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at JOCM 23,5 500 Journal of Organizational Change Management Vol. 23 No. 5,

Journal of Organizational Change Management Vol. 23 No. 5, 2010 pp. 500-516 q Emerald Group Publishing Limited


DOI 10.1108/09534811011071252

China’s state-owned enterprises:

economic reform and organizational restructuring

John Hassard

Manchester Business School, The University of Manchester, Manchester, UK and Cambridge University, Cambridge, UK

Jonathan Morris

Cardiff Business School, Cardiff University, Cardiff, UK

Jackie Sheehan

School of Contemporary Chinese Studies, Nottingham University, Nottingham, UK, and

Xiao Yuxin

Baosteel, Shanghai, China


Purpose – The purpose of this paper is to examine how the Chinese economic reform process has engendered significant changes in the structure and management of work organizations. Central to this process has been the “marketization” of state-owned enterprises (SOEs). The paper reviews the attempts to reform SOEs as conducted, primarily, under the modern enterprise system (MES) and group company system (GCS) programmes. Design/methodology/approach – The paper analyses institutional issues relating to organizational restructuring, describes the evolution of the SOE “problem” in China, and discusses case evidence of enterprise reform in one of the largest SOE-dominated industries, iron and steel. Qualitative field data, collected regularly (mostly yearly) since 1995, were derived from in-depth interviews with executives of ten large SOEs that have restructured as part of MES and GCS programmes. Findings – It is suggested that the historic reluctance of SOEs to embrace reform stems from three main factors – the opaque nature of property rights, the failure of ministries to produce a firm strategy for channelling surplus labour and the inability of government agencies to offer a sense of managerial autonomy to SOE executives. Recent policies designed to overcome these problems together with kindred ones for separating government functions from business operations in the drive to prepare SOEs for global markets are described. It can be argued that China’s preference for gradual reform reflects the wider reform context where economic restructuring has not been accompanied by a greater expression of political democracy. Originality/value – The paper’s findings offer insights from a major longitudinal field study of two of the main programmes of China’s reform period.

Keywords China, Economic reform, Organizational restructuring, Government policy

Paper type Research paper

Introduction The focus of this paper is the reform of state-owned enterprises (SOEs) since the emergence of so-called “open door” economic policies in China in 1979. Overall, we examine

changes in the structure and management of Chinese SOEs in the move towards marketization. In particular, we assess those reforms conducted from the mid-1990s onwards under the rubrics of the modern enterprise system (MES) and group company system (GCS) programmes. The paper is developed in three phases. First, we describe the evolution of state-enterprise reform in China and in particular discuss the SOE “problem”. Second, we analyse case evidence of SOE restructuring in, primarily, the Chinese iron and steel industry, based upon interviews with senior managers and executives of enterprises undertaking MES and GCS reforms. And third, we bring the paper to a conclusion by discussing recent and likely future trends in Chinese SOE reform and restructuring.

Part one: economic reform and the SOE “problem” The economic reform process that China embarked upon post-1979 differed considerably from other transitional economies – such as Russia, the CIS and Eastern Europe – in eschewing “big bang” or “shock therapy” policies in favour of economic gradualism. This process saw incremental liberalisation of agriculture and the non-state sector (McKinnon, 1994; Oi, 1999; Fishman, 2005) and the gradual establishment of the necessary institutions to facilitate “marketization” (McMillan and Naughton, 1992; White and Liu, 2001; Hassard et al., 2006a, b, 2007; Cooke, 2008). This process is now well documented, as are its organizational implications. Broadly, the organizational/institutional environment has changed in four major respects:

The development of internal product markets and increased exposure to


China’s SOEs


competition. (2) The increasing exposure of Chinese enterprises to international markets.

(3) The multiplication of the sources of external investment funds. (4) High rates of economic growth.

