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The state sector is the 'commanding height' of the economy but is in decline due to the rise of the private sector.
The state sector is the 'commanding height' of the economy but is in decline due to the rise of the private sector.
True
All state-owned enterprises (SOEs) are controlled by the central government.
All state-owned enterprises (SOEs) are controlled by the central government.
False
The state sector pays more taxes compared to the private sector.
The state sector pays more taxes compared to the private sector.
True
Most listed companies in China are privately owned.
Most listed companies in China are privately owned.
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Local government policies on SOE reform are uniform across all regions.
Local government policies on SOE reform are uniform across all regions.
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Xiagang refers to employees who have been fully terminated from their positions in a company.
Xiagang refers to employees who have been fully terminated from their positions in a company.
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The net equity of Sida Insulation Material Company is 1.3 million yuan after subtracting liabilities.
The net equity of Sida Insulation Material Company is 1.3 million yuan after subtracting liabilities.
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Corporate governance primarily concerns conflicts of interests among various stakeholders, including managers and investors.
Corporate governance primarily concerns conflicts of interests among various stakeholders, including managers and investors.
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Under the managerial contract system, managers are incentivized based on enterprise profit.
Under the managerial contract system, managers are incentivized based on enterprise profit.
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The SOE reforms between 1978 and 1992 included privatization of state-owned enterprises.
The SOE reforms between 1978 and 1992 included privatization of state-owned enterprises.
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The total assets of Sida Insulation Material Company amount to 10.9 million yuan.
The total assets of Sida Insulation Material Company amount to 10.9 million yuan.
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The approximate amount sold to each employee of Sida Insulation Material Company was more than 4,000 yuan.
The approximate amount sold to each employee of Sida Insulation Material Company was more than 4,000 yuan.
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One of the issues faced during the SOE reforms was the government intervention limiting enterprise autonomy.
One of the issues faced during the SOE reforms was the government intervention limiting enterprise autonomy.
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Firms affected by the 'Soft Budget Constraint' tend to make prudent financial decisions.
Firms affected by the 'Soft Budget Constraint' tend to make prudent financial decisions.
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The concept of the 'Soft Budget Constraint' suggests that financial failures are credible threats to enterprises.
The concept of the 'Soft Budget Constraint' suggests that financial failures are credible threats to enterprises.
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Limited punishments for financial failure contribute to firms acting opportunistically.
Limited punishments for financial failure contribute to firms acting opportunistically.
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Contracts in the SOE reforms were uniform and did not require negotiation.
Contracts in the SOE reforms were uniform and did not require negotiation.
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The introduction of profit retention aimed to improve worker benefits and welfare.
The introduction of profit retention aimed to improve worker benefits and welfare.
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Large SOEs account for 5% of the total number of small SOEs.
Large SOEs account for 5% of the total number of small SOEs.
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The regions with the highest number of state firms are in the Coastal area.
The regions with the highest number of state firms are in the Coastal area.
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By 1991, the share of bank loans in financing SOEs had increased to 73%.
By 1991, the share of bank loans in financing SOEs had increased to 73%.
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In 1998, foreign firms in China reported higher debt-equity ratios compared to SOEs.
In 1998, foreign firms in China reported higher debt-equity ratios compared to SOEs.
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SOE profits declined when market reforms began.
SOE profits declined when market reforms began.
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The budgetary capital expenditure as a share of GDP decreased from 15% in 1978 to 5% in 1991.
The budgetary capital expenditure as a share of GDP decreased from 15% in 1978 to 5% in 1991.
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SOEs have maintained a consistent profit level from 1978 to 1997 without any losses.
SOEs have maintained a consistent profit level from 1978 to 1997 without any losses.
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The Inland region has few transportation problems affecting state firms.
The Inland region has few transportation problems affecting state firms.
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Lenovo Group was originally listed on the New York Stock Exchange.
Lenovo Group was originally listed on the New York Stock Exchange.
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PetroChina had its initial public offering in the year 2000.
PetroChina had its initial public offering in the year 2000.
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By the end of 2022, more than 4,000 companies were listed on the Shanghai and Shenzhen Stock Exchanges.
By the end of 2022, more than 4,000 companies were listed on the Shanghai and Shenzhen Stock Exchanges.
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State shares make up the majority of the share classes in publicly listed companies in China.
State shares make up the majority of the share classes in publicly listed companies in China.
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The stock exchanges in China operate under the same legal environment as those in New York.
The stock exchanges in China operate under the same legal environment as those in New York.
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Public listing has a proven positive impact on firm performance in China.
Public listing has a proven positive impact on firm performance in China.
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China Netcom was acquired by China Telecom after its IPO.
China Netcom was acquired by China Telecom after its IPO.
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The Shanghai Stock Exchange and Shenzhen Stock Exchange have three classes of shares.
The Shanghai Stock Exchange and Shenzhen Stock Exchange have three classes of shares.
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Study Notes
State firms in transition
- State firms were the central pillar of the planned economy, with a strong focus on strategic industries.
- State firms continue to be a key part of the economy, paying more taxes and receiving more bank loans and stock market financing than private companies.
