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asia policy indicators such as economic value added. 5 However, these firms will still serve political goals, including fostering indigenous innovation, supporting social stability and crisis response in China, and advancing economic initiatives abroad such as “One Belt, One Road.” This essay analyzes three challenges confronting this reform agenda: determining how and when to grant market forces a greater role, especially for state firms designated as commercial; aligning mismatched managerial interests and incentives; and overcoming complicating factors within companies. First, continuing government-directed mergers while restricting competition in protected sectors will boost state firms’ market share at the risk of deepening their financial and operational weaknesses in the long term. Second, while the Xi administration is actively exercising personnel control, defined as the authority to appoint and remove top company leaders, shuffling executives cannot eliminate their mismatched incentives. 6 Finally, the size, complexity, and cadre culture of SOEs will complicate reform implementation. Whether these difficulties can be surmounted will ultimately determine the success of Xi’s reform agenda and China’s economic transformation. central state-owned enterprises China’s state-owned economy remains significant today. State firms’ exact contribution to industrial output is debated but has been estimated at between 25% and 30%. 7 State firms continue to enjoy advantages in obtaining bank loans and regulatory approvals, even if their privileged capital access has gradually declined. The central government currently owns 106 companies, out of which 47 firms ranked in the 2014 Fortune Global 500. 8 These centrally owned firms, or yangqi, controlled more than $5.6 trillion in assets at the end of 2013, including more than $690 billion abroad. 9 Concentrated in strategic industries like defense, petroleum, 5 Zhonggong zhongyang, guowuyuan guanyu shenhua guoyou qiye gaige de zhidao yijian, part 1, section 5. 6 Top executives refers to individuals holding one or more of the following positions: general manager (zongjingli), party secretary (dangwei shuji), or chair of the board of directors (dongshizhang), if one exists. 7 Nicholas R. Lardy, Markets Over Mao: The Rise of Private Business in China (Washington, D.C.: Peterson Institute for International Economics, 2014). 8 “47 jia zhongyang qiye ruwei 2014 nian shijie 500 qiang” [47 Central State-Owned Enterprises Enter 2014 Fortune Global 500], SASAC, July 8, 2014 u http://www.sasac.gov.cn/n1180/n1226/ n2410/n314259/n315134/15951889.html. 9 “Guoziwei ‘modi’ zhongyang jingwai zichan” [SASAC “Feels Bottom” on Central State-Owned Enterprises’ Overseas Assets], Xinhua, March 18, 2015. [ 86 ]
leutert • china’s reform of state-owned enterprises and electricity, yangqi also operate in competitive sectors ranging from automobiles to shipping. Centrally owned firms have long been integral to China’s industrial policy at home. Today, they also play a leading role in its economic statecraft abroad, such as the Xi administration’s “One Belt, One Road” initiative to promote infrastructure development and economic integration in Eurasia. SOEs have historically been controlled by government ministries and other state organizations, but in 2003 Chinese leaders centralized their administration under the newly created State-Owned Assets Supervision and Administration Commission (SASAC). Yangqi are officially divided into two groups based on their strategic importance and size. The first is a core group of 53 firms known as “important backbone state-owned enterprises” (zhongyao gugan guoyou qiye). This group includes many of China’s largest and best-known companies, such as Sinopec, China Mobile, and State Grid. The second group comprises the remaining firms—a varied mix of global industry players such as Sinosteel, lesser-known companies like the China National Salt Industry Corporation, and state-run research institutes like the General Research Institute for Nonferrous Metals. Due to their varying strategic importance and size, these two groups of yangqi possess different administrative ranks. The core 53 state firms are ranked at the vice-ministerial level (fubuji). This gives their top executives official standing equivalent to political elites of the same administrative rank (for example, vice provincial party secretaries or governors). 10 The remaining centrally owned firms have department-level (zhengtingji) rank. Administrative rank confers important political privileges that can enhance executives’ ability to advocate for benefits to their companies, such as licenses, or oppose economic policies disadvantageous to their industries. Specifically, these political privileges include access to documents of varying grades of classification, invitations to meetings for officials of a certain rank, and the opportunity to participate in study groups and further training at the Central Party School of the Chinese Communist Party. While SASAC states that administrative rank does not matter for how yangqi are managed and assessed, in practice it is critical to the political influence of both these firms and their leaders. 10 A small number of executives come to their companies with a higher administrative rank by virtue of their previous positions. For example, Wang Yupu, appointed as party secretary and board chairman of Sinopec in April 2015, gained full ministerial rank (zhengbuji) by serving previously as the vice party secretary of the Chinese Academy of Engineering starting in 2013. [ 87 ]
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is south korea in china’s orbit?
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