Employee Ownership
Chinese Style
by Guang Zhang and John Logue (Ohio Employee Ownership
Center)
In this section, we discuss the
background within which stock-based employee ownership has emerged. In sharp
contrast to the Russian “shock therapy” and rapid privatization, China’s
market-oriented reforms is characterized by gradualism and administrative
decentralization and. The Chinese government did not privatize SOEs at the outset of reforms,
as the Russians did after the fall of the Soviet Union. Instead, in the 1980s,
the government limited its reforms on SOEs to enterprise autonomy and did nothing
serious on their ownership. At the same time, however, it allowed and in some
cases even encouraged non-state actors to enter the economy. These non-state
actors grew much more rapidly than SOEs. By the 1990s, under the increasing
competitive pressures from non-state actors, a great number of SOEs had been at
a loss. Only by then the government started to take serious policy toward
restructuring the ownership of state enterprises. Also by then stock-based employee
ownership was adopted by restructuring SOEs and local governments as a major
means to reform SOEs.
Chinese peasants were
the first social group allowed by the government to go privately in
production. The household
responsibility system, which distributed lands to peasant households in
long-term lease, was initiated by the peasants in Anhui, one of the poorest
areas in China. The spontaneous practices of peasants received support first from
local and provincial officials and eventually from central leaders. By 1984,
99% of rural households had adopted household farming under the household
responsibility system. A de facto privatization of the agricultural sector had
been realized. This privatization paid off as agricultural output soared,
peaking with the phenomenal bumper harvest of 1984.
More important was the government’s allowance
of a number of non-state actors, including mainly TVEs, foreign invested
companies, and domestic private firms, to enter non-agricultural sectors of the
economy during the 1980s. These actors have expanded much rapidly than the
SOEs. As a result, in the last two decades, the ownership mix has continued to
shift towards a diminishing state sector. As Table 1 indicates, the share of
the SOEs in the total industrial output has declined from 77 percent in 1978 to
53 percent in 1991 and 28 percent in 1999. The share of collective-owned
enterprises increased from 23 percent in 1978 to 36 percent in 1991, but then
leveled off during the 1990s. On the contrary, domestic private and foreign
invested enterprises grew slowly during the 1980s, as they raised their shares
from zero in 1978 to 5.7 and 2.5 percent, respectively, in 1991. Since then,
however, they have grown rapidly. In 1999, domestic private and foreign
invested enterprises produced 18 and 16 percent, respectively, of the total
industrial output.
|
|
1978 |
1991 |
1995 |
1999 |
|
Total State-owned or state holding majority shares enterprises Collective-owned enterprises Urban Rural Domestic private enterprises Foreign invested enterprises Other share holding enterprises |
100.0 77.3 22.7 13.6 9.1 0.0 0.0 0.0 |
100.0 52.9 35.7 12.9 22.8 5.7 2.5 3.1 |
100.0 34.0 36.6 9.3 27.3 12.9 11.7 |
100.0 28.2 35.4 18.2 15.9 9.7 |
Sources: China’s Statistical
Yearbook, various years.
Collective-owned enterprises include urban
and rural collectives. Table 1 shows clearly that it is the latter, or TVEs,
that are responsible for the growth of collective-owned enterprises during the
reform era. The TVEs originated from
the “commune and brigade industries” in Mao’s era. However, before reforms,
rural enterprises were no more than a supplement to the collective communes
where they were located. They were prohibited from selling their products
outside their communes. This policy stifled rural enterprises in China. Hence,
of China’s total industrial output in 1978, only 9% was produced in rural
areas. Even non-state industry was a majority urban: 60% of non-state
industrial output was produced by urban collectives, 40% by rural
collectives.
Like the household responsibility system in
the agricultural sector, TVEs started and grew as a spontaneous response by
peasants and local leaders to the window of opportunity opened by reforms. Urban
reforms, especially those in the wholesale and retail sectors, provided TVEs
with an opportunity to sell in cities. The savings from the increased income in
the agricultural sector since the introduction of the household responsibility
system became timely a major source of investment. The central government
started to adopt formal policies to encourage TVEs to develop in the mid-1980s.
On January 1 1985, for example, the Party Central Committee and the State
Council issued Ten Policies for Further
Invigorating the Rural Economy. This document required, among others,
implementing the preferential credit and taxation policies toward the TVEs.
The result was a take-off and sustaining
growth of the TVEs from the 1980s through the mid-1990s. In 1978, TVEs numbered
1.5 million, hired 28.3 million people, and accounted for 9% of national
industrial output. In 1995, the three measures were 22 million, 128.6 million,
and 27.3 percent, respectively. [1]
Domestic private
enterprises did not exist in 1978, on the eve of reforms. During the period between 1949 and 1978, the
government eliminated all old private firms and forbade any new from emerging. In its 12th National Congress,
however, the Party redefined
individual-owned enterprises as a “necessary and valuable supplement to
the public-owned economy.” Since then, the central government has gradually and
cautiously relaxed its policy toward domestic private enterprises. By 1997 the
party declared eventually in its 15th National Congress that “non-public
economies are important components of China’s socialist market economy.” In
response to these policy changes, private enterprises have grown and increased
their weight in the economy during the 1990s. Their share in the total national
industrial output rose from 1.9% in 1985 to 5.7% in 1991 and 18.2% in 1999.
Like domestic private enterprises, foreign
invested companies were eliminated during Mao’s era. Since 1978, however, the
attraction of foreign direct investment (FDI) has become a central component of
China’s open-door policy. The central
government has pursued a gradual approach to achieving this goal. In terms of
ownership, during the 1980s, the government allowed FDI in China only in the
form of joint-venture where foreign stocks had to be under 51%. This limitation
was abolished in the early 1990s. The economic sectors offered for foreign
investors to enter have also expanded from manufacturing and energy extraction
in the early 1980s to virtually every industry except defense industry and mass
media in the late 1990s.
Regionally, China opened first four economic
special zones, three in Guangdong and one in Fujian, for FDI in 1980. In 1984,
14 coastal cities were designated as opening cities for foreign direct
investment. In 1987, China launched a coastal development strategy. It called
for turning China’s coastal region into an exporting base for manufactured
goods. To implement this strategy, China had practically no alternative but to
rely on foreign invested companies. As a result, China opened its coastal
region further widely. In 1988, the Hainan Island became the fifth special
economic zone. In the early 1990s, Shanghai and the whole Yangzi delta area
opened for foreign investment under the policies as favorable as, if not more
favorable than, those in the five special economic zones. Since the mid-1990s, the central government
has finally extended its preferential policies for attracting foreign direct
investment to interior and western provinces.
