ANNUAL REPORT

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while retaining majority state control. 63 Although the September
2015 guidelines did not specifically address reforms to subcentral
SOEs, which account for a majority of the country’s 150,000 SOEs,
subsequent statements revealed policies to reduce overcapacity and
pollution by closing down subcentral SOEs and announced plans to
lay off five to six million state workers in the steel and coal industries.
64 To date, however, there has been little to no progress in reducing
overcapacity, and indeed there have been some capacity increases.
65
Increased dividends: Although the Chinese government is entitled
to all SOE profits, it has historically allowed SOEs to retain
nearly all of their profits—another instance of the state providing
SOEs with preferential treatment. 66 In 2010, for example, central
SOE profits totaled around $169 billion, only 3.8 percent of which
was paid to the government through taxes and dividends, and
which was all recycled back to SOEs rather than contributing to
the state budget. 67 Although SOEs pay taxes, the extent of these
payments is often overstated, with reported SOE taxes consisting
mostly of remittances of indirect taxes (such as the value-added tax
and the excise tax) that put economic burden on consumers, not
SOEs. 68 To increase SOE payments to the state, dividend rates for
central SOEs were set between 0 percent and 10 percent in 2007,
and four years later were increased to between 5 percent and 15
percent. 69 According to the most recent guidelines, SOEs will be required
to pay a 30 percent dividend to the central government by
2020, with an increasing contribution each subsequent year. 70
However, companies will still be able to adjust their reported profits
by shifting them to subsidiaries or adjusting how investments
are accounted for to suppress the portion of profits subject to dividend
payments. 71
State asset management: The government is establishing state
investment and operation companies to supervise and manage
state assets on behalf of the government—an approach known as
the Temasek model.* 72 For example, in August 2016, Beijing
launched a $30 billion venture capital fund that will selectively invest
in the country’s industrial sector, seeking to increase efficiency
and upgrade technologies in the sector. 73 In effect, this policy shifts
the central SASAC’s function from asset management to regulating
state assets on behalf of the government. 74 However, Dr. Lardy remains
uncertain Beijing will fully embrace the new regulatory
model, saying, ‘‘SASAC has a penchant for intervention in firm decision
making that is the opposite of the Temasek model.’’ 75
Employee Stock Ownership Plan: SASAC has announced
plans to pilot an employee stock ownership program that will allow
employees of select SOEs to buy company stocks. 76 Beijing hopes
the plan will incentivize SOE employees to work to improve com-
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* Temasek, a Singaporean SOE holding company, was founded in 1974 when it inherited 35
companies from the finance ministries. Today, Temasek’s holdings have multiplied and diversified,
with only 30 percent remaining in Singapore itself. Its domestic holdings are concentrated
in ‘‘government-linked companies,’’ allowing the state to maintain ownership without interfering
in firms’ profit-driven management. Economist, ‘‘From SOE to GLC,’’ November 23, 2013.
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