State Firms in Transition Quiz
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State Firms in Transition Quiz

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Questions and Answers

The state sector in the Chinese economy is considered a 'commanding height' of the planned economy.

True

State-owned enterprises (SOEs) have increasingly gained significance in the Chinese economy over the reform years.

False

About ¼ of state-owned enterprises are directly controlled by the central government.

True

Most listed companies in China are privately owned and not controlled by the state.

<p>False</p> Signup and view all the answers

Diverse local government policies on SOE reform can lead to local interests conflicting with national interests.

<p>True</p> Signup and view all the answers

Large SOEs account for 5% of the number of industrial SOEs but comprise 57% of output.

<p>True</p> Signup and view all the answers

Small SOEs account for 95% of the total number of industrial SOEs and produce 43% of the output.

<p>False</p> Signup and view all the answers

The Coastal region has a higher proportion of state firms compared to the Northeast region.

<p>False</p> Signup and view all the answers

SOEs have shifted their main financing sources from bank loans to the government budget over the years.

<p>False</p> Signup and view all the answers

In 1991, 73% of SOE financing came from bank loans.

<p>True</p> Signup and view all the answers

SOEs had lower debt-equity ratios compared to foreign firms operating in China in 1998.

<p>False</p> Signup and view all the answers

SOE profits experienced only an increase from the start of market reforms in the late 1970s until 2008.

<p>False</p> Signup and view all the answers

SOEs were mobilized after the 2008 crisis to support the economy, leading to a reduction in their profits.

<p>True</p> Signup and view all the answers

The SOE reforms from 1978 to 1992 led to significant privatization of state-owned enterprises.

<p>False</p> Signup and view all the answers

One of the main themes of the SOE reforms was to increase the profit incentives for workers.

<p>True</p> Signup and view all the answers

The Soft Budget Constraint is a phenomenon where the government allows firms to face severe financial consequences without intervention.

<p>False</p> Signup and view all the answers

Short-term contracts in the SOE reforms encourage firms to focus on long-term performance.

<p>False</p> Signup and view all the answers

The government’s threat to let a firm go bankrupt is considered credible in the context of the Soft Budget Constraint.

<p>False</p> Signup and view all the answers

Limited autonomy for enterprises during the SOE reforms means that government intervention was completely eliminated.

<p>False</p> Signup and view all the answers

The managerial contract system was designed to link managers' pay directly to enterprise profits.

<p>True</p> Signup and view all the answers

Firms under the Soft Budget Constraint tend to make responsible financial decisions due to fear of bankruptcy.

<p>False</p> Signup and view all the answers

China's corporate governance includes a Board of Directors, a Shareholders' Meeting, and a Supervisory Board.

<p>True</p> Signup and view all the answers

The Party Secretary in China is considered the CEO of the company.

<p>False</p> Signup and view all the answers

Independent directors can make up to 50% of all board directors in Chinese companies.

<p>False</p> Signup and view all the answers

The SASAC oversees all financial firms in China.

<p>False</p> Signup and view all the answers

The principle of 'Party controlling personnel' aims to reduce the agency problem in corporate governance.

<p>True</p> Signup and view all the answers

Managers in China usually do not have a formal cadre rank.

<p>False</p> Signup and view all the answers

In the context of publicly traded firms in China, the government is often the largest investor.

<p>True</p> Signup and view all the answers

Political interference and agency problems are significant challenges in China's corporate governance structure.

<p>True</p> Signup and view all the answers

Lenovo Group was listed on the Shanghai Stock Exchange.

<p>False</p> Signup and view all the answers

The general answer to whether public listing improves firm performance in China is 'Yes'.

<p>False</p> Signup and view all the answers

PetroChina is a listed company of China National Petroleum Corporation.

<p>True</p> Signup and view all the answers

At the end of 2022, over 4,000 companies were listed on at least one stock exchange in China.

<p>True</p> Signup and view all the answers

Only state shares and personal shares exist in the Chinese stock market.

<p>False</p> Signup and view all the answers

China Netcom was listed on both the Hong Kong Stock Exchange and NYSE.

<p>True</p> Signup and view all the answers

Until 2004, most shares (about 2/3) of publicly traded companies were personal shares.

<p>False</p> Signup and view all the answers

Different classes of shares include state shares, but not institutional shares.

<p>False</p> Signup and view all the answers

Study Notes

State Firms in Transition

  • The state sector was the main part of the planned economy.
  • The state sector is still important to the economy, dominating strategic industries, paying the most taxes, and receiving more bank loans and stock market funding.
  • State-owned enterprises (SOEs) are problematic, and are at the root of labor and financial sector issues.
  • The importance of SOEs has decreased during the reform years because of the rise of the private sector, but they are more substantial than some figures show.

Varieties of State Firms: By Level of Control

  • The state controls SOEs on four levels: central, provincial, municipality, and county.
  • About 25% of SOEs are directly controlled by the central government, and the remaining are controlled by local governments, primarily at the municipal level.
  • This leads to various local government policies on SOE reform and a conflict of goals between national and local interests, for instance, in the case of local protectionism in the automobile industry.

Varieties of State Firms: By Firm Size

  • There are two main categories of SOEs based on size: large and small.
  • Large SOEs represent a small percentage of their total number, but are responsible for a significantly larger proportion of output, employment, assets, taxes, and profits.

