born by large SOEs. (O’Connora,
Chow and Wu) These benefit and pension programs, combined with over-employment
decreased the profitability of SOEs.
After the liberalization of the economy and the entrance of private firms, employment
was no longer a given. As a result, employment contracts first came into being in
1986. (O’Connora, Chow and Wu) SOEs began following the Modern Enterprise
System (MES), in 1993, whereby SOE employment was no longer guaranteed for life.
“A large number of once protected white-collar staff have been reallocated to lesser
positions, and the size of bureaucracies reduced.” (Bai and Bennington) SOEs then
introduced financial incentives such bonuses. The change from lifetime
state-employment to contract SOE or POE employment was a slow, but steady
progression. By 1990, only 10% of workers were on contract. (O’Connora, Chow and
Wu) By 2009, the percentage of workers in the Pearl River Delta region covered by
contract had reached 62%. (Freeman and Li) By 2005, 70% of all employment
contracts, across the entire country including SOEs and POEs, were fixed term. Even
in SOEs, the percentage of lifetime or open-ended contracts had dropped to 20%. (Li)
The fixed term contracts have been the cause of the majority of China’s employment
disputes. They are also the cause of friction and dynamism in the China job market.
Because employees do not enjoy a feeling of employment security, they are more
likely to change jobs, frequently, as they perceive better opportunities arising
elsewhere. (Li)
To be able to attract the best managers and employees, the SOEs will need to be able
to pay market appropriate wages, something they were unable to do in the past.
“However this has been tried in the past and has not been sustained. When SOE
executives are seen to be making a lot of money, paid for by state assets, political
reaction has been very negative.” (Orr) A further problem of these increased payments

15. 15
to SOE managers is that offering more money to successful SOE managers doesn’t
necessarily guarantee they will remain with the SOE. SOEs offer financial incentives
and may still offer lifetime employment to certain key employees who are essential to
the firm’s performance, due to training and experience. However, they may not
remain, because these highly valuable employees are also the ones most coveted by
the POEs. And so, if the POEs can offer them enough financial incentives, they will
leave the SOE and move to a POE. (Li)
In spite of corporatization of SOEs, the Communist Part still remains influential in the
modern SOE. In SOEs the state closely controls labor relations through the
Communist Party, which oversees a system of policies, regulations, and ‘‘Party
controls personnel’’. The Party can “intervene in enterprise decision making,
including the appointing, firing, and promotion of divisional managers (Hassard et al.,
1999 cited in O’Connor, Deng and Luo)
Party representatives with direct control over hiring and firing may make those
decisions based on politics, rather than profit maximization. This reduces the benefits
of delegating authority to competent managers. (O’Connor, Deng and Luo) “A survey
shows that 92 per cent of the directors were members of the CCP which suggested a
correlation between directors’ appointment and the power of the CCP over staff
appointments.” (Hong Tan and Wang) Therefore it is questionable whether or not the
directors can be called independent. (Hong Tan and Wang)
Over the years, SOEs have slowly changed their internal culture, approaching
international norms, in order to be more competitive, globally. (Ralston et al.) As has
been seen previously in this research, some of these changes include reducing staff,
giving incentives and bonuses, increasing responsibility, and increasing pressure to
turn a profit. All of these factors combine to make China’s job market extremely
dynamic, with employees frequently leaving one company and joining another.
With the exception of some managers, SOEs tend to hire new graduates, rather than
employees with experience at either foreign owned or POE companies. New SOE
employees learn procedures and build relationships with coworkers and management,
although job responsibilities “are not always clearly defined”. In 2010, the average
employee turnover in SOEs was only 10%, while turnover at POEs was 18.5%. So, it
can be seen that employee turnover in SOEs is much lower than in POEs. (Wang, P)
9. Employment in POEs
POE management structures are based on family or clan structures typical of the
Chinese culture. But, given the smaller size of the average POE and the more
competitive environment in which they must operate, they are more innovative,
entrepreneurial, and reactive than SOEs. (Ralston et al.)

16. 16
Even with the changes and modernization in SOEs many of the old cultural aspects
carry over. Company dynamics in China are such that Chinese leaders and employees
are thought to be especially concerned about relationships and tend to preserve
interpersonal harmony in organizations. Supervisors are to take care of their
employees in the same manner that the family patriarch is to care for his family
members, while employees should be devoted and loyal to the supervisor. (YI) SOEs
represent the traditional, Chinese collective culture, whereby interpersonal
relationships and harmony are considered important concerns. (YI)
The POEs operate differently, largely because of the influence of multinational
corporation (MNC). For the first two and a half decades of foreign direct investment
(FDI) in China, the preferred means for MNCs to enter the Chinese market was to
engage in joint ventures (JV) with local companies. (Dickinson) In general, FDI and
JV can bring Western management methods and experience and help promote
industry growth. But in a transitional economy, where the state still has tremendous
direct influence and control over industry, the transition from command economy to
market economy can be hampered. (O’Connor, Deng and Luo)
SOEs and POEs differ in a number of ways. In a POE, decisions such as the number
of employees to maintain are determined by the market. But in SOEs this number is
mandated by the government. In return for creating and maintaining employment,
SOEs receive subsidies from the government, including both “direct subsidies, such
as cash payments used to cover production losses, and capital subsidies, or
low-interest loans from state banks.” (Bajona and Chu)
The presence of SOEs, POEs, and MNCs all in the same system, have made China’s
job market extremely dynamic. POEs generally pay better than SOEs. But even
MNCs in China have found it difficult to retain qualified employees because they are
in such demand. (Machwurth)
10. Employee Turnover in China
In the modern Chinese economy, employee turnover is very high. According to a poll
by an international recruitment agency, “35% of staff workers in China have changed
jobs in the past two to four years…and 10.4% in the past one year.”
(Wantchinatimes.com) Another study found that the turnover rate for skilled workers
is 20-25% (Deloitte Financial Advisory)
Employee turnover will generally be higher in industries dominated by FDI and JV
firms. These will also be the industries where performance-based incentives are used
to attract and retain the best and brightest candidates. (O’Connor, Deng and Luo)
Through 2010 foreign companies were the companies of choice for top Chinese
graduates. Since 2010, the employment climate has changed, with most grads

