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Red Flag Manuscript: State-Owned Enterprises (SOEs) Are the Bellwether for the Rise of the Economy

[Editor’s Note: The U.S.-China Economic and Security Review Commission was mandated in the year 2000 to report to Congress annually on the security implications of trade with the People’s Republic of China. It recently published its 2012 report, "An Analysis of Chinese Investments in the U.S. Economy." [1] Bill Gertz discussed some of the report’s conclusions in an article he wrote for the Washington Free Beacon, "Congressional Report: Chinese government-controlled enterprises threaten U.S., world economy." Gertz summarized from the

report, "The Chinese system of state capitalism or ‘capitalism with Chinese characteristics’ has blocked many of the potential benefits of a free market, not only in China, but among China’s trading partners," "The state-owned sector in China can undercut prices charged by privately held competitors globally due to a variety of subsidies granted by the Chinese government: low-interest-rate loans; below-market-rate land, fuel, and electricity; special exemptions from environmental and labor regulations; tax abatements and preferences." [2]

Recently, the Chinese Communist Party (CCP) agreed that having the backing of state funding and favorable government policies gives China’s SOEs a huge economic advantage. Hu Angang, Director of the Center for China Studies, Tsinghua University, wrote an article on for Red Flag Manuscript, a publication of the Central Committee of the CCP in which he argued that, although China’s SOEs are a form of enterprise and compete in the global market, they differ greatly from Western enterprises in that they are state-owned and under the leadership of the CCP. China’s SOEs have the advantage of being backed by state-owned capital and, as such, have the ability to generate strong competition to rival the world’s top 500 enterprises. They should be the leading force for China’s "going abroad" strategy. The following are translated excerpts from the article.] [3]

1. The Glorious Decade of SOEs


2. The Characteristics of SOEs

One can understand the SOEs, especially the central enterprises, from the following attributes.

A. SOEs Are Modern Enterprises

Through creating a modern enterprise system, SOEs have established and perfected their company structure to meet the requirements of large-scale socialized production (in which people work together instead of individually) and the market. They have thus formed an efficient and flexible operating model. They show that Chinese enterprises have a lot of things in common with Western modern enterprises; they both fully absorb and fully use modern enterprises’ competitive mechanisms and competitive advantages. Along with the deepening of SOE’s reformed stock system, modern enterprises have become better structured. The SOEs have positioned themselves better in the economy. They have become the main business entity in the market economy and conduct their business activities based on market principles and under a legal framework.

B. SOEs Are Socialist Enterprises

We need to fully realize that the SOEs are not only modern enterprises, but also socialist enterprises. China’s SOEs fully embody the socialist national advantage, political advantage, and organizational advantage, which is their biggest difference from capitalist enterprises.

From the ownership perspective, China’s SOEs belong to the state instead of to individuals. With the advantage of being backed up by state-owned capital, they can quickly generate enough competitive power to rival the world’s top 500 enterprises. This is why the developing countries in Asia, Africa, and Latin America are very envious of China’s SOEs. With the deep pockets of state-owned capital, China’s SOEs can not only compete with the world’s top 500 enterprises in China, but can also “go out” to compete with them in the international marketplace. This explains why the Western countries, especially the government and media of the United States, always denigrate and attack China’s SOEs.

From the social perspective, China’s SOEs are more like “social enterprises.” Compared to enterprises of other types of ownership, China’s SOEs carry more national and social responsibilities. On the one hand, they implement China’s major development strategies. On the other hand, they are important forces in coordinating development within regions so as to improve people’s living standards and promote social harmony. Economists call this “externalities.” The former role is to provide “national externalities,” or contributions to the country; the latter role is to provide the “local externalities,” or contributions to local areas. This also explains why all levels of government need not only to guide the SOEs, that is, to guide the developmental direction for the SOEs in national and local developmental planning, but also to support SOEs, for example, to support the development of SOEs in certain fields through industry policy and innovation policy. The governments also need to help SOEs when they encounter difficulties in order to avoid large-scale layoffs and economic recession. These are the national and local advantages of SOEs.

From the organizational perspective, China’s SOEs are under the leadership of the Chinese Communist Party, not some group or individuals. The Party organizations within these enterprises play the core political role. This is a major feature, and also a major political advantage, of China’s SOEs. Unlike the shareholder corporate governance structure in the Western countries, China’s state-owned holding companies are not only controlled by the shareholders, board of directors, and board of supervisors, but also by the Party committee, the labor union (which is under the control of the Party), and the employees’ congress (also under the control of the Party).

The SOEs are under a “(one owner) dual control” model. The Party committee’s leaders and employees’ representatives hold seats on the board of directors and board of supervisors. [Editor’s note: In reality, the Party committee members really control the SOEs. The employees’ representatives usually do not have much influence.] Similarly, the chairman of the board of directors, the chairman of the board of supervisors, and the Chief Executive Officer (CEO) hold positions on the Party committee. This decision-making mechanism is more like a “collective CEO” model, which solves the problem of a giant company’s future and destiny being determined by one or two people so that one or a few people make the company either succeed or fail.

Therefore, the “collective CEO” not only guarantees that the company can make a unified decision on major issues, but it also ensures the decision-making process is collective, democratic, and scientific. It not only guarantees the achievement of the company’s own objectives, but also ensures that the enterprise will implement and fulfill the principles and policies of the Party and the nation. This is the SOE’s unique political superiority and decision-making superiority.

