Industry

The measures of the reform policy raised industrial output by 50 times between 1978 and today (Naughton 2018: 333). At the same time, fundamental structural and institutional changes took place which transformed the state planning system with its focus on heavy industries to a flexible, modern and highly diversified industry in a market economy. Yet still, large SOEs account for 23% of enterprise revenues, in contrast to 34% in the private sector and 22% among foreign-owned enterprises (Naughton 2018: 333). Also in international dimension, some Chinese SOEs belong to the world’s largest firms. The world's largest controlling shareholder is the Chinese State-Owned Assets Supervision and Administration Commission of the State Council (SASAC, Guowuyuan Guoyou Zichan Jiandu Guanli Weiyuanhui 国务院国有资产监督管理委员会). Yet most of the large SOEs depend on protected domestic markets and have a negligible share on the world market.

Regarding private business (mingying 民营), there is no enterprise playing a leading role domestically and in the international sphere, mostly because of domestic restrictions, and also because the economic miracle of China goes back to the activities of small-scale private or communal enterprises ("microenterprises"). The high tide of private business was around 1998, when 43% of the industrial output was produced by small private enterprises (Naughton 2018: 336). Yet in 2013, there were more than 2 million small-scale industrial enterprises employing 42 million people, corresponding to 30% of the industrial workforce (Naughton 2018: 336-337). Small-scale private business (getihu 个体户) has reached by 2015 an urban employment quote of 28% (Naughton 2018: 339).

According to other figures (referring to fully and partially state-owned enterprises), in 2014 the state enterprise sector comprised 159,000 enterprises with 39 million employees, 107,000 of which owned by local governments (20 mio. employees), 38,000 by the SASAC (13 mio. employees), and 12,000 by various ministries (5.5 mio. employees) (Naughton 2018: 349). The number of workers in SOEs declined from 46 million in 1992 to 18 million in 2007 and has remained constant since (Naughton 2018: 354).

Particularly during the 1990s, the size of the state sector was dramatically downsized, from 120,000 around 1995 to 34,000 (fully state-owned) in 2003 (Naughton 2018: 344).

The term minying "operated by the people (not the government)" refers to management forms, and not necessarily ownership structures.

During the 1980, the high-tech sector was characterized by various hybrid models of ownership which contributed to growth and innovation. One type was managerial ownership in a spin-off from bureaucratic state organizations, another one divided (but mostly private, and also foreign) ownership of enterprises, many of which are listed on the stock markets, and a third one mixed ownership in enterprises embedded in (licensed) manufacturing. Mixed ownership is widespread, particularly in competitive market sectors.

The most famous example for spin-offs is the computer producer Legend 联想 (since 2002 Lenovo), originally owned by the Institute of Computing Technology (Jisuan Jishu Yanjiusuo 计算技术研究所) of the Chinese Academy of Sciences (CAS, Zhongguo Kexuan Yuan 中国科学院). Today, the institution holds one-third stake, the firm 36% (Naughton 2018: 338). Other examples for hybrid ownership are technology firms like TCL, Founder (Fangzheng 方正科技), ZTE (Zhongxing 中兴), China Datang (大唐) and SMIC (Zhongxin 中芯), or the water producer Wahaha 娃哈哈.

Fully private enterprises are at a rate of 85% family business (Naughton 2018: 339). This is due to traditional business patterns in China and among Chinese overseas. Very typical for this type of business is diversification and networking. Managers or owners do not only have to establish good relationship with the local government, but also to the CPC. About one third of owners are Party members (Naughton 2018: 339), in order to have better access to credit and perhaps reliable ties in case of law suits. For small private firms, access to credit is restricted to such an extent that they raise 90% of their finance internally, and only 4% from banks. About half of all enterprises are sole proprietorships, and 40% types of partnership. Moreover, only 5% of small private firms had the status of limited liability (youxian gongsi 有限公司) (Naughton 2018: 340-341).