China’s active attraction of FDI has paid
off. By the 1990s, it had emerged the world’s second largest recipient of FDI,
next only to the United States. This development has left a significant impact
on the ownership structure of the Chinese economy. Foreign invested firms produced only 0.4 percent of China’s
industrial output in 1985, and then 2.5% in 1991. In 1999, the share reached 16%.
By the mid-1990s, while
the entrance of non-state actors had changed to a significant degree the
ownership structure of the Chinese economy, the Chinese government had never
attempted to privatize SOEs to any significant extent. This, however, does not
mean that it had not tried to reform SOEs before that time. As early as 1979
and 1980, vigorous reforms centering around expanding enterprise autonomy and
combining plan and market began in the state sector. Encouraged by the success
in agricultural reforms, in 1984 the government began to implement four
important measures to increase enterprise autonomy: the factory manager
responsibility system; the authority to draw up the overall production plan
inside the enterprise; the system that linked total wage bill to profit; and
long-term contracting over profit remittance between factories and their
governmental superiors.[2]
Of the four measures introduced in 1984 for reforming SOEs, the most important was the factory manager responsibility system. Under this system, factory managers were appointed after a competitive tendering process, and signed contracts to deliver a certain level of profits. The contract specifies the proportion of profit that can be retained by the enterprise and also defined the managers’ remuneration, which could be considerable by Chinese standards at that time. But managers faced financial penalties if they failed to meet profit targets, and some had to pay a bond before taking up their posts. Once such a contract was concluded, the management had, at least in principal, the power to draw up the production plan of the enterprise and to determine wage and bonus distribution to employees. The factory manager responsibility system and the other supplementary measures were designed to free the management from the controls of both the bureaucracy externally and the Party inside the enterprise.
At the
macro-level, the Chinese government introduced in the mid-1980s a dual-track system in
order to gradually marketize the economy. One side of this system was the
planned sector, with compulsory deliveries at state fixed prices. The other
side was the market sector, with freely determined prices in response to changes
in supply and demand. In 1984, the central government decided to freeze the
absolute size of the central plan, that is, to keep the size of the overall
central government materials allocation plan fixed in absolute terms. Given the
obvious fact that the economy was growing rapidly, this would imply that the
plan would become proportionally less and less important until the economy grew
out of then plan. This is, for example, exactly what has happened in the steel
industry. In 1987, the allocation of steel sales by the central government,
local governments, and enterprises were 45%, 33%, and 22% respectively. In
1991, the allocation by the three become 30%, 23%, and 46% respectively.
In retrospect, it is
clear that the Chinese government’s failure to make serious ownership reform in
the state sector in the 1980s was not just for its ideological adherence to
socialism. It was also and perhaps more due to a belief held then by reform
leaders in the effectiveness of the
factory manager responsibility system and the dual track system. According to
this belief, or what economists call the market approach to SOE reform, if
the markets for products, factors of production, and enterprise autonomy are created and
function well, efficiency improvements of SOEs can be achieved without dramatic
changes in ownership.
This belief and its
practices constituted the core elements of China’s gradual reforms during the
1980s. In an aspect, they explain why market-oriented reforms succeeded in
China but failed in Russia. The “therapy shock” in Russian in 1992-1994
destroyed completely the old planned economy but got little time to replace it
with a workable market system. The result was an economic disorder that
paralyzed the production and supply sides of the economy. In addition, the
rapid privatization also drove huge number of people out of work. This,
together with high inflation that wiped out people’s savings, demolished demand
for goods and services. Under such circumstances, an economic collapse was
inevitable. In China, at the macro-level, the “double track system”, while
freezing the scale of the central planning, allowed it to continue working. At
the same time, more dynamic non-state actors were allowed to enter the economy
and to grow rapidly. A net effect of this was that China under the “double
track system” produced more goods and services, and in many cases produced more
efficiently. On the other hand, without fundamental restructuring, the SOEs
continued to expand in absolute terms both in number and employees until the
mid-1990s, thus helping maintain and even boost demand for goods and services.
The increase in demand for goods and services came more from the growth of the
non-state sector: income increases in the countryside (mainly thanks to the
TVEs and the household responsibility system) and the non-state sectors in
cities (from foreign invested enterprises and urban private firms), and
increase of the demand from abroad for consumer goods made in China.
All of this, of course,
did not come at no cost. A dear price China paid for its delay of privatizing
SOEs was the continuos deterioration of their performance. Table 2 shows the
increasing trend of loss-making by the state-owned industrial enterprises since
the mid-1980s. The total losses reached 79 billion in 1996 while the losses for
1985 were only 3.2 billion yuan. The annualized growth rate in losses is 23.4
percent. These losses were absorbed by government subsidies, inter-firm debts,
and, most importantly, the state banks. According to an estimation, in 1994
over 80 percent of state enterprises had debt/asset ratios higher than 90
percent). In the mid 1990s, it was
widely reported that one-third of China’s SOEs were losing money, one-third
barely broke even and only one-third were making profits; and it was also said
that one in two employees of the state sector was working for a loss-making
enterprise. [3]
(100 million
yuan)
|
|
1978 |
1985 |
1991 |
1995 |
1996 |
|
Total fixed assets Total profits Total loss Total tax Fiscal subsidies to loss- making enterprises Ratio of pre-tax profits to total assets |
3193.40 508.80 42.06 281.9 0.248 |
5956.20 738.20 32.44 595.90 0.224 |
13556.75 402.17 367.00 1258.98 510.24 0.123 |
30935.70 665.60 639.57 2208.60 327.77 0.093 |
34764.96 412.64 790.68 2324.49 337.40 0.079 |
Sources: China’s Statistical
Yearbook, various years.
Given the heavy weight
of SOEs in the Chinese economy, their poor performance inevitably had a
significant macroeconomic impact. First, SOEs maintained a large proportion of
China’s total fixed asset and consumed a large proportion of the total
investment, but failed to produce a large proportion of goods and services. For
example, in 1995, state-owned units accounted for 54% of China’s total fixed
investment, but produced only 34% of the total industrial output. More
importantly, it is estimated that by the mid-1990s, 20% to 30% of the total
debt outstanding in China was non performing debt. Almost all of the debt was
lent by state-owned banks to SOEs. By the mid-1990s, it must have become
apparent for Chinese leaders that a further delay of restructuring, or
privatizing, SOEs would jeopardize the whole economy.