17. 17
preferring to work for domestic companies. But, many of these local Chinese
companies are offering the bonuses and incentives once exclusive to foreign
companies. “According to some reports, domestic firms looking to raid Western
companies of experienced technical talent and executives are offering dramatic pay
increases—often as much as 50%. “ (Schmidt) The SOEs are not offering such
incentives.
MNCs are less likely to be influenced by trade unions, resulting in more frequent
labor disputes. (Cooke) Employment pressure and job security are lower in MNCs
and JVs, compared to SOEs, especially for older workers, who were used to having a
lifetime contract, complete with retirement provisions. The highly competitive
business climate in which the MNCs work also causes job uncertainty. For example,
in 1997 Kodak and Fuji China became embroiled in a price war which resulted in
20,000 employees being made redundant. (Zhan, 2003 cited in Cooke)
The goal of the Chinese government economic reforms has been to become more
market oriented, by adopting some, but not all of the Western management systems
exhibited in foreign controlled businesses (FCB). (Ralston et al.) However, the
reforms of “the Chinese government are evolutionary, not revolutionary.” The
government seeks to streamline, to pare down the old dinosaurs, but not to completely
eradicate the hierarchical culture. By thinning out the old companies, the new style
SOEs can be more flexible in the modern transitional economy. (Ralston et al.)Thus,
the hierarchical structure in the modern SOEs reflects both the Western and the
Chinese styles.
11. China and the WTO
In 2001, when China was admitted to the WTO, the US and EU argued that because
of the dominance the SOEs still had in the Chinese economy, China should be
considered a non-market economy (NME). (Chen and Whalley) A market economy
is one that depends “heavily upon market forces to determine levels of production,
consumption, investment and savings without government intervention.”
(Asycuda.org) According to the Legal Information Institute of Cornell University Law
School, a country can be considered a market economy if: the currency is convertible,
Wages are determined by bargaining between labor and management, if it allows joint
venture and foreign investment, and exhibits reduced government control over raw
materials, allocation of resources, and prices. (Chen and Whalley) Some countries felt
that China did not match this definition.
It is actually hard to determine exactly how much of China’s economy is controlled by
the government or the percentage of China’s GDP that is attributable to government
controlled companies. SOEs can own shares in POEs and joint ventures (JV). The
government can own controlling interest in a company by buying its shares on the
stock market. Also, that company can in tern purchase controlling interest in a

18. 18
company where the government owns no shares. The US and other observers feel that
the influence the SOEs have over the Chinese economy violates the definition of
market economy. But other countries have agreed with China. “Approximately 150
countries have granted China market economy status, while most OECD countries
(EU member states, Japan, United States and India) still label China as a NME.”
(Chen and Whalley)
In the end, China was willing to compromise. China agreed “China’s accession terms
explicitly allow other WTO members to treat China as a NME under their domestic
laws until 2016.” (Chen and Whalley)
In becoming a WTO member, China had to sign agreements to adhere to regulations
related to “trade policy, such as tariff reduction, elimination of quotas, and improved
accessibility to domestic markets by foreign competitors.” (Bajona and Chu) These
agreements opened China further for FDI.
12. Foreign Direct Investment (FDI)
Early restrictions within China’s command economy structure prohibited foreign
direct investment (FDI). Following the economic reforms of the 1970s, FDI was
allowed, but strictly controlled. At that time, FDI was required to be in conjunction
with a local partner. And, it was restricted to four Special Economic Zones (SEZs).
By the mid 1980s the laws were further relaxed as the government began courting
FDI with tax incentives. Wholly foreign-owned enterprises were permitted, as were
joint ventures and companies which brought new technology to China. (Girma, Gong
and Görg)
In the 1980s many of the FDI investors were overseas Chinese, with the investments
themselves coming from Hong Kong, Macao, Taiwan, Japan, Korea and Southeast
Asia. (Cooke) In the 1990s the FDI, coming largely from the Pacific Rim countries,
was small scale and involved low levels of technology. Today, the FDI comes from
MNCs involved in large-scale strategic operations. (Cooke)
Large company acquisitions have to be approved by the Ministry of Commerce
(MofCom). SASAC chair Li Rongrong named seven strategic sectors in which the
Chinese government believes it must retain 100% control of the corresponding SOEs,
for the purpose of national security. These companies happen to be some of the
largest and most profitable. They include: defense, power generation and distribution,
oil and petrochemicals, telecommunications, coal, aviation and shipping. (Mattlin)
Foreign companies would be restricted from owning stakes in these companies but
may be allowed to own stakes in “downstream” or value-added product production.
(Mattlin)
Sometimes, the incentives and benefits given to FDI are exploited by local companies.

19. 19
This results in “round tripping,” (Song, Yang and Zhang) “Round tripping” is when a
domestic Chinese company forms an offshore holding company which then buys
shares in a domestic Chinese company, in order to benefit from being a foreign direct
investment. (Chao and Xu)
FDI has become an important component of the Chinese economy. (Girma, Gong and
Görg) In 2014, China became the world’s largest recipient of foreign direct
investment. (Mathew) This is in part due to foreign companies wanting to gain access
to cheap labor as well as cashing in on China’s exceptional economic growth. FDI is
one of the main factors driving this economic growth, which is why attracting FDI has
been a main focus of the government’s reform programs, beginning in 1978, with the
open-door policy. (Cooke)
While FDI in the 1980s took the form of joint ventures with local companies, today,
acquisitions are one of the main strategies for FDI. In becoming a member of the
WTO, China had to allow increased access to FDI, which often takes the form of
mergers and acquisitions (M&As). M&As require a lot of investigation into the firms
which could be considered sensitive in China. (Cooke)
13. Mergers and Acquisitions (M&A)
Recently, there has been a lot of merger activity as the Chinese government pushes
smaller SOEs to merge, in order to compete with MNCs. (Deloitte Financial Advisory)
Other merger activity comes from MNCs merging with local companies. As China’s
ascension to the WTO has created investment opportunities for MNCs many of these
mergers occur in sectors which were previously blocked for FDI. (Deloitte Financial
Advisory)
In 2003, the State Restructuring Regulations established the procedures for SOE
restructuring, the M&A Regulations soon followed. (Cooke) M&A firms in China
have existed for approximately twenty years, for the purpose of bailing out ailing
SOEs. (Cooke) The original focus of Chinese M&A activity was to allow
underperforming SOEs to be acquired by foreign MNCs who in addition to bringing
much needed financing and world famous brands, would bring improved management,
technology and efficiency to the firms. This type of corporate structure would also
allow the government to maintain control over foreign companies operating in China.
Allowing these joint ventures also has a capacity building effect whereby local
companies can acquire skills and training from the foreign partner. Allowing MNCs
into an industry reduces the government’s control of that industry. (Cooke)
M&A negotiations in a Chinese business culture are extremely inefficient and involve
a large number of people and multiple meetings. Before a recent merger, Chinese
insiders said that the Chinese company held ten internal meetings, each involving a
dozen people, before even meeting the would-be foreign partners. Over 170