In large part, this process reflects a policy of decentralization of control from central government to local levels, with a consequent shift in ownership and property rights (Nee, 1992; Bolton, 1995; Putterman, 1995; Boisot and Child, 1996; Hussain and Zhuang, 1997; Peng, 1997; Meyer et al., 2002; Sutherland, 2003; Fishman, 2005; Hassard et al., 2007; Cooke, 2008). It has also led to a far greater role for market transactions. SOEs have naturally played a central role in this reform process. In certain accounts, however, the SOE sector has been viewed as anachronistic (Chen and Faure, 1995; Ding et al., 2000). Once the mighty leviathans of the Chinese command economy, they have been depicted variously as “industrial dinosaurs”, “muscle-bound goons” or the “relics of a failed economic experiment” (Woetzel, 2008). SOEs have been characterised as possessing a lack of managerial flare, little concern for profit, low employee motivation and mobility, a tendency to maximise corporate size and as being ready for dismembering (Meyer et al., 2002). Commentators have described their dramatic decline – or even “death march” (Fishman, 2005) – in simple terms of number of enterprises and contribution to Chinese industrial output (Tsui and Lau, 2002). This so-called “pessimistic” view argues that a significant proportion of the less “open” and less “transparent” SOEs pose a significant “problem” for the further development of market-based practices in the Chinese economy (Woetzel, 2008). In sum, the view traditionally expressed is that a significant percentage of SOEs are loss making, their




managers lack real business acumen, and within them significant enterprise reform is difficult to effect (Putterman and Dong, 2000; Tsui and Lau, 2002). In part, such criticism serves adequately to demark the differences between the “old” (state owned) from the “new” (marketized) Chinese economy. However, it also ignores the size of the SOE sector and its continued importance to the Chinese economy and polity. Moreover, such analyses run the risk of ignoring extremely competitive SOEs and the often-blurred boundaries that exist between the SOE and non-SOE segments of the Chinese economy. Woetzel (2008, pp. 1-2) for example, has argued that as the business climate continues to shift over the next decade, the ownership structure of SOEs “will matter much less than the degree of openness they show in their business practices and management – that is, their transparency and receptiveness to new ideas”. Further qualifications can be added from the contemporary history of the reform process to the “pessimistic” accounts of SOE activity. First, their decline has been a relative one: between 1980 and 1995, for example, levels of output and employment in SOEs actually increased, albeit slightly (State Statistical Bureau, 2000). Second, while a large proportion of SOEs are loss making, they are not necessarily inefficient, and many are both profit making and efficient (Cooke, 2008). Third, the economic reform process within the non-SOE segment in China could not have proceeded without SOEs, particularly as many non-SOEs depend on the SOEs for business ties and subcontracting relations (Hassard et al. , 2007). Fourth, a large percentage of foreign investment activity has been conducted through joint venture activity with SOEs (Fishman, 2005; Cooke, 2008). And finally, SOEs have been the buttress of much tax revenue and social welfare provision in China (Hassard et al. , 2007).

Contract responsibility system Initial reform of the state-owned sector came via the contract responsibility system (CRS) experiment. The essence of this reform was an attempt to clarify and codify property rights and ownership as part of the wider transition away from the centrally planned economy (Byrd, 1991; Hay et al., 1994; Chen, 1995; Hassard and Sheehan, 1997; Hassard et al., 2007). The CRS largely governed relationships between the state and the enterprise from the early 1980s until 1995 and operated at two levels: enterprise-level contracting between the state and the enterprise (the state contract system) and an internal contracting system within the enterprise. This system was particularly prevalent in large and medium sized SOEs; for example, in the steel industry, where 85 per cent of enterprises adopted it. Two forms of state-enterprise contracts existed; enterprises would either turn over a fixed percentage of their profits each year to the state or turn over a set amount of profits annually. The remainder of profits was retained for investment, acquisition, restructuring, etc. As such, the CRS represented a considerable shift in ideological, if not real, terms in its acceptance that state enterprise representation was not the sole prerogative of government agencies. Despite self-proclaimed successes of the CRS by SOEs (Chen, 1995; Hassard and Sheehan, 1997), the programme as a whole was deemed a failure for a number of reasons. First, it did not resolve the problems of government-management separation in that SOEs were still prone to government interference and control. Second, the SOEs under the CRS did not have “legal person” status and thus were not independent economic entitles (none was, for example, responsible for financial losses). Third, bilateral negotiations led to disparities between contracts. Fourth, as every

enterprise was expected to succeed under the CRS, inefficient enterprises were kept in operation by over-favourable contract terms. And finally, the CRS fostered a short-term profitability chase and thus, it is argued, longer term organizational instability (Lui, 1987; Chen, 1995; Lee, 1996; Hassard and Sheehan, 1997; Hassard et al. , 2006a, b, 2007).