It was against this
background that the Chinese government started a reform program centering on
“establishing a modern enterprise system” in the 1990s. This reform aims at, to
quote a 1999 resolution on SOEs reform by the Central Committee of the
Communist Party, “clarifying ownership, specifying rights and responsibilities,
separating business from politics, and promoting scientific management.”[4]
The central task of this reform is to clarify ownership by restructuring
Chinese enterprises into stock companies. Ideally, after such a restructuring, the
corporate governance that is taught in the typical MBA program in the United
States would work in China too. As Wu Jianlian, a senior economist of the
Development Research Center of the State Council, describes, corporate
governance of a modern enterprise means “the organizational structure consisting
the owner, board of directors and senior managers. A check and balance
relationship is formed within that structure, through which the owner entrusts
its capital to the board of directors. The board of director is the highest
level of decision making of the company and has the power to appoint, reward
and penalize and dismiss senior managers.”[5]
One of the first steps the Chinese
government took in restructuring the ownership of SOEs was to redefine the
meaning of state and public ownership. According to the redefinition, China
would remain as a socialist country as long as the state holds the dominant
shares in those large-scale corporations in the economic sectors with strategic
significance (such as banking, energy, telecommunication, and defense
industry). Within this policy context, all ideological and legal obstacles to
privatizing SOEs in non-strategic sectors and small-medium enterprises have
been removed. For those large enterprises whose stocks are held to a dominant
extent by the state, ownership diversification is considered a necessary means
to build up a “modern enterprise system.” The large enterprises thus
restructured can be little different from what is labeled as partially
privatized companies in the West. Hence, the last decade has seen a de facto
partial or complete privatization of state enterprises in China.
Thus, employee ownership has been introduced into China as a result of the efforts to build up a modern enterprise system centering on clarifying and diversifying ownership of SOEs and, to a lesser degree, of TVEs and other collective-owned enterprises.
The Development of
Stock-Based Employee Ownership in China
However, we may trace the starting point of China’s experiment with stock company and employee ownership as a part of it back to the mid-1980s, however. In 1983 a Shenzhen TVE named Baoan County United Investment Company became the first Chinese enterprise to issue shares to the public since the establishment of the PRC in 1949. In July 1984, Beijing Tianqiao Department Store (BTDS) was the first SOE restructured as a company limited by shares. And in November of the same year a Shanghai SOE, Shanghai Feile Acoustics Company, issued shares to the public. By 1986 10 enterprises in Shanghai had issued shares to the public. By 1988 there were nearly 10,000 so-called shareholding companies in the country.[6]
The experiment on stock company
during the 1980s happened under little governmental regulation or support. It
was partially a resurrection of the past share company practices before 1949
and partially the importation of the similar practices in the current
capitalist world by emerging entrepreneurs under the encouraging influence of
the policies of opening and reform. More significantly, it was a response
by enterprises and local governments to the central government-endorsed factory
manager responsibility program. By the end of the 1980s, many enterprises
involved in the program had become exceptionally autonomous and sought to
pursue their own interests through the issue of shares.
A part of shares during
the 1980s experiment with stock company was bought by employees of the share
issuing companies. For example, the aforementioned BTDS, originally 100 percent
owned by the Municipal Government of Beijing, had sold 3.5 percent ownership
interest to individual employees, in addition to 25.9 percent to state-owned
banks and 19.7 percent to other SOEs.[7]
One of the previous mentioned 10 Shanghai enterprises having issued shares to
the public by 1986 was the Yanzhong Industrial Company (YIC), which was set up
for the purpose of issuing stock by the Yanzhong Photocopying Industry Company
(YPC). Less than 10 percent of the 100,000 shares YIC sold to the public were
bought by workers of YPC. [8]
This kind of employees’ purchase and holding of the shares of their
companies during the 1980s might be regarded as the start of employee ownership
in China.
During the 1980s,
however, the major purpose for employee to hold shares of their companies was
simply an investment comparable to but with better return than certificate
deposits in banks. Shares issued to the public bore a strong resemblance to
debt securities since they were issued at par value and paid dividends at a
rate fixed in excess of the bank deposit rate. Therefore, both employee and
regular individual shareholders tended to hold their shares in order to earn
interest-like dividends.
By the late 1980s, it
had become apparent that the
shareholding experiment had already gone far for the government to hold back.
In 1987 the Party in its 13th Congress reaffirmed the spontaneous
experiment with shareholding company stating, “The shareholding system form
that has appeared during the reforms, including state majority ownership with
participation in shareholding by ministries and local enterprises as well as
investment by individuals, is one kind of organizational form of enterprise
property and can be continued.”[9]
Within such a permissive environment, during 1989-1990, a few central agencies,
such as the powerful State Commission for Restructuring Economic System and the
Ministry of Agriculture’s Executing Office for Rural Reform Experimental Areas,
started to investigate the Mondragon Cooperative and stock-based employee
ownership in the United States and other Western countries by sending officials
to investigate abroad and inviting foreign experts in employee ownership to
China.[10]
It was also during 1989-1990 that the
mind-set of investors in stocks had changed dramatically from earning dividends
to making returns from speculation. A “share fever” made this change. Before
1989-1990, shares were transferable through over-the-account trading. However,
the appreciation of stocks was then too small to support active OTC trading in
stocks. But in March 1989, the Shenzhen Development Bank lit the fire of “share
fever” by announcing exceeding generous dividends to its investors, which
allowed the latter to enjoy a profit several times their original investment.
The market responded immediately to this by raising the price of the bank’s shares
in OTC trading from 40 yuan per share at the end of 1988 to 120 yuan just
before June 4. Despite the June interruption, the bank’s share ended the year
at 90 yuan. In addition to the Shenzhen Development Bank, other four publicly
traded Shenzhen companies joined the “share fever” in 1990. Funds poured in
from all across China to push the prices of the five companies’ shares higher
and higher until November of the year when the government began intervene strongly, leading later to a
market crash in Shenzhen. During 1990, similar “share fevers” but on smaller
scale took place in OTC trading in other cities, such as Shanghai, Beijing, and
Shenyang.
Both investors and the
government learned lessons from the “share fever” during 1989 and 1990 and its
subsequent crash. Investors became aware of the long term value of investing in
shares. More importantly, they reoriented their investing behaviors toward a
quick short term capital gain. As a result, the stock market expanded and
became speculative in nature. The government responded by imposing a variety of
limits on the stock experiment. In late 1990, formal securities exchanges were
established in Shanghai and Shenzhen, but the intent was not to expand the
experiment, rather to control it by halting OTC trading and concentrating it in
one of the two exchanges.[11]
The responses of both
investors and the government to the 1990 share fever had a significant effect
on the development of stock-based employee ownership in China. Employee
shareholders found that their shares, which they had purchased as original
shares, usually at significant discount, would appreciate greatly in value once
they became tradable in stock markets. Thus, it was in employees’ interest to
purchase as many their companies’ shares as possible if the companies were
going to be listed in one of the two securities exchanges. Since in the first
half of the 1990s, only SOEs had the chance to become listed companies in
Shanghai or Shenzhen securities exchanges, it was also in the interest of the management
of the companies to sell as many shares as possible to employees as a quick way
to increase the latter welfare. Even
for those employee shares issued by non-listed companies, they might be sold in
OTC trading and bring profits to their holders. Employee shares was so popular
during the early 1990s as to get a specific name, internal staff shares (neibu zhigonggu).