20. 20
people/times were involved on the Chinese side, but the MNC only sent two
representatives. And the MNC senior manager only attended a few of the more
important meetings. The two representatives of the MNC knew exactly what they
wanted from the negotiations. They had an agenda, and in the end, they won the
necessary concessions. All of the cost of entertaining, hosted dinners, drinking
sessions, and gifts were born by the Chinese side. The reason “why so many people
were involved from the Chinese side is that nobody wants to take responsibility for
the decision in case it goes wrong and yet everybody (especially those from the local
government) wants to be involved and have a say in it.” (Cooke)
Mergers and acquisitions are still fairly new in China, often resulting in failures
because of poor strategic planning or problems with quality control or intellectual
property rights. Alternatives to mergers and acquisitions include: joint venture,
organic growth and franchising. (Deloitte Financial Advisory) All of these methods
have been used in China and may be better alternatives for some companies. Mergers
and acquisitions in China have becoming extremely costly and problematic. For one
thing, collecting data about the acquisition target may be extremely difficult as firms
lack experience with mergers, data may be falsified, or firms may simply not want to
reveal company information. Even determining the value of the company proves
problematic as many companies use nonstandard accounting procedures. There may
be lack of clarity of ownership and licensing restrictions. If the company is deemed to
be in a strategic industry, the data may be sensitive and may not be shared even to
other departments of the same company. (Deloitte Financial Advisory) There is a lack
of transparency in Chinese firms, particularly when the data could be considered state
secrets. (Cooke) Statutes of limitation rules related to tax debts are unclear and it
would be possible to inadvertently buy a tremendous tax liability.
Local governments are highly involved with the SOEs and also maintain a balance
across industries and regions. M&A activity with a MNC will disturb this balance. In
some cases, local governments may under-quote the value of a poor performing SOE
just to offload it. As MNCs enter the local market they drive up the cost of
employment. MNCs also dilute the local talent pool by attracting the better, more
qualified workers, which further decreases the performance of the local SOEs.
(Cooke)
14. Changes in Corporate governance
In many of the privatized firms, the government remains the majority shareholder,
which defeats the purpose of privatization. The reason the firms were privatized in the
first place was that the state recognized that it was not good at company management.
Unfortunately, however, even after privatization the state maintains a large enough
percentage of stock that it still controls the operations of the company, which negates
the advantage of private management and ownership. The Bureau of State Asset
Management (BSAM) monitors the listed SOEs but the BSAM officials are

21. 21
government employees paid a standard civil servants’ wage. Their compensation is in
no way tied to the performance of the firms they oversee, so there is no incentive for
them to ensure that the SOEs maximize profit. (Hong Tan and Wang)
Good corporate governance is still not prevalent in the Chinese stock market. “Many
SOEs are debt-ridden enterprises ‘repackaged’ for listing and continue to be
controlled by their parent companies, who having successfully seen to their IPO, look
towards them as cash cows for ready milking.” (Hong Tan and Wang) This statement
demonstrates two very serious concerns. The first is the concept of “window dressing”
intentionally making the company look financially better than it is, in order to make it
more attractive for sale. Next, is the obvious conflict of interest that exists in the
partial privatization of SOEs. The goal of a publicly traded SOE is not always profit
maximization.
SOE managers are often motivated by goals apart from earning profits. “High ranking
officials are often appointed as the top managers of SOEs, while high profile
managers of SOEs are often appointed as government officials.” (Song, Yang and
Zhang) The goals will often be a mix of economic and political. (Song, Yang and
Zhang) The firms don’t fear bankruptcy and the politically minded SOE managers
may lack entrepreneurship. (Lok and 駱佩傑.) Separating the SOEs from the
government and implementing private sector managers would solve many of these
problems. Privatizing some SOEs while corporatizing others, creates two conflicting
systems in a single economy. The Chinese government refers to their hybrid system as
“socialism with Chinese characteristics.” (Lok and 駱佩傑.)
The Chinese culture, political system and business management system are all in the
shape of a pyramid. The pyramid structure of a Chinese SOE creates inefficiencies
and inaccuracies in information transfer. Information has to pass through several
layers of management before reaching the top. Along the way, it may be in someone’s
self interest, either financial or political, to misreport the information or fail to
forward the message all together. (Fan, Wong and Zhang) The system of having state
asset management companies, rather than local governments, manage SOEs creates
one more layer of management which information has to pass through, making the
transmittal even less efficient. (Fan, Wong and Zhang)
To improve accounting, disclosure and corporate governance in general, in 1994, the
Chinese government passed the PRC Company Law of 1994, which combined with
the Securities Law of 1999 were instrumental in the early stages of securities
regulation. Since then, The China Securities Regulatory Commission (CSRC) has
published Code of Corporate Governance for Listed Companies to evaluate corporate
governance. Furthermore, the CSRS and other agencies have created laws and
regulations governing “disclosure, mergers and acquisition, accounting, related party
transactions, independent directors and securities litigation,” (Hong Tan and Wang)