Varieties of State Firms: By Region

  • The Northeast region has a Soviet-style industrialized base with many large and old SOEs, resulting in a high proportion of state firms.
  • The coastal region has fewer SOEs, especially provinces like Guangdong, Fujian, and Zhejiang, because of historical reasons and closer ties with overseas firms.
  • The inland region faces transportation challenges and has many defense industries, including the Third Front.

SOEs: Changing Pattern of Finance

  • SOE financing has shifted from government budgetary capital to bank loans.
  • This is a significant reliance on indirect financing (bank financing) and generates high debt-equity ratios.

SOEs: Bank Loan Financing

  • SOE financing has changed, with budgetary capital expenditure decreasing, and bank loan financing significantly increasing over time.

SOEs: High Debt-Equity Ratios (1998

  • SOEs have significantly higher debt-equity ratios than foreign firms or Hong Kong and Taiwan firms in China.
  • SOE profits saw an initial decrease, followed by an increase due to factors like consolidation in monopolistic and capital-intensive sectors, the closure of SOEs, and downsizing.
  • SOE profits declined after the 2008 crisis when SOEs were used to support the economy.

Main Themes of SOE Reforms: 1978-1992

  • The focus was on expanding enterprise autonomy by granting production and marketing decision-making power to SOEs.
  • Incentives were increased through worker bonuses and profit retention for social welfare improvements, like housing.
  • The "managerial contract system" was introduced, linking manager pay to enterprise profits, aimed at replicating the success of agricultural household responsibility systems while adjusting to the complexities of industry, which was different from agriculture.
  • There was no privatization during this period, and layoffs were avoided, leading to continued SOE employment growth.

Evaluation of SOE Reforms: 1978-1992

  • The reforms were only moderately successful due to improvements in incentives and autonomy, and increased competition.
  • The problem of limited autonomy due to persistent government intervention remained, contracts were short-term, creating incentives to favor short-term profits, and contracts were specific to each enterprise, making negotiation more crucial than performance.
  • This created a system where firms benefited when profitable but weren't penalized for losses, limiting punishments for failure.

The Problem of the “Soft Budget Constraint” (Janos Kornai)

  • This refers to a situation where the government or other entities bail out financially troubled firms, often seen in China.
  • This leads to opportunistic behavior and irresponsibility from firms as they know they won't face consequences for failure, such as choosing unprofitable projects, taking risks, misappropriating funds, overstaffing, and engaging in related party transactions.

The Reasons for the Soft Budget Constraint (Janos Kornai)

  • The lack of credibility in the government's threat to punish firms for financial failure is the main reason for the soft budget constraint, which is why the government often chooses not to let a failing firm go bankrupt.

Special Issues in China

  • China's corporate governance system combines the new with the old, introducing new institutions like shareholders' meetings, boards of directors, and supervisory boards, but maintaining old representative bodies like the Party Committee, Employee Representative Committee, and Workers' Union.
  • The principle of "Party control over personnel" remains crucial, with managers holding cadre ranks, making them accountable to the Party.
  • This creates a double problem of corporate governance in China: political interference and agency problems.

Special Issues in China: Ownership Issues

  • Traditionally, government was the sole owner of SOEs.
  • In listed firms, the government remains the largest investor.
  • Reform efforts include diversifying ownership by introducing multiple investors, both domestic and foreign, and reducing state share proportions in publicly traded firms.

SASAC

  • The State-Owned Assets Supervision and Administration Commission (SASAC) manages non-financial firms.
  • SASAC operates at both the central and local levels.

China’s Largest Firms (2019, in revenue)

  • China's largest firms are primarily state-owned, including Sinopec, China National Petroleum, State Grid Corporation, and others.

Large SOE Reforms in Reality: Going Public

  • SOEs are increasingly going public on exchanges like the NYSE, NASDAQ, and Hong Kong Stock Exchange (H-shares and red chips), and domestic exchanges like Shanghai and Shenzhen.
  • The rationale for going public is to secure funding and restructure governance and control.
  • However, different legal environments across these markets, with varying laws, enforcement, and investor types, create challenges.

Large SOE Reforms in Reality: Examples:

  • Lenovo Group (formerly Legend Group)* - - Listed on the Hong Kong Stock Exchange, the largest PC maker in Asia, excluding Japan.
  • PetroChina (PTR)* - Listed on the NYSE, a subsidiary of China National Petroleum Corporation (CNPC).
  • China Netcom (now part of China Unicom) (CN)* - Listed on the Hong Kong Stock Exchange and NYSE. Formerly served 10 northern provinces of China Telecom.

Large SOE Reforms in Reality: Going Public

  • Over 4,000 companies were listed on the Shanghai and Shenzhen Stock Exchanges as of the end of 2022.
  • There are three classes of shares: state shares, institutional shares, and personal shares.
  • The state holds the majority of shares, either directly or indirectly.
  • Until 2004, only about 1/3 of total shares (around 1 trillion yuan) were publicly tradable personal shares.

Large SOE Reforms in Reality: Going Public

  • Studies have not proven that public listing improves firm performance in China.

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Description

Explore the dynamics of state-owned enterprises (SOEs) in the context of economic reforms. This quiz delves into the levels of control exerted by different government layers and the ongoing challenges faced by SOEs in balancing national and local interests. Test your comprehension of the issues surrounding SOEs and their role in the economy.

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