Modern enterprise system and group company system As a result of such shortcomings, the CRS programme was officially terminated by the end of 1995. This did not, however, presage the end of the reform process for SOEs. Instead, the CRS was replaced by two related models of reform, the MES and the GCS. These were specifically designed to tackle problems that the CRS either did not address or failed to resolve. As pilot programmes, the MES and GCS, were launched in 1994 and 1992, respectively, and designed to promote what can be termed the “corporatization” of medium and large SOEs (Hassard and Sheehan, 1997). As such, the programmes were to embrace certain “western” corporate governance structures – such as boards of directors and shareholders – consequent to making state-enterprises more “entrepreneurial”, reducing government interference and reducing state reliance (Hassard et al. , 2007). The official projected termination date for the MES and GCS programme “experiments” was to be 2010. The GCS programme originally embraced 56 of the largest SOEs and involved the creation of holding companies and a large group of sub-companies with a degree of managerial autonomy from the parent company. The initial reform process was somewhat confused, however, in that the original 56 GCS enterprises also, internally at least, embraced some of the reforms piloted within the 100 large- and medium-sized SOEs of the MES programme. In addition, provincial governments selected local pilot enterprises for MES-styled corporate reforms. Indeed, as it became judged to be an effective strategy for reform, MES-type restructuring became adopted by companies that were not officially included in any pilot project, this pattern being familiar from previous rounds of reform in China, where experimental blueprints tended to become general in industry by the time they were adopted as official policy, the CRS being a case in point. The MES programme embraced the Chinese reform mantra of gaige, gaizao and gaizu (namely reform, reconstruction and restructuring). It was to address four main elements of reform: the clarification of property rights; providing clear definitions of rights and responsibilities; distinguishing between governmental and management functions; and developing “scientific” enterprise management. In order to realise these aims, the reform process was to promote new enterprise management mechanisms, technical transformation and improvement and the re-organization of property rights and assets. Whereas, the GCS programme’s primary aim was to create large internationally competitive companies and a reorganization of resources, assets and structures, the MES was intended to adopt modern management methods and elements of the Western corporate system (Hassard et al. , 2007).

China’s SOEs


Part two: organizational restructuring in China’s SOEs – case evidence In order to appreciate the impact of economic reform on the Chinese SOE economy at enterprise level, we undertook detailed qualitative field work directed at explaining the trajectory of changes to organizational structuring, management strategy and the




institutional environment. The main issues that framed our analysis were concerns with levels of managerial autonomy, the nature of financial and market orientation, the growth of surplus labour and the direction of political influence. In addition, we explored issues related to the culture and practice of the “new” employment relations in China’s SOEs (Cooke, 2005, 2008; Lee and Warner, 2006).

Methodology Our analysis of the MES and GCS reform programmes was drawn from a series of (mostly yearly) research visits to SOEs in China from 1995 to 2008 (further visits are planned for 2010 onwards). On average, visits were of between two and four weeks duration; occasionally, more than one visit was made in a calendar year. These field investigations were based, primarily, on-site visits to ten large state enterprises, nine engaged in iron and steel production and related products and one in petrochemicals and associated products. During the period of field investigation, these SOEs were researched on a rolling programme where enterprises would be visited typically every two to three years to trace their development. Our ten companies were all subject to MES-type reforms, whether as part of the initial experimental GCS and MES programmes or subsequent provincial MES programmes. These enterprises are located in major cites of northern, central, eastern and southern provinces of China. The number of employees currently (as of 2009) employed at these sample enterprises range from 14,000 to 130,000, although at the commencement of research, in 1995, our largest enterprise housed 220,000 employees. In each enterprise, we conducted a number of in-depth, semi-structured interviews with members of the senior management team. These interviews were generally carried out with small groups of executives and managers responsible for business strategy/marketing, production, finance and personnel functions. In three cases (including the largest organization), we gained direct access to the chief executive officer. Each interview was conducted through a translator, almost exclusively a member of the research team. In addition, we carried out a number of semi-structured interviews with academics and industry/ministry officials with direct experience of, or an interest in, SOE reform. The interviews as a whole, which now number over 70 in total, were directed at developing a chronological and longitudinal understanding of the impact of MES and GCS reforms on issues of organizational restructuring, financial regulation, market orientation and employment. In explaining the trajectory of reform and restructuring activities through interpretation of this interview data, we agreed with all our case companies that their identities would remain anonymous. As such, in the overview of case material that follows we refer to our state enterprises simply by way of a letter prefix (e.g. SCo, BCo, TCo, etc).