From the
perspective of the central government, internal staff shares created more
problems than solutions to SOE reforms. As Shao Bingren, the Deputy Director of
the Economic Institution Reform Bureau of the State Council, summarizes, the
major problems were as follows. (1) Internal
staff shares were issued to outside people, a popular but illegal way used by
enterprises and other institutions to raise funds. (2) Internal staff shares
were illegally traded outside government-regulated securities exchange markets;
many black securities exchanges were established because of this. (3) Internal
staff shares made it difficult for stock company to operate in accordance with
rule, for the price, return, and voting right of internal staff shares were
different from those of other kinds of shares. (4) Internal staff shares failed
to function as a positive incentive for employees to increase productivity for
their major attraction to employees was their short-term returns through
trading in securities markets. (5) Since the issuance and pricing of internal
staff shares were not open to the public, and they had the potential to earn
their holders extremely high returns once they became tradable in the open
stock markets, the issuance and trading of internal staff shares were highly
correlated to governmental corruption. [12]
Hence, the policies
taken by the central government toward internal staff shares have become more
and more restrictive since the early 1990s. In May 1992, the central government
issued the Standard Opinion on Companies
Limited by Shares, the first systematic national codification of the legal
basis of an enterprise as a corporate form owning and operating productive
assets. Article 10 of the Standard Opinion limited corporatization to the state
sector exclusively, indicating that the share system was introduced then only
for restructuring SOEs. Under the Opinion,
internal staff shares had to be under 20 percent of the total shares for the
companies set up through the direct offering method and under 10 percent for
those through the public offering.[13]
In 1994, the central government ordered to cease any new issuance of internal
staff shares in the companies set up through the direct offering. In 1998, it
ordered to stop any new issuance of internal staff shares in the companies set
up through the public offering method. During this process, the central
government tried to restrict and even prohibit existing employee shares from
trading in either of the two securities exchanges. [14]
The central
restrictive policies toward internal staff shares have forced employee
ownership to “exit” from China’s listed companies. In 1991, individual shares, most of which were held by
employees, accounted for 12.9% of the total market capitalization in Shanghai
securities exchange. Ten years later, as of August of 2001, employee-owned
shares accounted for only 2.3% of the total A shares of China’s listed companies.
[15]At
present, as Chi Fuling, a leading scholar in employee ownership in China,
states, “the basic attitude adopted by the securities regulatory agencies of
our country toward employee stocks in listed companies is prohibitive.” [16]
Even for employee shareholding for non-listed companies,
national legislation are non-supportive, if not prohibitive. No current major
national law, including the Company Law,
Securities Law, and Labor Union Law, provides any
legislation for employee-held stocks or employee ownership in any form. Indeed,
Article 20 of the Company Law, if
implemented rigorously, would preclude employee ownership from existing in
China. This article stipulates that “a limited liability company shall be
established through joint investment by not fewer than 2 but not more than 50
shareholders.”[17] Obviously,
in most limited liability companies in part or in whole owned by their
employees, the number of shareholders would pass the 50 threshold. Thus,
national legislation since the 1990s have appeared to leave little room for
stock-based employee ownership to develop in either listed or non-listed stock
companies.
All this has
happened after the central government gave a green light to massive
restructuring of SOEs centering on the establishment of stock company. National
legislation has thereby appeared to attempt to exclude employee ownership as an
option for restructuring SOEs into stock companies, or as an element of
SOE-turned stock companies. Had China taken a centralized approach, as Russians
did, to economic reforms, employee ownership might have played little role in
China’s SOE restructuring since the 1990s.
This scenario has been avoided because of initiatives by restructuring SOEs and their employees, provincial and local governments, and line ministries or
organizations at the central level. Despite the lack of support
from the central government, enterprises owned
completely or partially by employees have mushroomed since the 1990s. According
to some incomplete surveys, as of the end of 1998, there were 660
employee-owned enterprises in the foreign trade sector alone. As of the end of
1999, there were over 1,800 employees-owned enterprises in Nanjing. By 1999, over 1000 enterprises in Shanghai
had established employee stock ownership associations (ESOAs), which, as we
will discuss later, might be seen as China’s counterpart to ESOPs in the United
States. The enterprises with ESOAs in Shanghai were equal to 7.85% of the total
number of SOEs in the city. The participants in ESOAs were nearly 300,000, or
6.56% of the total employees in SOEs of Shanghai.[18]
Stock-based employee ownership has been applied to restructuring not only
small- and medium-sized but also large-scale SOEs. According
to a recent survey by the National Statistical Bureau of 4,371 key SOEs, of the
end of 2001, 724 restructured
enterprises have allocated shares to employees. In other words, employee
ownership has been adopted by about 17 percent of China’s large-scale SOEs.
Indeed, this figure may undervalue the actual position of employee ownership in
the restructuring of large- scale SOEs for the following reasons. Of the
surveyed 4,371 SOEs, only 3,322 had been restructured by the end of 2001. Of
the latter, 866 had been restructured into stock companies owned solely by the
state (guoyou duzi gongsi), and 2289
into stock companies with diversified ownership. That is to say, out of the
2289 restructured large-scale SOEs with diversified ownership, 745, or 33 %,
are owned at least partially by their employees.[19]
Given
China’s large territory and economy, and given that the massive restructuring
of SOEs has just a short history and is still unfolding, no systematic
statistics about stock-based employee ownership in China are available. In
addition to the uncompleted data cited above, it is worth here to quote a
general estimation made by Chi Fulin.
The
scale of experimental enterprises implementing employee ownership has expanded
step by step. From the early 1990s through the present, the coverage of
employee ownership has enlarged from small and medium SOEs to a number of large
SOEs, and from some TVEs and cooperatives to a variety of enterprises. Now some
private enterprises have started to establish employee ownership. At present,
at least over 10,000 SOEs have practiced employee ownership. In some provinces
and cities, such enterprises number several thousands.[20]
Why
and how could stock-based employee ownership mushroom in China despite the
central government’s non-supportive attitude? The rest of this section will
examine this question from the legal, economic, and ideological perspectives.