22. 22
In this new free-market system the accounting practices and management style of
many SOEs became outdated. Western style accounting systems were slowly
introduced. And those “SOEs that face higher market competition make greater use of
Western management accounting/controls.” (O’Connora, Chow and Wu) But not all
companies follow the disclosure laws or corporate governance laws. “In China, there
has been a huge gap between law and reality with regard to corporate disclosure.”
(Hong Tan and Wang)
Currently, the purpose of financial reporting and disclosure in China seems to be to
serve the needs of the tax authorities as opposed to the shareholders. Add to this that
the financial data is often falsified to attract investors, and the system of disclosure
and transmittal of information becomes very unreliable, even prosecutable. As was
the case with Yinguangxia (Hong Tan and Wang)
China’s First Blue-Chip Stock was a firm called Yinguangxia. From 1999 to 2000
Yinguangxia’s share price nearly tripled, making it the highest ranking stock on the
Shenzhen Exchange. When news leaked that Yinguangxia had forged their financial
data the share price plunged. This caused a trading frenzy across China’s entire stock
market, with many individuals and institutions losing large sums of money. This was
really China’s first major case of securities law violations. The Chinese security laws
clearly state that firms must make clear, accurate, and timely disclosure of financial
data. Such a blatant case of fraud shook the confidence of Chinese investors who were
new to the whole concept of having a stock exchange in their country. The case called
into question the accounting standards of the company and how best to calculate and
record corporate value, losses, and gains (Sipf.com.cn) Since the Yinguangxia case,
corporate governance ‘has become the primary concern of China’s regulatory
agencies. (Hong Tan and Wang)
Another “window dressing” scandal was the firm Baiwen which was found to be
faking its financial data. (Hong Tan and Wang) Zhengzhou Baiwen was converted
from an underperforming SOE to a shareholding company which was listed in 1996.
In 1999, after three years of losses, Baiwen faced bankruptcy. But rather than being
allowed to fail, the company was rescued through a deal brokered with the Zhengzhou
city government. Details of the case are widely published but the final outcome was
that the court supported a buyout of the company by Sanlian and the restructuring of
the company in such a fashion that the majority shareholders “had gone scot-free
whilst the vast number of A-shareholders (ie minority shareholders) had to suffer loss
by transferring their shares to Sanlian for free” (Green and Ho)
15. The Banking Sector
Prior to the 1970s all banks were state-owned and played a very small role in
financing companies or driving the economy. The leading bank was the People’s
Bank of China (PBC), which held about 80% of all deposits and accounted for 93% of

23. 23
all lending. Since that time, as China made its economic ascension, average wages
and average wealth in China increased, as did bank deposits. Banks gained in
importance as citizens reportedly deposited from 50-75% of their wealth. (Cull and
Xu)
In 1978, the government separated the People’s Bank of China from the Ministry of
Finance. Over the next year, other banks were created, including the Agricultural
Bank of China (ABC), the Bank of China (BOC), and the People’s Construction Bank
of China (PCBC). The People’s Bank became the central bank in 1983. The Industrial
and Commercial Bank (ICBC) took over the role of accepting deposits and granting
loans to businesses, accounting for half of all of China’s lending, making it the largest
bank in the country. (Cull and Xu) Once carved from the same government mold, the
big four have evolved into giant commercial banks which compete with each other.
(Lin and Zhang) A much smaller but up and coming bank is the Bank of
Communications (BoCom) which may become the fifth major player. (Dobson and
Kashyap)
Changes in the banking rules allowed for the entry of new types of financial
institutions, many of which were joint stock banks whose shareholders were SOEs or
local governments. During the 1980s three smaller banks, Everbright, Hua Xia, and
Min Sheng opened, as did several regional banks. At this time, other types of credit
institutions were established, such as “credit cooperatives, trust and investment
companies, finance companies associated with enterprise groups, financial leasing
companies, securities companies, and credit rating companies.” (Cull and Xu)
In the 1980s, bank employees earned only slightly more than government employees.
By the late 1990s, because of bonuses bank employees received for increasing bank
profitability, their income levels rose to about three times those of government
employees. This bonus system is thought to have improved the bank’s motivation to
decrease the number of non-productive loans, where these types of cuts were
politically possible. By the 1990s the government still mandated what percentage of
loans banks could give to the various sectors, but bank employees now had some
discretion, within a narrow band, to select profitable loans and reject potentially
nonperforming ones. (Cull and Xu) Chinese banks began asking the kinds of
questions and conducting the kinds of analysis of potential borrowers which were
standard in more developed economies, such as asking about the products produced,
geographic location, past history of profit and loss and so on. Even with this new
discretionary freedom, banks were still sometimes forced by local governments to
make nonperforming loans to SOEs. This extra level of bank scrutiny was thought to
have had a positive impact on the corporate governance of SOEs. SOEs who
borrowed from banks, as opposed to depending on direct government bailouts, tended
to be more productive. (Cull and Xu) This increased productivity continued into the
1990s. But, as the weight of bailouts became a more difficult burden for the
government to bear, they put pressure on banks to ease their lending restrictions.