There are mainly two reasons why the Chinese government retains public-owned enterprises (even if these are managed like private firms), namely the control over resources provided to the public, and the earning of revenue. Apart from these two points, there might be the need to ensure employment (until the mid-1990s), investment in huge projects or technological experiments, or the distribution of investment, in one word, the need to interfere into the market where either imbalances occur, or where the private market is not interested to invest (because of cost or missing return-on-investment). State-owned firms are faced with the "magic triangle" of managing at the same time the targets of economic efficiency, cutting down corruptions, and pursuing public interest.

In order to increase the performance of SOE, a series of decisive measures were taken, like incentives for profitability managers (annual profit with target, return on equity or increase in assets, specific targets), hard budgets, dismissal of surplus employees.

The strategy of the SASAC was to improve corporate governance in SOEs and to retain state ownership in sectors allowing justification for this type of ownership. Corporate governance includes a board of directors with decisive authority and outside members. Transparency would be achieved by the prerequisite of a "total" listing including all corporate assets. Even if the SASAC was in nominal control of SOEs, the largest of them wield great autonomy. The institution claims dividends of between 5 and 20 per cent from profitable enterprises (Naughton 2018: 351).

In 2015, the SASAC created state capital investment and operations companies (guoyou ziben touzi, yunying gongsi 国有资本投资、运营公司, SCIO) which were aimed at either maximizing profit or at balancing a mixture of objectives. The outcome of the increased control of SOE management by the SASAC is still not clear.

Even if private firms have no access to fields defined as "state zones", the government tries to prevent monopolistic structures by allowing two or three SOEs to compete with each other in their sectors. State enterprises retain control over the sectors military industry, electricity, oil, coal, telecommunications, civil aviation, and transport. The SASAC urged large enterprises to spin off fields not belonging to their core business. Yet the organization was never able to formulate clear principles about which sectors SOEs should occupy or leave. This uncertainty leads to distortion in many business sectors where SOEs have competitive advantages against private enterprises. In spite of the recommendation to cut back diversification, most SOEs are organized in large and widely diversified conglomerates in huge pyramids. Also, the principle of competition between SOEs as adhered to in the 1990s is often neglected when state enterprises with similar business fields carry out mergers.

In 1994 (rev. 2005, 2013), the government issued the Company Law providing a legal framework for corporations and ownership systems. Managers of SOEs were free to decide whether their enterprise would be running under the old State Enterprise Law or under the new corporate law, according to which the state was the main shareholder and had a high interest in control. In the course of time, all SOEs would have to transform into "modern" shareholding companies or at least such with limited liability. The Company Law also provides rules for mixed ownership and allowed SOEs to list on the stock markets. By now, two thirds of all SOEs are corporatized (Naughton 2018: 346).

Some large SOEs, like China's largest oil corporations, are even listed on international stock markets like New York and Hong Kong, and foreign oil companies own shares of them.

In the course of privatization, non-profitable sections of large SOEs were transformed into so-called "left behind" or "remainder" enterprises (cunxu qiye 存续企业) which are kept alive by the parent company. After the radical reform of the SOWs in the mid-1990s, profitability of the remaining SOEs rose considerably and today makes out 14% of GDP (Naughton 2018: 352). Investment of SOEs was made easier by their comfortable access to bank credit, in contrast to many private companies who face difficulties of obtaining credit from public banks.

During the Asian Financial Crisis in 1997, many SOEs went bankrupt, a circumstance which made the year a watershed in the elimination of less well performing state firms from the market. The Global Financial Crisis 2008 had an impact on SOE profitability in general, mainly because the state ordered them to invest in projects which helped to alleviate the slowdown of the economy. Yet state firms never recovered after that date, and the rate of return has declined constantly since. The economic slowdown in the private sector set in around 2011.

The performance of Chinese enterprises was rated by the World Bank Group. China performed well in the fields of contract enforcement, property registry, availability of credit, and insolvency procedures, but less well in the fields of starting a business, taxes, protection of minority investors, and permits for constructions.