The
mushroom of stock-based employee ownership used for SOEs restructuring has
mainly taken place at the provincial and especially local levels. This, as a
World Bank study of corporate governance in China shows, reflects three
constraints faced by local governments (but to a great degree not by the
central government) and that employee ownership provides an easy way for them
to overcome the constraints. The first constraint is poor financial performances of small and medium SOEs, which
make direct sales difficult. The second is a de facto control by insiders of
these companies, acquired during the implementation of the factory
manager responsibility system. The third is
political feasibility, especially in regard to procedures, that is, less strict
valuation and pricing of assets can be politically acceptable and the social
impact of privatization can be less severe. The local government officials in
Jinhua of the Zhejiang province interviewed by the authors of the World Bank
study aptly summarized that employee ownership satisfied three constraints:
government officials’ fear of making political mistakes, managers’ fear of
losing power, and workers’ fear of losing jobs.[21]
A result of the active promotion by
provincial and local governments of employee ownership is the proliferation of
local regulations over employee-owned-stocks, thus filling the legal void on
this matter at the national level and providing the legal foundation for
employee ownership to develop in China. Nearly all of the 30 provinces have
published regulations concerning employee-held-shares. At the local levels
below province, the promulgation of employee ownership-related regulations is
even more active. In addition to provincial and local governments, some central
line ministries or organizations, such as the Ministry of Foreign Trade and
Economic Cooperation, also have their own regulations over employee ownership.
All
regulations promulgated by provincial and local governments and line ministries
derive their legal and ideological foundations from relevant central documents
and national legislation. According to a survey made by China Institute for
Reform and Development that compares the provisional regulations over employee
ownership enacted by and implemented in 17 provinces or major cities, all the
regulations state that employee ownership is a major means to carry out the
decisions of the Party’s 15th National Congress. The national
legislation or regulations that are used as their legal or policy foundations
for local regulations include the Company Law, the Labor Union Law, the
Ordinances of Social Juridical Associations, and the Standard Opinion on Companies Limited by Shares.[22]
In
reality, however, many local regulations over employee ownership are in
conflict with national legislation and policies. For example, as mentioned
above, the central attitude toward employee-owned-stocks, or internal staff
shares, has changed from restrictive to prohibitive during the 1990s. This
attitude is ignored by every locality and line ministry which practices
employee ownership. Shenzhen, one of the pioneers of employee ownership in
China, in its regulations allows up to 35 percent of employee-held stocks for
large companies with a capital over 50 million yuan, 35-50 percent for
companies with a capital of 10-50 million yuan, and over 50 percent for
companies with a capital below 10 million yuan. Jiangsu permits employees hold
total shares for small-scale SOE-turned stock companies. Gansu requires
employee-held-stocks to be at least 10 percent or more of the total stocks for
restructured SOEs under its jurisdiction.[23]
The freedom of local governments and line
ministries from central regulations in regard with employee ownership is made
possible because of administrative decentralization during reforms, which
allowed provincial and local governments to own de facto the SOEs under their
supervision or jurisdiction. In the traditional socialist economy of China or
any other socialist or former socialist country, state owned enterprises were
formally defined as owned by “all people” (quanmin
suoyou). This means literally that every Chinese citizen had a claim on the
ownership of a giant SOE like China’s largest steel producer Baogang in Shanghai as well as a small
SOE like a department store in a remote county. Practically, under this system,
the central government became the sole owner of all SOEs, if not the economy as
a whole, although there existed
innumerous obstacles for this sole owner to exercise its rights. During
Mao’s era, this system worked mainly through two economic mechanisms. First,
the center maintained a tight fiscal control over localities and line
ministries, leaving little room for them to have independent financial power.
Then, in theory as well as in practice, China had only one budget, the central
budget which covered not only the central government proper but also every
locality, ministry, and SOE. Secondly, the supervision over a great number of
SOEs frequently shifted between central line ministries and provincial
governments. The downward shifts happened during the Great Leap Forward and the
Cultural Revolution when Mao’s calls for decentralization met the local desires
to have economic and fiscal autonomy. However, each round of downward shift was
followed by an upward shift, as the central government took back the SOEs whose
supervision had been shifted to local governments. The central government even
took away some profitable SOEs from local governments that had been found by
the latter with their own extra-budgetary funds.
Since the very outset of reforms, China has
adopted an intergovernmental fiscal system called “eating in different
kitchens,” which means that every provincial or local government has to rely on
its own revenues for its expenditure. The supervision of SOEs, which
constituted the major source of both tax and non-tax revenues until the
mid-1990s for the country as a whole and for most provincial and local
governments, has become a major determinant of how much revenues a provincial
or local government can collect and spend. The shifts of SOE supervisions
between governments at different levels have become very exceptional. By the
mid-1990s when the massive SOE restructuring started, governments at upper
levels had become unable to take away profitable SOEs from their supervised
governments at lower levels. At the same time, there was and is no way for the
latter to ask the former to take over their loss-making SOEs. The two decade
reforms have turned China, at least economically, into a de facto federalist
state in which each provincial or local government or line ministry de facto
“owns” SOEs under its jurisdiction.
This explains well the proliferation of employee ownership-related
regulations in China.[24]
Regulations over Employee Ownership: Variations and
Convergence
Thus, employee
ownership has not developed in China since the 1990s under a united legal
framework provided by the national government, but under plural executive
regulations delivered by different provincial and local governments.[25]
It follows from this fact that the regulatory rules concerning employee
ownership – say how to set up, finance, and administer it – may vary from one
locality to another. Nevertheless, in many important respects, employee
ownership related-regulations of different local governments have tended to
converge. This section will discuss
variations and convergence relative to three issues: the administration of
stock-based employee ownership, its financing, and the participation of
employees as shareholders in management.
Under China’s national
legislation, employee-held stocks, together with the shares held by the general
public, are classified as individual shares. As mentioned above, the central
government’s orders of stopping new issuance of internal staff shares in 1994
and 1998 has resulted in the exit of these shares from listed companies. The Company Law’s stipulation that the
shareholder number of a liability company limited by shares must be between 2
and 50 would, if rigorously implemented, makes stock-based employee ownership
impossible in China’s non-listed companies.
In sharp contrast to
the central negative attitude, all regulations by provincial and local
governments legalize stock-based employee ownership within their respective
jurisdictions. Furthermore, virtually all provinces, localities, and ministries
with employee ownership-related regulations have adopted regulations that
legalize employee stock ownership associations (ESOAs). An ESOA pools employee
shares and thus combine numerous employee shareholders into one, thus avoiding
a violation of the Company Law. More
importantly, an ESOA is required by regulations to administer the shares of
employees in their interest.