24. 24
Under newer, softer restrictions, the positive correlation between bank credit and
improved performance evaporated. (Cull and Xu)
Today, the Big Four state-owned banks sit at the top of a three tier system. The second
tier contains 12 national-level domestic joint-equity banks, and the bottom tier is
made up of 100 city-level commercial banks. Other financial institutions now exist,
such as foreign funded banks, local credit cooperatives, trust and investment
companies, finance companies, and leasing companies. (Lin and Zhang)
ABC is riddled with nonperforming loans and may face serious problems in the near
future. (Dobson and Kashyap) “The Big Five banks show few signs of properly
accounting for credit risk in the pricing of their loans, and they continue to show a
substantial bias toward lending to state-owned and politically connected borrowers.”
(Dobson and Kashyap)
China’s banking sector is still largely dominated by state-owned banks which do most
of the corporate financing as the corporate bond market being very small. The lack of
bond financing in China qualifies China as the least developed bond market in Asia.
(Dobson and Kashyap) China’s state-owned banks are sometimes used to funnel
money to ailing SOEs. Firms with close political connections will find it easier to
obtain credit as well as lucrative contracts for government projects. (Firth, Lin and
Wong) The SOEs were not only inundated with debt as well as failing to turn a profit,
but they often also distorted their performance reporting, showing that they earned
phantom profits, which resulted in a tax debt. The banks would then make loans to the
SOEs, bailing them out. (Dobson and Kashyap) This accounts for the large percentage
of nonperforming bank loans which banks are forced to carry. (Firth, Lin and Wong)
The SOEs didn’t repay the loans and eventually, some of the banks needed a
government bailout. (Dobson and Kashyap)
Most of China’s banks are still owned by the public sector, the central, provincial, or
local governments. Their financial books still carry many nonproductive loans, made
to SOEs. (Caprio et al.) These banks are under the control of bureaucrats who use the
banks to further their own political and personal agendas, such as providing jobs and
to bailing out failing businesses. Banks often fulfill the role of overseer, monitoring
the activities of the firms they lend money to. But in the case of the state-owned banks,
this role is compromised. (Firth, Lin and Wong)
As a condition of ascending to the WTO, China had to open its banking industry to
foreign competition. Beginning in 2003, in preparation for this new competition,
China has been improving the competitiveness of its banking industry. The
performance has improved a great deal but still has a number of problems. (Dobson
and Kashyap) Unemployment is a serious concern of the Chinese government.
Demand for more jobs comes from China’s 260 Million Migrant Workers (Song), as
well as workers downsized from recently privatized or restructured SOEs. (Dobson

25. 25
and Kashyap) Between 1993 and 1997 about 10 million SOE workers were made
redundant. In 1997, the 15th National Congress of the Chinese Communist Party
pledged to lay off an additional 4.3 million SOE employees. (Chen, 1999) Concerns
about unemployment hamper the government’s reform efforts with both SOEs and the
banks which provide funding to the SOEs allowing them to keep employment
numbers high.
Research has shown that both foreign ownership and private ownership improve the
performance of banks after privatization. (Lin and Zhang) A s6tudny conducted in
2006 showed that China’s big four state banks underperformed foreign join-equity
banks and banks capitalized by foreign funds. (Lin and Zhang)
Public sector banks have performed poorly compared to private sector banks if
Measured by nonperforming loans and return on assets. “Public sector banks have
also demonstrated a poor collection record with their borrowers, especially in bad
economic times, and thus tend simply to "roll over" their loans.” (Caprio et al.)
Rather than pushing for privatization of banks the Chinese central government has left
the state ownership structure in place but taken a more hands-off approach to bank
operations, allowing the banks to function more like a corporation. As a result the
performance of state-owned banks has increased tremendously in the last five years
with the percentage of non-performing loans dropping significantly. (Caprio et al.)
16. Corruption in SOEs
In accordance with the anti-corruption campaign under President Xi Jinping, within
the first 10 months after the 18th Party Congress nearly 80 senior SOE executives
were investigated by the Disciplinary Commission of the Central Party Committee.
(Fu) President Xi’s anti-corruption campaign is considered to be the most impactful
such campaign in PRC history. In total, more than 100 top SOE executives would be
detained. Some of the SOEs whose executives were named include PetroChina, China
Southern Airlines, China Resources, FAW and Sinopec. (Anderlini) Many of the
private sector firms included retired senior government officials on their boards,
which created opportunities for bribery and other forms of misconduct. Over 40,700
officials have resigned, in order to avoid being implicated, or have been removed
from SOEs. (Yibing)
In a larger organization, such as an SOE, a government agency, acting as owner, may
sit atop a pyramid shaped hierarchical structure. Below the owner is a manager who
may have some decision making authority in order to carry out the daily operations of
the company, without involving the owner. According to agency theory, an owner can
allow a manager more and more authority, to allow the business to run efficiently,
until the manager has so much authority that he begins acting in his own, and not the
owner’s best interest. At that point, the owner would step in and take control away

26. 26
from the manager. A fundamental problem facing an SOE, however, is that there is no
physical owner. (Fan, Wong and Zhang) This departure from the standard agency
model may help to explain two points; first, why there is so much corruption in SOEs
and second, why SOEs often fail to perform financially.
This is not to suggest that government has no control over the SOEs. Obviously in the
case of direct SOEs they can fire a manager. In the case of corporatized SOEs they
can exercise voting rights and restructure the management. (Fan, Wong and Zhang) It
is more a question of motivation and volition. A faceless state-owner would be less
likely to step in and protect its rights as owner than would a private individual or
board.
17. Stock Market Listing
The Shanghai Stock Exchange (SSE) was founded on November 26th, 1990
(Krishnamoorthy) SSE opened with 8 companies listed. The Shenzhen Stock
Exchange (SZSE) followed shortly after. A mere decade later, the two exchanges had
1,088 firms listed. (Wang, Xu and Zhu)
Prior to the 1990s, State-owned enterprises (SOEs) were wholly owned by the
Chinese government. After that, as part of the “grasp the large and let go of the small’’
strategy (O’Connor, Chow and Wu) the government began listing and selling off some
of the smaller SOEs. (Ralston et al.) Some of the larger SOEs were corporatized, and
turned into shareholding companies. (Wang, Xu and Zhu) Once listed, depending on
share class, the shares could be bought by virtually anyone, from SOEs to private
individuals or other privately held companies. (O’Connor, Chow and Wu)
As the economy increased in both size and liberalization, the stock market became a
more and more important source of funds for companies wishing to expand or take on
large projects. As a result, more accounting transparency was needed, as this was a
requirement for listing on an exchange. And so, more western accounting and
management practices were adopted. (O’Connor, Chow and Wu)
Listing on a stock exchange is one of the methods of privatizing SOEs, as shares will
be sold to private citizens and companies, which will become the new owners. After
initial public offering (IPO) state-owned firms often underperform, but one reason
why this might be true is because pre IPO they inflated their profitability to appear
more desirable. (Wang, Xu and Zhu)
Most IPOs in developed countries occur when a privately held company becomes
large enough to go public. But in China, most IPOs are of state-owned companies
moving toward privatization. But the resulting company will have a mix of state and
non state shareholders. In neither the SOE or the publicly traded corporation is the
owner a manager. Before the IPO the owner is the state. After the IPO the owners