Organizational restructuring Organizational restructuring is a key to the internal reform process of SOEs providing an umbrella for other reform elements. Before analysing this process, however, a brief sketch needs to be drawn of what exactly these state enterprises entail. In form, they are historically not dissimilar from SOEs of the former socialist states, such as Russia and Eastern Europe, especially in scale of production and social welfare functions. In certain respects, they are similar also to Japanese keiretsus or Korean chaebols, in that they are extremely large vertically integrated enterprises. They differ from the

keiretsu and chaebol models, however, in that they have an almost exclusively single-product focus (in our case, iron and steel), whereas the keiretsus and chaebols tend to be more diversified. As such, they are perhaps more akin to enterprises found in the former state socialist societies of Russia and Eastern Europe. Indeed, historically an apt description of our sample organizations would be “economic and social conglomerates,” given the traditional role of “cradle to the grave” functions and employment and welfare provision. In this respect, they have traditionally been similar to the large Japanese and Korean conglomerates. Where they differ however is in scope, for Chinese conglomerates have traditionally provided extreme vertical integration of economic and social functions, although organizational restructuring processes during the reform period –, e.g. based on marketization philosophies under the MES – have brought with them profound and far-reaching changes to such arrangements (as we describe below). The organizational restructuring process from the mid-1990s has taken different forms in different SOEs, but there is a common trajectory – decentralization and devolution. However, the scale of the decentralisation has differed from organization to organization. For example, one of our main case companies, SCo (one of the China’s largest steel producers) initially decentralized its structure into around 20 sub-companies. In the process, SCo became less a socio-economic conglomerate and more a characteristically economic one. In addition to its core iron and steel activities, SCo comprised production-related sub-companies, such as construction, mining and machinery, and retained a substantial shareholding in a bank. The issues of organizational and financial restructuring are intimately intertwined; organizational restructuring was introduced as a precursor and facilitator of restructuring for a number of key enterprise functions and the marketization of them, including finance, human resource management (HRM) and marketing. It was also, however, a precursor to marketization of social welfare provision. SCo and another case company, GCo, were very much pioneers in this process: staff housing was sold off either to workers or to property developers; service companies were allowed to offer services outside the company; while schools and medical facilities were transferred to local and provincial government. In the process, there has been evidence of the potentially corrupt side to such reform, with several writers indicating that such initiatives have frequently been used illegally to asset-strip SOEs, and notably so during the 1990s (Ding, 2000; Hassard et al., 2007). In general, structural reform has been characterised by the provision of a centralised holding or parent company, the maintenance of the core business (in our case, iron and steel production) as part of the parent company (or close to the holding company), and the decentralization (and in some cases, divestment) of especially non-core activities involving non-production services such as banks, housing, etc. Decentralization represents the crux of the reforms, but is also indicative of its hybrid form, and thus its limitations. At one of our case companies, TCo, for example, the decentralisation process saw the non-core enterprises completely restructured into a conglomerate of sub-companies. These non-core companies were thus transferred with a view to transforming them ultimately into shareholding companies. As one senior manager informed us: “The reform is aimed at the functional separation of all of TCo’s various companies.” He went on to describe an evolutionary process of quasi-vertical disintegration where all sub-companies could be transformed into limited liability companies, would go to the market and be

China’s SOEs





independently managed. Sub-companies would be able to sell and buy outside of the main group. Crucially, however, the group would be the largest shareholder in the sub-companies and would therefore maintain control. This process of progressive decentralization was manifest in all of our SOEs. BCo, for example, was one of the earliest of our enterprises to embrace a “market culture”, both in terms of external and internal markets. By the late 1990s, a senior executive described the organization as “extremely decentralized” by Chinese standards. Interestingly, BCo is a relatively young company, buoyant by industry standards, and located in a part of South China where market reforms were advanced quickest. Here, the majority of day-to-day decision making were delegated to sub-company and unit levels, with top management retaining authority only on large investment projects, key senior appointments and overall strategic planning. A senior executive described this process in the following way:

When subsidiaries are given their independence, they have a contract with the parent company and are accountable for their own profit and loss. The top manager and deputy are appointed by the parent company, but all other appointments are made by the subsidiary itself. They are given a budget by the parent company, and only investments above a certain ceiling have to be approved by the parent company.

