Comments on the evolution of the business model of state-owned companies in China

I.    Introduction

The People’s Republic of China (the “PRC”) is expanding its presence internationally and already has a substantial presence in many countries. The main factor behind this expansion has been the gradual reform of its business model over the years, which has made the PRC lead the ranking of foreign direct investment in different countries, including Peru.

II.    Gradual reform

Before 1978, the PRC government’s involvement in its State-owned enterprises (“SOEs”) was centralized. In fact, all SOEs were managed by the Central Government which appointed all managers and employees.

In 1978, the PRC started an economic reform characterized by an “openness policy”, which changed the manner in which SOEs were managed, gradually moving from a minor change program to a thorough reform, in three stages, as follows:

(i)    A management reform (1978-1984) was first undertaken: the purpose of this stage was to give SOEs greater management autonomy to encourage them to become profitable and grow. Instead of turning all their profits to the Central Government, they were allowed to capitalize a percentage of their profits if the State-set quota was achieved. The most important reform was the delegation of management autonomy.

(ii)    The “dual track” system (1984-1992): during this second stage, SOEs were allowed to sell their products outside of the State plan. The traditional subordinated management relationship between SOEs and the PRC’s government was replaced by contractual relations. As a result, each SOE became liable for both its losses and profits. Finally, a profit tax was introduced to replace direct profit hand-overs; and

(iii)    The third stage (1992 – to date): the purpose of this stage has been to turn SOEs into truly modern companies. Privatization was undertaken at a broader scale. Some of the biggest SOEs were listed on the Shanghai Stock Exchange and on the Hong Kong Stock Exchange. The RPC’s government succeeded in implementing its openness policy and its economic model was successfully transformed.

To improve transparency, the State Council established the State-Owned Assets Supervision and Administration Commission (“SASAC”) to invest State assets on behalf of the Central Government (excluding financial institutions). SASAC plays the role of an institutional investor, enjoys the rights of a shareholder, assumes legal obligations and responsibilities under the Business Corporation Law and the State-owned Company Supervision and Administration Regulations, but refrains from taking part in the management of SOEs, their production and operation.

The pace of reform has been substantially quicker after 2003. The number of SOEs has been gradually dropping year after year and their competitiveness has grown quickly. While the number of profitable SOEs continues to increase, unprofitable SOEs have filed for bankruptcy and have then been liquidated. As a result of this reform, the relationship between the SASAC and SOEs has become one of an investor of State assets, thereby separating ownership rights from management.

The autonomy granted to SOEs with respect to the SASAC can be clearly seen in the Provisional Regulations on the Supervision and Management of State-owned Assets in Enterprises, in force since May 27, 2003, which provides that “the companies where it invests and the companies created with the investment of said companies enjoy autonomy in their operations as provided for in the relevant administrative laws and regulations.”

III.    Participation of China’s business companies in Peru

As a result of the aforesaid reform, the economic presence of the PRC has increased all over the world and the PRC’s economy is regarded as a market economy by a growing number of countries, including Peru.

Also as a result of this great reform and the development of Chinese business activity, the PRC has become the most important player in the world’s economy. The PRC is making large investments in different countries; however, in Latin America, Peru has been the main recipient of Chinese investment. In the last 12 months Peru has received Chinese investments, accounting for approximately 50% of the total, with around US$9.3 billion (ahead of Argentina, Brazil, and Venezuela). These investments have been made by over 120 Chinese companies established in Peru.

This information shows that the PRC is interested in our economy, which will gradually attract a larger number of Chinese companies to Peru. To continue attracting Chinese investment to our country and make the most of it, it is necessary to learn how the world´s largest economy works and make an effort to adjust our regulations to it, and become familiar with its structure.