27. 27
become the shareholders, which may or may not be the state or organizations
controlled by the state. Either way, a management structure is hired, and put in place
to operate the company in the stead of the owners. In this instance, the agency model
applies.
Generally, privatization through the sale of shares should decrease state control of a
company. But, in the case of China, as shares could be owned by the state and legal
persons, controlled by the state, the state remains, effectively, the majority
shareholder of most listed firms. (Wang, Xu and Zhu) Shleifer and Vishny (1994)
have found that the interference of government shareholders in joint stock companies
is often at the expense of profitability because many of their decisions are motivated
by political gain or cronyism. This is one reason why Chinese SOEs generally
demonstrate higher profitability after listing. (Tian and Estrin) Many of the listed
SOEs are now profitable and their management and accounting standards are similar
to those of western companies but the government still exerts a lot of control over
them. (Tian and Estrin)
Chinese SOEs going public creates additional agency problems. Once a company
goes public the shareholders become the owners and are thus entitled to a share of the
profits. The agent is still the management team, who, according to agency theory, will
eventually work in their own interest, possibly to the detriment of the owners, if the
owner doesn’t step in and protect his interests. (Gibbons) When the state was the sole
owner, the motivation for the state to step in was higher than it is in the diluted
ownership of a publicly traded SOE. By the same token, the private shareholders, as
minority owners, may fail to exercise their rights to step in and control the agent.
Theoretically, the conflict between agent an owner can increase after an IPO and
result in lower performance. (Wang, Xu and Zhu) In the case of Chinese state-owned
enterprises going public, it is not hard to imagine this conflict arising. As there is a
mix of state and public shareholders, the state may still retain significant control
through majority voting rights.
Under the old system, SOEs were not used to having to contend with such factors as
investor demands, public access to corporate information, disclosure, competition for
capital, or even competition. O’Connor, Chow and Wu found that the degree to which
SOEs used western accounting methods decreased as government control increased.
Research has also found that even partial privatization, whereby the public is
permitted to purchase some percentage of shares, even if the state remains the
majority shareholder, has a positive effect on SOEs. The stock market fulfills a
monitoring role, overseeing the corporate governance of the listed firms. Also, the
market rewards well-performing companies through increased share prices, which can
translate into increased wealth for the stakeholders, including management.
(Aivazian, Ge and Qiu)
All stock market listings of Chinese companies have to be approved by The China

28. 28
Securities Regulatory Commission (CSRC), which seems to favor SOEs for listing,
over POEs. In fact, as recently as 2007, 80% of listed companies were SOEs.
(Mattlin)
The State Planning Commission regulates the listing of PRC companies on the
Shanghai and Shenzhen, as well as the Stock Exchange of Hong Kong (SEHK) and
international exchanges, and limits the number of shares issued. The two share classes
include A-Shares, denoted in RMB and only sold to domestic investors, and B-Shares,
denoted in US or Hong Kong Dollars, and sold to foreign investors. Some A-Share
firms are also permitted to issue B-Shares. H-Shares are those listed on the SEHK and
N-Shares are listed on the New York Stock Exchange. Many of the H-Share firms
listed on the SEHK are also listed as A-Shares in the PRC, but are not permitted to
issue B-Shares. A-Share firms are required to comply with PRC GAAP, but B-Shares
with the IASC. NYSE and SEHK listed firms must comply with the prevailing
accounting standards. (Ferguson, Lam and Lee)
18. Domestic Listing
PRC firms listed on the Shanghai and Shenzhen Exchanges tend to disclose very little
information beyond what is required by law. There are a number of theories why this
is true. One suggests that the firms lack the sophistication and experience with
financial reporting, as the first PRC accounting standards were only introduced in
1992. (Ferguson, Lam and Lee ) Another theory says companies fear giving away too
much information to competitors or to the tax authorities.
Publicly traded companies in China issue two classes of shares; A-Shares,
denominated in RMB and only sold to domestic investors, and B-Shares, also
detonated in RMB, but sold to foreign investors. H-Shares are sold in Hong Kong and
N –Shares in the US. (Wang, Xu and Zhu)
There are five types of share ownership: state-owned, legal person or institutional,
employee-owned, individual-owned, and foreign owned. State and institutionally
owned shares cannot be sold on the stock exchange. Their sale requires the permission
of the China Securities Regulatory Commission (CSRC). “State shares are held by
government bodies such as state asset management agencies, or …wholly state-owned
investment companyies” Legal persons can include SOEs or companies controlled by
SOEs. (Wang, Xu and Zhu) Non-government shareholders can include “another
domestic industrial company; b) investment fund, securities companies and other
investment firms; c) foreign investors; d) family or individual investors.” (Tian and
Estrin)
Profit is one of the metrics for delisting. But since the establishment of the Chinese
stock market until 2002, although a number of firms should have qualified for
delisting based on profits, only six companies had been delisted. Many of the

29. 29
loss-making SOEs that should have been delisted have been protected by the
government. (Hong Tan and Wang) This government protection of listed firms seems
like a violation of a market economy and more in line with the old style command
economy.
19. Hong Kong Listing
The Stock Exchange of Hong Kong SEHK is the source of much of PRC firm’s
foreign capital investment. (Ferguson, Lam and Lee) SOEs may issue H-shares on the
SEHK to raise cash to support welfare and pensions. (McGuinness and Ferguson)
Lack of management experience, corruption, over employment and over
compensation, government interference, and lack of disclosure have all been cited as
concerns of potential H-Share investors. “In addition to H-Share firms’ lack of prior
history, important investor concerns include management quality, the potential for
asset stripping or misappropriation, de-capitalization through excessive wage
increases, and the role of the government as a major shareholder.” (Ferguson, Lam
and Lee)
In order to list in Hong Kong Chinese SOEs have to meet certain voluntary disclosure
requirements. Disclosing information is not something the SOEs are used to, but they
do it in order to get financing. The cost of disclosure could be increased political or
competitive pressure. Lack of disclosure is often attributed to firm management
worrying that too much disclosure could leave the firm vulnerable to competitors or
regulators. The benefit to complying with the disclosure requirements however will be
greater access to capital and more international exposure for the company. In the case
of H-Share firms, since they operate in industries of strategic importance to the PRC
government, they are less vulnerable to competition. One theory suggests that the
PRC government carefully selects the firms that will list internationally as a way of
showcasing the success of the Chinese economic system. In this way, firm disclosure
becomes a kind of PR for the country. (Ferguson, Lam and Lee)
Red Chips are PRC companies incorporated internationally and listed on the SEHK.
(Chinadaily.com.cn) In order to maintain their listing, Red Chips are expected to
fulfill SEHK disclosure requirements. (Chinadaily.com.cn) Currently, “Red chip
companies are generally not allowed to trade on the Chinese A-share market on the
Shanghai Stock Exchange or the Shenzhen Stock Exchange.” (Chinadaily.com.cn)
According to the rules of the SEHK, non-Red Chip, PRC firms may sell H-Shares.
Red Chips, however, are incorporated in Hong Kong, although they are largely
controlled by PRC state shareholders. They often have significant business interest in
Hong Kong, functioning as subsidiaries of PRC firms and are frequently unaffected
by government reforms in the PRC. They are also barred from listing on the PRC
domestic exchanges. (Ferguson, Lam and Lee)