Therefore, a socialist enterprise has at least the following characteristics or advantages: the first one is the state-owned capital advantage; the second one is the state support advantage; and the third one is the political advantage, or the core role that the Party organization plays. The nation needs to deliberately create external advantages for the SOEs by investing in, guiding, supporting, and helping them. The SOEs should make full use of the external advantages, strengthen the internal advantages, and transform these several advantages into domestic and international competitive power.

C. SOEs Are Socialist Multinational or Global Enterprises

Multinational or “global” enterprises refer to those businesses that conduct business operations including procurement, manufacturing, and sales globally, compete globally, manage globally, and receive revenue and profit globally. The key to determining whether an enterprise is a global enterprise or not is the percentage of its overseas income as compared to its total income. If this ratio exceeds 50 percent, the company is a typical global enterprise. Although currently, many of our SOEs have a limited overseas market, transnational business has become one of the effective ways for them to grow.

China’s rapid rise benefited from China’s successfully taking advantage of its domestic and international situations, flexibly allocating and utilizing domestic and international resources, and actively developing domestic and international markets. China is not only the birthplace of the world’s emerging top 500 enterprises, but also the emerging destination market for the world’s top 500 companies. As of 2011, about 490 of the world’s top 500 enterprises had invested in China. The number of Research and Development (R & D) centers and regional headquarters that multinational enterprises have established in China has reached more than 1,600. In recent years, at the same time that China has been vigorously implementing its “bringing in” policy, it has also actively carried out a “going abroad” strategy. China-funded enterprises are increasingly becoming an important new force in global investment. By the end of 2011, China’s cumulative direct investment in foreign countries was more than $380 billion; the number of Chinese enterprises in foreign countries reached more than 18,000, in 178 countries and regions around the world. Their overseas assets amounted to nearly $1.6 trillion.

3. Positioning SOEs

What kind of large enterprises do we want to develop our SOEs, especially the Central enterprises, into? How can the SOEs achieve leapfrog progress in development? The former question is about setting the goal, while the latter one is about developing the strategy and approach.

Based on the understanding of SOEs, the strategic positioning for the SOEs, especially the Central enterprises, should be: from the industry perspective, the SOEs are the leaders and the vanguards of their industries; from the regional and industry perspective, the SOEs are the important force in promoting regional economic development and reducing the regional development gap; domestically, SOEs are an important component of the state-owned economy and a strategic pillar of the national economy; and overseas, the SOEs, especially the Central enterprises, compete with the Western multinational companies to break their long-term monopoly on the world economy and industrial system. They also cooperate with multinational companies and are the main force, the aircraft carriers and the fighter jets, behind China’s “going abroad” strategy.

In terms of future development, the positioning of the SOEs, especially the Central enterprises, should be: “world-class, with Chinese characteristics, and well-known brand.” This is the objective need of China’s development and also the development need of China’s SOEs. We suggest taking it as a national strategy, even as China’s core strategy for improving its international competitive power. If the enterprises are prosperous, the nation will be prosperous. If the enterprises are powerful, the nation will be powerful. The essence of enterprises’ prosperity is the prosperity of SOEs and Central enterprises. From the global perspective, if China’s enterprises are prosperous, the South (referring to the developing countries in the world) will be prosperous. If China’s enterprises are powerful, the South will be powerful. (China’s SOEs development) bears great world significance for the rise of the developing countries.

If we want to reach a consensus in this area, we need to figure out three core issues: What is a world-class enterprise? What is “with Chinese characteristics?” What is a well-known brand?

First, about “world-class enterprises.” If an enterprises meets the following three conditions, it can be called as a “world-class enterprise:” 1) ranked in the world’s top 500 enterprises or its main business indicators and performance have reached the level of the world’s top 500 enterprises; 2) ranked in the world’s top 10 in the industry it is in, which is in line with the standard “having its composite indicators ranked at the top level among the companies in the same industry worldwide” set by the State-owned Assets Supervision and Administration Commission (SASAC); 3) on par with world-renowned brands and core technologies.

Second, about “with Chinese characteristics.” It means: 1) the SOEs should adhere to the direction of socialist enterprises; 2) SOEs should serve overall national development, including both the Central and local areas, actively become the pioneers and leaders in the transformation of the development mode and the innovation of science and technology, leverage national development to become world-class enterprises, and make first-class contributions to national development; 3) “China’s enterprise culture” is not a copy or a duplicate of the Western enterprise culture, but the integration of the grand Chinese culture into its enterprises; it is also the inheritor, innovator, and practitioner of Chinese culture.

Third, about “well-known brand.” It means that the SOEs should have their own brands in the global market, should have a relatively high market share, and should have a relatively stable and relatively loyal consumer base. The “well-known brand” is also part of China’s “soft power.” It is in line with the SASAC’s concept of “mastering the core technology of independent intellectual property rights and having an international well-known brand name.” It is also in line with the core objective for the Central enterprises to become multinational and global enterprises.

[1] U.S.-China Economic and Security Review Commission, “An Analysis of Chinese Investments in the U.S. Economy,” October 2012.
[2] Washington Free Beacon, “Made in China; Congressional Report: Chinese government-controlled enterprises threaten U.S., world economy,” November 13, 2012.
[3] Red Flag Manuscript, Periodical Number: 2012/19, “State-Owned Enterprises (SOEs) Are the Bellwether for the Rise of China’s Economy.”
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