However, local and
ministerial regulations vary on the issue of the legal status of ESOAs. Most
local regulations define ESOA either as a subsidiary of the labor union or a
social association legal person, or both. This definition reflects the reality
that stock-based employee ownership has often developed under the umbrella of
the labor union. The labor union may directly manage employee-held shares and
becomes itself the ESOA, as stipulated by Guangdong’s regulations. But most
regulations separate the ESOA from the labor union by requiring it to register
as an independent social association legal person with the capacity to assume
civil rights and responsibilities. In China, the social association legal
person has the legal status as non-profit organization. A very few localities,
such as Shanxi, defines an ESOA as a corporation legal person. Hainan, in its
draft of Regulations on Employee Ownership, defined an ESOA as a trust, quite
close to the legal status of ESOPs in the United States. Depending on their
different defined legal statuses, ESOAs when established may register at
different supervising governmental organs, such as local labor unions general,
bureaus for civil affairs, restructuring of economic system, state-owned
property, or civil affairs, or industrial and commercial administrations.
Provincial and local
regulations over employee ownership have set up various conditions for the
establishment of employee-held-shares and ESOAs. For example, in Shenzhen and
Anhui, employee ownership does not apply to the enterprises in the
telecommunication, banking, and insurance sectors, which are all chartered
companies enjoying preferential treatments from the state. Jiangsu stipulates that any enterprise
wanting to establish its ESOA must have a clean record of accounting for the
last three years.
In all regulations of
different provinces or localities, the burden of financing stock-based employee
ownership and ESOAs fall mainly on employees. Basically, employees have to
purchase shares with cashes from their savings and/or compensations they have
obtained from their companies. However, depending on localities, employees may
enjoy some “preferential” treatments. For example, Shenzhen’s regulations
permits up to 40 percent of employee shares to be financed by debts and the
rest by cashes when a SOE is under restructuring. The debts may come from
employees’ or ESOAs’ borrowing from banks, and their companies are encouraged
to provide guarantees for the loans. For small SOEs in great difficulty of
performance, Shenzhen encourages their employees to buy out. If they have
difficulty doing so, the method of installment may be used to finance the
purchase under the condition of obtaining permission from relevant supervising
governmental agencies.
In China, tax
advantages for employee ownership are, if any,
very exceptional. The national tax codes give no advantage to employee
ownership. A few localities, however, give employee ownership tax breaks by
deducting personal income tax, which is a local tax now in China. For example,
in Shenzhen and Gansu, income taxes upon the dividends allocated to employee
shareholders of the companies in difficult performance can be exempted if “relevant governmental organs” permit.
Zhejiang and Anhui temporarily exempt employee shareholders from paying income
taxes for the dividends they receive if the dividends are reinvested in the
companies in the form of purchasing more shares of their companies.
Most provinces and localities require
managers of companies with ESOAs and/or employee-held- stocks to buy shares
significantly more than the average volume of regular employees. In Shenzhen,
Zhejiang, Anhui, and Jiangsu, senior managers, including directors of boards,
general managers, and party leaders, are required to hold shares no less than
five times the employee average. All of
them encourage managers and other key staffs of companies, such as technicians,
financial and marketing employees, to own larger number of shares. Zhejiang,
Anhui, and Jiangsu stipulate that once an employee holds shares more than five
times the employee average, he or she may (in Zhejiang and Anhui) or must (in
Jiangsu) hold his or her shares as a natural person rather than through the
ESOA of the company. While these provinces or localities appear to encourage managers
to hold more shares, a few localities attempt to place a cap on the proportion
of shares the management may hold relative to the shares held by regular
employees. Heilongjiang and Shaanxi, for instance, allow the director of board
or general manager of a company with ESOA and a capital of less 30 million yuan
to hold the company’s shares no more than 3% of the total employee shares. For
a company with a capital of 3-5 million yuan or more than 5 million yuan, the
cap is 2% or 1%.
All provinces
and localities in their regulations over stock-based employee ownership address
the issue of the tradability of employee-held-shares. In general, such shares
can transferred between employees and/or within an ESOA, but not to outsiders. Shanghai, for example, excludes
employee-held-shares from trading in the stock market. It further specifies
that when a stock company with an ESOA becomes a listed company, the shares
already owned by the ESOA are not tradable. Yet employees may purchase up to
10% of the total shares the company issues to the public as internal staff
stocks and trade them in security exchanges. Most provinces and localities with
ESOA-related regulations stipulate that when an employee of a company with ESOA
leaves the company because of retirement, resignation, lay-off, or death, all
of his shares must be sold back to the ESOA at a fair price.
Many provinces and
localities assign a leading role to the labor union in the ESOAs
administration. For example, Guangdong stipulates that employees-held-stocks of
a company should be administered and operated by its labor union. The labor
union prepares the charter of the company’s ESOA and places it for a vote of
all employee shareholders. Heilongjiang requires that the director of an ESOA
be in principle assumed by the director of the company’s labor union. However,
many other provinces and localities require the management of the ESOAs be
elected by all employee shareholders. All provinces and localities stipulate
that employee shareholders have the right to participate in the company
management by means of, for example, serving on the board of directors.
The Real World of Employee Ownership in SOE
Restructuring
To what extent, then, provincial, local, and
ministerial regulations over employee ownership and ESOAs have shaped the
actual role of employee ownership in China’s SOE restructuring? To answer this
question, it is useful to compare the Chinese experiences with the American
experiences in ESOPs.
ESOPs in the United
States are qualified employee benefit plans under federal law. The federal
government stipulates that when a company contributes company stock (or cash to
buy stock) to the ESOP, the contribution is deductible from its taxable income.
It also mandates that the vesting period, namely the years of service that an
employee has to meet in order to have a vested (i.e. guaranteed) right to the
stock under his or her name, cannot exceed seven years. By federal law,
individual employees cannot sell or mortgage the stock until they leave the company
or retire. This last stipulation is complemented by the federal permission of
employees to diversify their ESOP holdings when they approach retirement: ESOP
participants who have been in the plan for ten years can diversify up to 25% of
their ESOP accounts at age 55 and 50% at age 60.
The federal tax breaks
for contributions by companies to their ESOPs and other mandatory requirements
gives all ESOPs in the United States an identical feature: all being federally
qualified pension plans. Limited to this point, federal law does shape the real
world of employee ownership in the United States. However, beyond this point
federal law remains silent and allows a company to decide for itself all other
issues from how the contribution of stock or cash to the ESOP is allocated
among employees to what role the ESOP or employee shareholders play in the
company’s management. Mainly because of this reason, as a great number of
empirical studies show, an ESOP alone is not enough to have a significant
positive impact on corporate performance. Employee ownership and employee
participation together can do so.[26]
Returning to China, we
see a silent, if not prohibitive, national government and multiple voices from
provincial and local governments on the issue of stock-based employee
ownership. Thus, what we may expect, at most, are multiple worlds of employee
ownership in China, varying from one locality to another and/ or from one
sector to another. Furthermore, local and ministerial regulations over
employee-owned-shares provide few clearly-defined incentives or mandatory
applicable to all relevant cases under their jurisdictions. A good example for
this is, as mentioned above, that the exemptions of income taxes Shenzhen and
Gansu give to the dividends allocated by companies to employees are conditioned
on that these companies are in difficult performance and that “relevant
governmental agencies” agree to the exemption. In China, it might be argued,
the practices of employee ownership may vary in every aspect not only from one
locality to another and from one sector to another, but also from one company
to another. In short, particularism,
rather than universalism in any kind, prevails in the real world of employee
ownership in China.