30. 30
20. Overseas listing
There are numerous reasons why high profile Chinese companies, such as Baidu and
Sina chose to list overseas. First some companies working in technology or other
sensitive sectors may not be eligible to list in China. So, they restructure their
companies, using a variable interest entity (VIE) structure. (Fong) First a Wholly
Foreign-Owned Enterprise (WFOE) is established in China, which then contracts with
the VIE, which invests in the restricted sector. (Millman) Other companies list
overseas because they don’t meet China’s financial requirements. Some find the
listing procedure time consuming and poorly defined. Finally, firms may list overseas
in order to avoid having the Chinese regulatory agencies overly-involved in the
operations of the company. (Fong)
Additional political and economic factors also motivate companies to list overseas.
The "going out" strategy of the Chinese government encourages the largest SOEs to
list on overseas stock exchange. (News.xinhuanet.com) Among the economic
motivations for Chinese SOEs to list overseas are: to find funding, support growth,
and expand product markets. The political reasons include: circumventing
government regulations, to showcase China’s economic power, and “to implement
national economic objectives by grooming a selected group of firms for global
competition.” (Hung, Wong and Zhang)
Overseas listing provides the firms several other advantages as well, such as meeting
the disclosure and corporate governance requirements of overseas stock exchanges
will result in “higher board professionalism, better accounting disclosure, and greater
investment efficiency for these firms.” (Hung, Wong and Zhang) This concept is
known as the bonding hypothesis, basically that corporate efficiency and performance
will improve when a company lists overseas, particularly in the US, because the
company will be forced to comply with US listing regulations. (King and Segal)
The Chinese government strictly controls the number of firms that can list, either in
China or overseas, and listing requires a number of government approvals. (Hung,
Wong and Zhang)
21. Government Control of Stock Markets
While the Chinese government has given up apparent control of many former SOEs,
by selling shares to the public, in cases where they still retain 51% their degree of
control may not be reduced at all. In China, it appears that minority shareholders do
not take a unified stand against the decisions or influence taken by the majority
shareholder. (Tian and Estrin)
As recently as 2002 the PRC government owned an average of 45 percent of shares
on the market. Since government shares can’t be sold, this reduces the liquidity of the

31. 31
entire stock market. (Hong Tan and Wang) Hostile corporate takeovers don’t really
happen in China because most of the shares are non-tradable. As a result, acquisitions
are negotiated. (Hong Tan and Wang)
Some investors wish to capitalize on China’s tremendous growth, but also want to
avoid companies that are controlled by the government. Investment funds are one way
that investors have found to achieve these two goals. WisdomTree China would be an
example of one such fund. WisdomTree China is an ex-State-Owned Enterprises Fund
(CXSE) which allows investors to invest in a wide array of PRC stocks, excluding
SOEs. (Yahoo Finance) WisdomTree’s CXSE allows investors to invest in China’s
dynamic POE sector, avoiding government owned companies which they feel are
influenced by goals other than maximizing profits. (Yahoo Finance)
WisdomTree CXSE is a way of owning PRC stocks without owning the government
run companies. (Greenberg) The state is an owner in almost all Chinese companies
which have been listed. So, even with WisdomTree it is difficult to completely avoid
government ownership. To qualify for inclusion in WisdomTree a company must
have less than 20% government ownership. Because WisdomTree doesn’t invest in
companies with large percentage of state ownership, the fund tends not to invest in
banks or energy stocks, two industries almost completely dominated by the
government. Instead, the fund includes a lot of technology firms, internet firms like
Alibab, Baidu, JD.com and Ctrip.com, and US firms listed in China. (Greenberg)
22. Outbound Investment by SOEs
One of the reasons for Chinese SOEs to expand overseas is to make them larger and
less of a target for liquidation under China’s policy of cutting the smallest SOEs.
(Fu)
To compete in the global economy, the Chinese government has adopted a “going out”
strategy investing in foreign countries. (Song, Yang and Zhang) Much of China’s
overseas investment is carried out by SOEs. “By the end of 2009, China’s 108 central
government-owned SOEs had invested in 5901 foreign firms,” accounting for nearly
38% of total profits for SOEs (SOASAC, 2010, cited in Song, Yang and Zhang) Many
of these acquisitions are in the fields of minerals and energy to guarantee China’s
access to raw materials. (Song, Yang and Zhang) Chinese SOEs dominate certain
global sectors. In fact, the international raw material sector is dominated by China,
purchasing commodities used for the production, which fuels China’s economy. The
SOEs are in a better position to invest abroad than are privately owned firms, as the
SOEs have better access to bank loans. (Song, Yang and Zhang)
Through mergers and acquisitions, some Chinese SOEs are the largest companies in
their sector, in the world. However, their names remain virtually unknown outside of
China. The Chinese companies with global recognition are all POEs. And they include