Thus, while the key stimulus for organizational decentralization and the formation of

sub-companies has been financial, the reform process has also included ideological attempts to change the centrally planned culture of enterprises to a market orientated one. In other words, the decentralization process in itself has represented a signal from senior managers to other managers and employees of the general philosophy and direction of change. One senior manager at SCo described it in terms of changing the organizational mindset to one of concentrating on “output quality and efficiency” rather than “output volume”, which was traditionally the norm in Chinese SOEs. In contrast, while the majority of managers and executives interviewed during the course of our research have articulated a clear vision of the potential benefits of decentralization, and are sanguine about the potential benefits to their enterprises,

a senior manager at WCo – a very “traditional” SOE – was less optimistic. At WCo,

the main changes have seen the reorganization of service departments into separate sub-companies amidst the development of a “continuous centralised system”, where core functional activities (such as finance) are centralised under the group aegis, rather than dispersed around various departments. With WCo being located in a central province with high unemployment rates, and thus finding it more difficult to “hive off” welfare provision, this senior manager felt that central government interference in his enterprise operations was as pervasive under the MES as it had been under the

previous enterprise reform programme his company had been subject to, the CRS.

Financial regulations MES restructuring has made an enormous impact at all levels of our case companies.

It has been intimately related to, and has significantly driven, for example, financial

restructuring. Within the framework of the marketization of SOEs, internal financial reform serves a number of purposes; it raises capital to reduce debt, it raises investment capital, it reduces state ownership, it allows for foreign finance and technology, and it aims to induce a more market-driven ethos within the organization.

In our sample SOEs, levels of state dependence have varied considerably from the start of MES restructuring. At BCo, for example, the state initially maintained a majority share in the group (55 per cent), with the rest split between foreign investment (25 per cent) and private Chinese investment (20 per cent). BCo has been through a series of reforms during the evolution of state-enterprise restructuring: from the “budget planning system” of the early reform period (where profits were shared with the government); through the “dual pricing system” (whereby the company was allowed to charge prices over the set government rate); to the “joint venture” system with the government (which has allowed for foreign investment). BCo has also been the most financially innovative of the SOEs in our sample, having early in its reform biography promoted a share issue to employees and gained a listing on the Shanghai Stock Exchange. Such innovations allowed the company to invest heavily in new technology, and as a result BCo is today the most technologically sophisticated of the Chinese iron and steel producers, is highly profitable, and a truly global player. Senior executives of the group have described to us how the government progressively reduced its intervention in the organization, although through most of its reform history major investments still had to be government approved. Within other companies in our sample, however, levels of non-state ownership were often more modest, with for example normative state ownership levels of around 60-75 per cent at WCo, CCo, and TCo. However, even in these more “traditional” SOEs a number of financial reforms were being undertaken across the board. These included:

Foreign joint-venture activity (generally in sub-companies or in non-core areas). SCo, for example, initially developed two Sino-Japanese joint venture companies (in robotics and air conditioning).

Moves to limited liability company status. While most enterprises claimed they had achieved such status, especially at sub-company level, in “traditional” SOEs such changes might initially only be on paper or with respect to title.

Employee share ownership. Introduced, as noted, early and widely at “innovative” BCo, but also in departments/sub-companies of in-land SOEs with sub-optimal legacy assets, such as TCo and CCo.

What has emerged from the reform process, therefore, is a mixture of experimentation and pragmatism. Many of our sample SOEs, depending on location and legacy assets, have developed within what Child (1994) and Woetzel (2008) have called the “grey territory” of the Chinese economy – increased marketization, but with state ownership still predominant, and state intervention lessened but still evident. It must be appreciated, also, that the internal financial reform of these SOEs may have had as much to do with access to investment capital as any search for the “liberalization” of the market.




China’s SOEs


Market orientation At the commencement of the MES process, the economic reform philosophy of “market focus” was relatively novel for our SOEs, nurtured as they had been on fixed volume, fixed market, fixed-price imperatives of the centrally planned economy. In contrast, the new “market orientation” of the MES served to embrace three concepts:

(1) New customer focus. That is, an attempt to develop a new concept of markets and customer awareness. This was novel, given the traditional emphasis




on output volume with quality and customer needs being considered either secondary or largely irrelevant. New product focus. The limitations of the centrally planned production system were perhaps most apparent at in-land located SOEs, such as CCo, where a senior manager early in the MES process indicated the deep-seated problems that his enterprise had faced:

We produce a huge tonnage of steel in China. This is all met, but often it is the wrong type of product. For example, our specialism is in steel for shipbuilding, but the plate we make is really too small for today’s ships. Our technology is also old, and our location is wrong for our markets and suppliers.

