BEIJING, China, Feb. 14
The vested interests of China's privileged class and its state-owned monopolies have become the country's greatest curse and obstacle to modernization. Doing away with such privileges and monopolies should be the prime task of the Chinese government.
The greater the number of state-owned monopolies that make it onto the annual Fortune 500 list, the less likelihood there is that China's economic modernization will succeed. At present, the ratio of assets to profits of China's state-owned enterprises is between 1 and 10 percent of the ratio in comparable enterprises in developed countries. The high costs and low efficiency of the state-owned enterprises make them a drain and a burden on the Chinese people.
According to the Assessment of the Aggregate Financial Risks in China compiled by economist Zhong Wei and others in 2002, the profit margin of state banks was 1-10 percent of that of leading banks in developed countries. Between 35 and 40 percent of all loans by the four major banks (the Industrial and Commercial Bank of China, the Bank of China, the Agricultural Bank of China and the Construction Bank of China) were judged to be non-performing, a figure over ten times that of leading banks in the developed world.
A report in the Legal Daily at the end of November said bad debt from car loans exceeded 100 billion yuan ($12.9 billion), with most cases the result of collusion between people working inside the banks and those outside. This cannot be accounted for merely by lax internal controls at the banks. Rather, it illustrates the dark side of state ownership and the "yardstick" system, under which the political or economic treatment of an individual is based on his or her rank or title in the relevant organization. In other words, official rank or status is taken as the only criterion for judging one's social worth.
Shady deals are rampant among state-owned securities dealers, fund managers and stock markets. According to Yuan Jian's Critique of China's Stock Markets (Chinese Social Sciences Press, Dec. 12, 2004) as of May 2002, the non-performing assets ratio of Chinese securities companies was up to 50 percent. An evaluation by BNP Paribas Peregrine Securities found that annual losses of securities companies in China amounted to 40 billion yuan ($5.1 billion) in November 2002. By 2004, bad debts had reached 90 billion yuan ($11.6 billion). Most securities dealers in China were already bankrupt by that time, but were propped up by local governments. While profits went into the pockets of securities companies, the losses were born by the nation.
Even the official China Central Television reported that 60 percent of Chinese funds sustained losses in the first half of 2005, while the income of fund managers had skyrocketed. China's system of "contractual funds" allows capital to pass through the fund managers' hands with very little supervision. These managers have become a special community not bound by standard reporting procedures or restrictions on insider trading.
Moreover, few listed companies in China actually pay dividends. The purpose of China's stock markets is to ease the financial straits of state-owned enterprises. As a result, thousands of state-owned enterprises are rescued while the shareholders bear the losses.
Similar problems exist in other sectors including the power, petroleum, petrochemicals, aviation, tobacco and telecommunications industries. In January 2006 the influential magazine Nan Feng Chuang (Window on the Southern Wind) carried a report on methods of intimidation, such as the refusal to provide power transmission lines, by which state-owned electric companies were taking control of hydroelectric projects in villages and small towns, acquiring their assets at little or no cost.
Since residents are not allowed to operate private generators, they have no choice but to pay the high prices for electricity demanded by the state-owned power company. The price can go up by as much as 10 times once the local power company is taken over. The power monopoly has seriously infringed upon the rights and interests of the people, particularly in poor, remote rural areas. The rate of return on assets in China's power industry is just 1 percent, compared to 9-11 percent on average in developed countries, and even developing countries like Brazil.
Nan Feng Chuang reported on Nov. 16, 2006, that the State Grid Corporation of China is now investing huge sums in rural localities to build an extra-high-voltage transmission system, allowing it to throttle the development of local power networks. However, the formation of a 1000 kV grid throughout the country involves a huge national risk. In the event of a military attack or major accident, the whole country could be paralyzed. Very few large countries would assume such a high risk. While most developed countries long ago suspended research and development of extra-high- voltage power grids, the Law Reform Commission of China authorized this project without even having to seek approval from the Standing Committee of the National People's Congress.
State petroleum and petrochemical corporations have tremendous unfair advantages under preferential policies including exclusive rights of oil exploration and refinement. They also benefit from a 1994 State Council resolution allowing tax revenues to be shared between central and local authorities, which states that after-tax profits of wholly state-owned enterprises registered before 1993 need not be turned over to the state.
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(Hu Xingdou is professor of economics and China issues at the Beijing Institute of Technology. Professor Hu is also deputy director of the Institute of International Business Management at Beijing University's College of Resources. This article is excerpted and edited from the Chinese; the original may be found at www.ncn.org.© Copyright 2007 by Hu Xingdou.)
Translated by Taylor Poon; Edited by Kathleen Hwang
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