32. 32
Alibaba, Tencent, Baidu and Xiaomi, all of which are too small to make the Fortune
Global 500 list. (Cendrowski) Chinese some Chinese SOEs have grown so large that
they are now purchasing companies in foreign countries. For example, state-owned oil
company CNOOC Ltd., the world’s largest energy explorer, took over the Canadian
firm Nexen. In 2012, China was rated by UNCTAD as one of the top twelve outbound
investors in the world. (Dobson)
Chinese outbound investment includes construction projects in the USA. “China
Construction America, Inc. (CCA) is a wholly owned U.S. subsidiary of China State
Construction Engineering Corporation Limited (CSCEC)…listed on the Shanghai
Stock Exchange.” (U.S.-China Economic and Security Review Commission) SASAC
is the primary owner of CSCEC. In 2009, when the company went publicly, it was the
largest IPO in the world. (U.S.-China Economic and Security Review Commission)
China’s SOEs, whether on an outbound or inbound basis, are involved with countries
in both the developing and developed world. For example, 400 Canadian businesses
currently operate in China, making China Canada's second-largest export market.
Some Canadian companies have entered into joint ventures with Chinese SOEs. Once
such company is Bombardier, the Quebec-based aerospace and rail transportation firm.
(Tradecommissioner.gc.ca)
Chinese outbound investment can be found everywhere and in every sector. Chinese
SOEs even invest in energy projects in Africa. (Tan-Mullins) Some African energy
projects include The Gibe III dam in Ethiopia, Kajbar dam in Sudan, and the $729
million Bui project in Ghana. (Hackley and Westhuizen)
The PRC government is considering investing in renewable energy geothermal energy,
and infrastructure in Wes Sumatra, Indonesia, where other Chinese firms are already
working on microhydro power plants (PLTMH), road infrastructure and agribusiness.
Additional Chinese companies have invested in energy, agriculture and tourism. (The
Jakarta Post) In 2015, after the US Iran nuclear deal lifted sanctions, Sinopec Group,
parent of Sinopec Corp and China National Petroleum Corp was read to start
producing at the Yadavaran oilfield. (Aizhu)
So far, this paper has demonstrated that historically, the SOEs were large, inefficiently
run enterprises, which operated in a domestic market where they often had a
monopoly. Risk analysis wasn’t something they had to worry about as they often
enjoyed a monopoly advantage. The lack of competition also meant they didn’t have
to focus too much on advertising or marketing. The lack of competition meant they
didn’t have to be concerned with advertising or marketing. They were given
preferential access to raw materials and when all else failed, and it frequently did,
they simply obtained direct aid from the government or preferential loans, which they
weren’t expected to pay back. Expanding into foreign markets has been a bumpy ride
for Chinese SOEs.

33. 33
The PRC’s aggressive outbound investment strategy has been met with some
resistance. China has been repeatedly criticized for “buying up the world.” Developed
countries which are receiving large amounts of Chinese SOE outbound investments
often raise security concerns related to having a foreign government controlling
domestic assets. (Dobson)
Once the SOEs left the comfort and privilege of their home market, they faced
challenges and obstacles they were ill prepared for. This resulted in a number of
their overseas investments failing. For example, 12 of the highest profile overseas
investments by Chinese Investment Corporation (CIC), China’s largest sovereign
wealth fund reported losses. (Yibing) It is clear that Chinese outbound firms are
facing a steep learning curve as far as complying with international trade rules and
regulations. (Dobson) Disclosure and due diligence seem to be two areas where
Chinese companies have opinions which differ from western industry norms.
State secrecy laws sometimes prevent disclosure and due diligence, as well as impede
fair competition for foreign companies against SOEs. One example would be the Rio
Tinto case where Australian steel executives were charged with espionage, bribery
and stealing state secrets. The steel industry is one of the key industries which the
Chinese government closely guards and they felt that stealing secret information in
that sector undermined national security. (Areddy) In the Rio Tinto case, the charges
of bribery were eventually accepted by the company, and the employees were fired. It
remains unclear whether bribery or simple due diligence was the actual reason for the
case being brought in the first place. Either way, Rio Tinto stands as a cautionary tale
about how difficult it can be in China to obtain or to disclose company data.
China maintains a strict battery of laws against unfair competition, secrecy, and
bribery, but in the case of SOEs, many outsiders feel the enforcement is selective.
“China’s Criminal Law and Anti-Unfair Competition Law are the basis for the state’s
corruption and bribery legal regime.” (Silk and Ashley) These laws, in part, involve
state secrets and make it illegal to attempt to get an “improper benefit” A company
who holds classified commercial data would be considered to have an “improper
benefit.” The normal disclosure and due diligence related to listing can result in state
secrets, data from SOEs, being leaked. PRC companies listing abroad, for example in
the US, may be forced to violate state secrets laws in order to comply with US listing
requirements. This may hamper the ability of a PRC firm to expand into the US. (Silk
and Ashley)
Despite bumps in the road, failings, and setbacks, China SOEs are some of the top
outbound investors in the world. In China, the SOEs account for 69% of outbound
stock investments. In 2013, The Industrial and Commercial Bank of China (ICBC)
and China Construction Bank, which were numbers one and two on the Forbes Global
2000. In 2012 alone, according to The China Entrepreneur Research Institute Chinese
companies expanded into 117 countries. (Dobson)

34. 34
23. Conclusion
This paper has given a brief history and overview of the SOEs, of both, their problems
and strengths. It has also looked at POEs, MNCs, bank, and other types of companies
which operate in the Chinese economy. The findings are that SOEs, on average, have
lower employee turnover, but also lower return on assets than POEs. The problems
inherent in the SOEs include corruption, over capacity employment, non-performing
loans, political constraints and unprofitability. The strengths of the POEs, however,
are preferential access to artificially low-priced raw materials, easy credit availability,
monopoly and sector protection, and sheer size. While the number of SOEs in China
have decreased, as have their employee numbers, the SOEs are still a driving force,
accounting for a significant percentage of Chinese total GDP and making up the bulk
of China’s stock exchange listed firms. SOEs are also an incredibly powerful vehicle
which China can employ to expand into foreign countries, and secure raw materials,
energy, and foreign markets. For all of their problems of low return on assets and high
government intervention, the modern, corporatized SOEs are some of the largest firms
in the world. And this trend, if China’s SOEs growing in size and importance, both at
home and globally seems to be the trend of the future.
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