Other enterprises, however were more innovative, developing higher value-added steel products (e.g. high carbon steel at SCo and stainless steel at BCo). This was contingent on heavy investment in product and process technology (often foreign), which had been facilitated by financial reform. In most other cases, enterprises had diversified upstream and downstream. WCo, for example, developed a highly profitable equipment company, while as noted SCo soon attracted two Japanese joint ventures. Some of our companies also diversified into oxygen markets. Overall, the MES financial reforms were crucial for securing access to capital and foreign technology. (3) New geographical markets. Export markets were historically limited for our sample SOEs. This was largely because of the high level of demand in the Chinese market for construction and consumer products. In addition, Chinese steel was traditionally caught in the position of being a relatively high-cost and low-quality product, thus rendering little competitive advantage based on either price or excellence. As such, there tended to be relatively little export activity. However, during the reform period, this began to improve in many of our sample companies. Notable within our sample was BCo, which from the start of the MES period produced high-quality steel (ISO 9000 rated) and exported it to relatively sophisticated markets (e.g. the USA, Japan and Korea). From the mid-1990s, 20 per cent of BCo’s steel output was being exported to such demanding product markets as the automotive and the petrochemical industries.


Employment relations If fiscal drain has traditionally been one of the key problems facing China’s SOE sector, then surplus employment has certainly been another (Kuehl and Szizaczki, 1995; Lim and Szizaczki, 1995; Solinger, 1999, 2003; Sheehan et al. , 2000; Lee and Warner, 2004, 2006; Hassard et al., 2007). In a very negative sense, Granovetter’s (1985) notion of social embeddedness applies here, as the surplus labour question has hitherto been a major barrier to wholesale reform of SOEs. It is also a major driver of internal organizational restructuring, as for the last decade and more SOEs have attempted to shed workers from core operations, without necessarily making them redundant from the group. However, this has not been the case uniformally, and in wake of the 1988 Bankruptcy Law, for example, other SOEs have made wholesale redundancies (Lee, 1997; Parker and Pan, 1996; Sheehan et al., 2000; Morris et al. , 2001; Solinger, 2003; Lee and Warner, 2006; Hassard et al. , 2007). As a result, the problem of redundancies from SOEs is part of a much wider debate on social welfare reform in China

(Selden and You, 1997; Hannon, 1998; Gu, 1999; Weller and Li, 2000; Sheehan et al., 2000, 2003; Guo, 2003; Hassard et al., 2007). All of the SOEs in our sample have reduced their work forces, in some cases dramatically, during the reform period. Both WCo and CCo halved their core workforces during the period of the research, while SCo reduced its core workforce by 30 per cent. All enterprises anticipated further reductions, with a variety of measures being employed to achieve such downsizing. By far, the most popular method was by transferring core workers to sub-companies within the group, what one manager termed “re-employment engineering”. New ancillary business units and social services provided an important buffer to the core production functions, much in the same way that small firms have in Japan vis-a` -vis larger firms. This has been one stimulus in the search for new business and product areas, such as auto-components and other downstream activities. Other “redeployment” mechanisms have included early and voluntary redundancies and severance schemes, attempts to help workers start their own new businesses, natural wastage, retraining and the replacement of casual labour, and a scheme whereby workers retain their enterprise employment status but do not receive remuneration and organize their own employment activities. The majority of the enterprises researched viewed employment issues such as redeployment as extremely sensitive and had attempted a “gradual” approach. One senior manager described his enterprise’s policy in terms of “establishing the channel before the water comes”, or in other words having employment opportunities available before workers are laid-off. While numbers employed was the key issue affecting employee relations within our SOEs, there were also attempts to introduce new styles of HRM. By comparison with Western organizations, however, such “innovations” could be seen as rudimentary; they represent merely the start of a shift from extremely centralised management and personnel systems, whereby originally managerial appointments were state made and HRM policies were extremely uniform. There are however, far more “progressive” HRM systems and policies in the private sector (Warner, 1999; Ding et al. , 2000; Ding and Akhtar, 2001; Cooke, 2005, 2008; Lee and Warner, 2006; Akhtar et al. , 2008). Although HRM innovations have been tentative and piecemeal, they have nevertheless been generally supportive of MES philosophies to decentralize, encourage individual responsibility, and make the shift from the former fixed volume, fixed market, fixed-price approach to a market responsive, “quality” culture. The major innovation has been greater enterprise autonomy over managerial appointments. Elsewhere, payment systems and contracts were transformed in our organizations. At SCo, for example, MES reform saw a bonus system introduced related to production volume, quality and cost, with the result that wages for similar occupations could vary between plants within the enterprise. This was partly tied to the introduction of new technology, the result being that an increase in wage was offset by a reduced cost base. Indeed, decentralized bonus systems were introduced from the mid-1990s in five of our companies. CCo perhaps developed the most innovative system, whereby managers’ were employed on three-year contracts tied to performance (as opposed to the former lifetime employment) and their pay calculated partly on a performance-related system based on a twice-yearly appraisal. Elsewhere, BCo introduced an employee-contributing pension scheme and a suggestion scheme with rewards. Seen through the eyes of Western managers, such HRM innovations may seem fairly basic, but they have been radical in the historical context of China’s SOEs. What is more, they represented,