This situation is
largely responsible, we would like to argue, for the lack of any systematic
statistical database about ESOAs or other types of stock-based employee
ownership in China. For the same reason, it is very difficult for researchers
to utilize cross-region or cross-sector data to determine the effect of
employee ownership on corporate performance.
Up to now, no such study has been provided by scholars based either in
or outside China. What we have are a lot of company case studies reported by
scholars and media based in and outside China. In the rest of this section, we
will consider three typical cases.
Case 1:
Employee Ownership in Legend, China’s largest PC producer
Legend originated from
the New Tech Development Company of the Computer Science Institute of China’s
Academy of Science (CAS).[27]
It was established in 1984 by eleven computer scientists or technicians of the
institute, with a capital of 200,000 yuan from the same institute. By 2000, Legend had become China’s largest
PC producer, with 7,000 employees and an annual sale of 17 billion yuan.
However, before 1994 although the company held a great deal of managerial
autonomy, it was considered to be owned fully by the CAS, a state agency. This
situation was changed in 1994 as a result of a one-year long negotiation
between Legend and the CAS, lading to a stock-based division of the company’s ownership
into two parts. The CAS, as the representative of the state, held 65% of the
total stocks, and the company’s ESOA owned the other 35%. At that time, the
company-held-stocks belonged to all employees of the company. Then, in 1998,
the 35% of the stocks owned by employees were further divided into three parts.
Of it, 35% was allocated to the 15 founders of the company, 20% to the 160
employees who joined the company in early periods, and 45% to all other
employees. Not everyone of the last group received stocks. Only those who had
made special contributions to the company obtained stocks. In none of the three
groups stocks were distributed evenly to recipients. Liu Chuanzhi, the founder
and CEO of the company, obtained the largest individual share, amounting to
1.2% of the total stocks of the company.
The case of Legend is representative.
During reforms, like Legend, a lot of companies have emerged under the umbrella
of various state agencies, including research institutes, universities, local
and ministerial governments, and SOEs. These companies, while usually receiving
capital inputs in their early periods and policy supports from their
supervising state agencies, have relied upon themselves to survive and expand
successfully in the market. Since the mid-1990s, most of these companies have attempted
to clarify their ownership by negotiating with their supervising state
agencies. In most recent years, the negotiations often involve outside buyers,
which can be other state or private enterprises and foreign investors. In the
process, how to compensate founders and/or senior managers of these companies
with stock allocation (or options) is
always a central issue at the negotiation table. The allocation of stocks to
ordinary workers is a less important issue.
Case 2: An
ESOA and Two Taxi Companies, Shanghai
Pudong Dazhong, as the
first stock company in the taxi industry in China, was established by a number
of companies or agencies, including Dazhong Communication, another taxi
company, Shanghai Gas Limited, and the
Pudong Branch of the Communication Bank.[28]
In 1997, the two Dazhongs established an ESOA with a total capital of 70
million yuan contributed by the 2,800 employees of the two companies. At the
same time, the two Dazhongs also established stock-holding company called
Dazhong Enterprise Management Limited (Dazhong EM), with 90% of its stocks held
by the Dazhong ESOA. According to the ESOA’s rules, general managers and party secretaries
of the companies had each to buy 200,000 shares of Pudong Dazhong, middle
ranking managers 100,000-150,000, and taxi drivers 30,000. Then, the Dazhong EM
bought 26 million shares of Pudong Dazhong from Dazhong Communication, which had
held 20.08% of the total shares of Pudong Dazhong. The purchase cost 111.8
million yuan, of which 70 million were funded by employee-contributed cashes
and the rest by bank loans. As a result, Dazhong EM became the largest
shareholder of Pudong Dazhong, and Dazhong Communication turned from the
largest to the third largest shareholder.
The management of the
two taxi companies adopted an ESOA and its dominant stock-holding company
mainly for addressing three questions. The first was the competition between
the two taxi companies, Pudong Dazhong and Dazhong Communication. It is true
that before the establishment of the ESOA and its dominant stock-holding
company, the competition between the two tax companies was controlled to some
degree for the fact that Dazhong Communication was the largest share holder of
Pudong Dazhong. As a matter of fact, in 1996, Yang Guoping was both the general
manager of Dazhong Communication and the director of the board of Pudong
Dazhong. However, the investment of the
ESOA in Pudong Dazhong would push the spirit of cooperation, instead of
competition, between the two companies work beyond the management into all
employees.
The second questions
was more important from the management’s perspective of the two tax companies. The establishment of
the ESOA with the capital contribution of 70 million yuan from the employees
provided the management with not only funds but also a legal means for
maintaining control over the two companies and expanding the business. Both
Dazhong Communication and Pudong Zhong were listed companies in 1997 and both
expanded rapidly after they had become listed companies. Before going listed,
Pudong Dazhong had only 100 taxis and its total stocks were 14 million yuan. In
1997, its total shares increased to 259 million, with each share worth about 4
yuan. It had over 1000 taxis. Its net operating profit increased from 3.7
million yuan in 1992 to 104.4 billion in 1997. For the management of both
companies, if they could not pour new capital into the two Dazhongs, it might
lose control over both companies if Dazhong Communication could not maintain
the position as the largest share holder of Pudong Dazhong, and if an outside
company or agency bought the largest proportion of shares of Dazhong
Communication. Under the leadership of Yang, a solution was reached by
mobilizing the employees of both companies to invest. The story did not end
with the ESOA of the two companies became the largest shareholder of Pudong
Dazhong, as a result of its purchase of large volume of shares from Dazhong
Communication. In 1999, with the approval of China’s Securities Supervision
Commission, Pudong Dazhong invested a package of 465 million yuan, which
included 1,000 taxies, in Dazhong Communication. According to Chinese law, if a
company holds 10% or more of the total stocks of another company, the latter
cannot purchase the former shares (Article 22 of the Standard Opinion). Obviously, the two companies’ ESOA-controlled
Dazhong EM helped the management overcome this legal barrier.
This case shows that
stock-based employee ownership is used as a means for companies to survive and
expand in China’s rapid growing sectors, which may be due to the nature of the
sectors, or governmental protection, or more likely both. The taxi industry in
Shanghai is a good example. Shanghai’s economy has expanded at a tremendous
speed since the 1990s, thus creating a rapidly increasing demand for taxi
service. As anywhere, the taxi industry in Shanghai is highly regulated by the
local government. Employee ownership was used by the two taxi companies, Pudong
Dazhong and Dazhong Communication, to maximize their interest in this rapidly
expanding and highly regulated industry.