- Their role in the economy has been decreasing in recent years due to the rising private sector, but they are more significant than some statistics show.
- Most listed companies are controlled by the state.
Varieties of state firms
- State firms can be classified by the level of government control: central, provincial, municipal, and county levels.
- About 25% of SOEs are directly controlled by the central government, with the remaining controlled by local governments.
Varieties of state firms: By firm size
- There is a significant difference between large and small state firms.
- Large SOEs account for a small proportion of the number of firms but a large proportion of output, employees, assets, taxes, and profits.
- Small SOEs dominate in numbers but contribute less to the economy.
Varieties of state firms: By region
- The Northeast region relies heavily on state firms, with a large number of large and old firms due to its Soviet-style industrial base.
- The Coastal region has a smaller state sector, with closer ties to overseas firms for historical reasons.
- The Inland region struggles with transportation issues and has many defense industries.
SOEs: Changing pattern of finance
- State firms have shifted their financing sources from the government budget to bank loans.
- This shift indicates a heavy reliance on indirect financing and a high amount of debt.
SOEs: Bank loan financing
- The share of bank loans in financing SOEs has increased significantly over time, while budgetary capital expenditure has decreased.
SOEs: High debt-equity ratios
- State firms have significantly higher debt-equity ratios compared to foreign and HK/Taiwan firms in China, indicating a high level of borrowing.
Industrial SOEs: Profit (% of GDP, 1978-1997)
- State firm profits initially declined when market reforms started, but later increased due to consolidation in monopolistic sectors and capital-intensive sectors.
- After the 2008 financial crisis, SOEs experienced losses as they were mobilized to support the economy.
SOE profits over time
- SOE profits initially declined due to market reforms, but later increased after consolidation and downsizing.
- However, SOE profits have experienced significant losses since the 2008 financial crisis, with SOEs being mobilized to support the economy.
Main Themes of SOE reforms: 1978-1992
- Reforms focused on expanding enterprise autonomy, increasing profit incentives, and implementing the managerial contract system.
- However, privatization and layoffs were not implemented, leading to sustained expansion of SOE employment.
Evaluation of SOE reforms: 1978-1992
- While these reforms had limited success in improving incentives and increasing competition, they faced several challenges.
- Limited autonomy and government intervention continued.
- Contracts were short-term, incentivizing short-term profits.
- Contracts were tailored to each enterprise, making negotiation more important than performance.
- Firms were rewarded for profits but not punished for losses.
The Problem of the “Soft Budget Constraint” (Janos Kornai)
- The government, banks, and other organizations often bail out financially troubled firms, creating a soft budget constraint.
- This leads to opportunistic and irresponsible behavior among firms, such as choosing unprofitable projects, taking unnecessary risks, and diversifying funds for personal benefits.
- Firms behave this way because they expect someone else to pay for their failures.
The reasons for the Soft Budget Constraint
- The government's threat to punish failing firms is not credible.
- When a firm is in trouble, the government often finds it in its interests to bail it out.
Case: Zhucheng, Shandong Province
- Sida Insulation Material Company, a state firm in Zhucheng, sold its net equity to employees at a heavily discounted price.
- This case was widely publicized as an example of SOE reform, but it is important to analyze the effectiveness of the sale.
Massive SOE Layoffs
- Xiagang, or furlough, became a common practice for laying off workers.
- It involved removing workers from their posts but maintaining a nominal relationship with the firm.
- This system provided a form of subsistence-level salary and benefits, although it varied significantly by region.
- This massive layoff of state workers created a need for alternative social insurance programs.
Corporate Governance
- Corporate governance, similar to the universal problem in publicly held corporations worldwide (as defined by Berle and Means, 1932), involves conflict of interests between managers and investors, and different types of investors.
- Conflict of interests also arise within investor groups, such as large vs small shareholders, shareholders vs. creditors, and private vs. state investors.
Large SOEs: Going Public
- Large state-owned enterprises increasingly used IPOs (Initial Public Offerings) in recent years, seeking to raise capital, and restructure their corporate governance and control.
- Different legal environments for listed companies, where laws, enforcement, and investor demographics differentiate markets, raise challenges.
- Examples of IPOs in significant markets, like the New York Stock Exchange, NASDAQ, Hong Kong Stock Exchange, and Shanghai & Shenzhen Stock Exchanges are given.
**Large SOEs: ** Performance of Publicly Listed Companies
- Public listing of SOEs in China has not necessarily improved firm performance, despite ambitions.
- The link between ownership structure of publicly listed companies and their performance remains inconclusive, particularly in a context where state control remains significant.
Large SOE Reforms in Reality
- Over 4000 companies listed in the Shanghai and Shenzhen Stock Exchanges, as of late 2022.
- The state remains the dominant owner, either directly or through state controlled financial institutions.
- The trading of shares (publicly available) until 2004 was relatively small, constituting about one-third of total shares.
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Description
Explore the role and classification of state firms in a transitioning economy. This quiz delves into the impact of state-owned enterprises on the economy, their size variations, and the level of government control. Test your understanding of how these firms operate amidst rising private sector dynamics.