Case 3: Using
Employee Ownership to Save a Bankrupted SOE
Changchun Special Cement
Factory, found in 1972, was a small-sized SOE, with the Construction Material
Bureau of the Changchun Municipal Government as its supervisor or de facto
owner.[29]
In 1997, on account, the company had a capital stock of 17.14 million and a
total debt of 15.09 million. It had lost money for several years, with a total
loss over 6 million yuan in the three years from 1995 to 1997. It employed then
190 workers and managers, and was responsible for supporting 57 retired
individuals. Obviously, this factory had become a burden, rather than an asset,
for the local government. For its employees, the total shutdown of the factory
was the last thing they wanted. They wanted jobs.
Within the policy
environment that gave a green light to privatizing small and medium sized SOEs,
the local government and the management of the factory agreed to restructuring
the factory into a stock-based cooperative. A key step to this goal was to
estimate the asset of the factory. An accounting firm was hired to do the job.
Its estimation – the factory having a total asset of 17.14 million yuan, a
total debt of 15.09 million yuan, or a net asset of 2.05 million yuan – was
accepted by the government. More importantly, the government further gave the
factory a package of preferential treatments for its ownership restructuring,
which resulted in a total net asset of minus 4.6 million yuan for the factory.
This is to say, one could buy the factory with a payment of zero dollar!
On the side of
employees, they decided to replace the old factory with a new stock-based
cooperative. The cooperative was established with a total stock of 1.015
million yuan, divided into 1015 shares, with 1,000 yuan per share. All shares
were issued to employees. Each of them was required to purchase a certain
number of shares in accordance with his or her rank or duty in the cooperative.
The company recognized the years of service in the replaced factory as a
capital contribution, with 100 yuan for one year and 5000 yuan as the possible maximum.
Every employees needed only to pay cashes or salary for the difference between
his or her capital contribution derived from service years and his or her subscription
of shares. The stock issuance raised a total capital of worth 1.015 millions
yuan, with 260,000 yuan in cash. From September 26, 1998 on, the state-owned
cement factory has turned into a cooperative 100 percent owned by its
employees.
Of the three cases
reported above, the last represents the largest number of restructured and
restructuring SOEs, which are usually small or medium sized, and have been
losing money for a long period. Local governments have tended to encourage
employees of these companies to buy out and own the companies. In so doing,
they usually meet much lesser resentment, if not resistance, from employees, than
selling the companies to private interests. Thus, for local governments
employee ownership is a politically safe way to restructure SOEs. But would it
also be an economically effective way? The above cement cooperative is reported
to achieve excellent performance. However, not all reports are positive toward
the application of employee ownership to bankrupted SOEs. Recently, Washington Post reported that a county
government in Zhejiang had to manage to resell an employee-owned wine company,
which had been a money-loosing SOE before any ownership restructuring, to its
top manager. According to the report, at first local governments favored
workers. However, because the poor performance of employee-owned companies, now
they start to prefer a whole privatization of small and medium SOEs under their
jurisdictions. [30]
Employee Ownership in Township and Village
Enterprises
In the United States,
many scholars tend to consider China’s TVEs as employee-owned companies. This
understanding may be supported to some degree by Chinese laws. The Regulation on Township and Village
Collective Enterprises of the People’s Republic of China, issued by the
Chinese State Council in June 1990, indicates, “Assets (of a collective TVE) are owned collectively by
the whole of rural residents of the township or village which runs the
enterprise; the ownership rights over the enterprise assets should be exercised
by the rural residents’ meeting (or congress) or a collective economic
organization that represents the whole of rural residents of the township or
village. The ownership rights of the enterprise assets will not change when the
enterprise is under a managerial contract responsibility system, leasing, or
joint operation with enterprises of other types of ownership (Article 18,
Chapter 3).”[31] From this regulatory point of view, China’s
TVEs appear similar to the Mondragon Cooperatives in Spain.
In reality, however,
employee or community ownership is just a component, and in many cases, a minor
component of the ownership structure of TVEs.
In terms of the original investors in TVEs, as a Chinese economist
states, the enterprises can be classified into three groups.[32]
The first group include those township enterprises established originally with
funds from township governments. Township governments, transformed from
people’s communes during Mao’s era, are the most basic or lowest level of the
state in China. In this sense, those enterprises set up directly by township
governments are considered widely quasi-state-owned enterprises.
The second group
include village enterprises whose original investments have come from villages
and/or villagers teams, which were production brigades and teams respectively
during Mao’s era. A village is defined formally as an administrative village,
for it is responsible for administering several natural villages, which are
defined administratively as villager teams. However, the administration of the
village has never been a part of the state either before or after reforms. It
belongs to the arena of villager autonomy. Indeed, since 1987 the Chinese
government has implemented a national law that requires the administrative, but
not party, leadership of the village be elected by all of its adult members.
Therefore, enterprises established with investments from villages and/or
villager teams are really collective or community enterprises in nature.
The third groups include “fake collectives,”
which were set up by individuals with their own funds but used the collective
label for protection and economic benefit. In China, such enterprises are also
called the private companies wearing “red caps.”
The three groups of
TVEs, however, share an important character: “they are not and never were part
of the centrally planned economy, their inputs and products were never
allocated under the plan; they produce for the market.”[33]
From the 1980s through the early 1990s, TVEs in all of three types had expanded
rapidly not only for their major competitors were hopelessly inefficient SOEs, but
also for they were market-oriented with no lack of political support from
township governments. Since the mid- 1990s, however, the growth of TVEs has
leveled off for two reasons. First, the
major competitors faced by TVEs are no longer inefficient SOEs, rather foreign
invested firms, domestic private enterprises, and later selective SOEs enjoying
protection and support from the central and provincial governments. Secondly,
many Chinese, including ranking officials, consider that the decline of TVEs’
competitiveness is significantly due to the historical legacy of their unclear
ownership. On March 31, 1994, the Agricultural Ministry issued its Opinion on Ownership Reform of Township and Village
Enterprises. It called for a transformation of TVEs into stock-based
cooperatives or stock companies. At the same time, as mentioned above, the
central government started to promote their application of shareholding system
to reforms of SOEs.
The Agricultural Ministry’s opinion specifies that a TVE-turned stock-based cooperative must have two types of stocks: one owned by the village(s) and the other by employees. The dividends from the former is used mainly for enterprise development, agricultural aid, and charities and other public benefits for the community. They cannot be used for the administrative expenditures of the township government. Employee stocks are composed of two parts. One comes from employees’ new investments of cashes or other assets in the co