China’s SOEs





together with the other MES changes in management and organization, a key ideological shift from the old central control system to a market system.

Part three: recent and future trends in SOE restructuring Over the last five years, the official line from Beijing has been that China will accelerate the convergence and re-distribution of its state-owned assets. In September 2005, for example, Li Rongrong, Minister in charge of the State-owned Assets Supervision and Administration Commission (SASAC), announced that SASAC would design further measures to promote the redistribution of state-owned assets and the regrouping of state-owned firms (Xinhuanet, 2005). Li, who remains the Chief Commissioner of China’s central SOEs, suggested that such regrouping would be on the basis of “market principles” and overseen by the SOEs’ own boards of directors, which signalled a step change in managerial autonomy. Since its establishment in 2002, the main task of the SASAC has been to foster around 80-100 globally-competitive corporations. Thus, far, it has succeeded in reducing, mainly through mergers and acquisitions, the number of central SOEs that report directly to central government from 196 (in 2002) to around 150 today (in 2009). During this process of converging state-owned assets, undoubtedly the toughest obstacle that SASAC has faced has been to remove redundant workers from loss-making SOEs. Central government, however, has offered renewed financial help to SOEs for them to lay-off workers or claim bankruptcy. In sum, although SASAC was originally charged with completing the task of “shaking off burdens” by 2010, in hindsight this was wildly optimistic. An important development in recent years has been that, in a circular published in February 2005, the State Administration of Taxation announced that large SOEs adopting debt-to-equity swaps would receive new tax breaks to boost their financial strength. This policy appeared to be oriented at stimulating SOE performance through relieving the burden of heavy non-performing loans (NPLs). This package of tax breaks would include, crucially, the exemption of value-added tax and consumption tax for SOEs. The tax breaks would operate as a kind of capital support by the government to intensify SOE reforms, given that in 1999 China had established four asset management companies (AMCs) – Huarong, Cinda, Orient and Great Wall – to tackle the rising NPLs of the country’s four major banks – the Industrial and Commercial Bank of China, Bank of China, the Agricultural Bank of China, and China Construction Bank. The four AMCs subsequently conducted a series of debt-to-equity swaps with around 580 SOEs, involving more than 400 billion yuan (US$48.3 billion) of debt. Debt-to-equity swaps were aimed at helping debt-ridden large SOEs overcome their huge financial burdens. The debts were transferred into equities which the AMCs controlled in the enterprises: then a new holding company would be set up, according to the contract of the debt-to-equity swap. Since April 2000, participating SOEs have stopped paying interest on loans to banks, which is reportedly equivalent to an annual sum of 24 billion yuan (US$2.9 billion) (Hassard et al., 2007). Another important development in recent years has been the announcement by officials in Northeast China’s Liaoning Province – one of the last bastions of the planned economy in China – that international investors would be able to take “full control” of those large SOEs under the province’s control. A statement by Liaoning Province’s Vice-Governor Li Wancai in 2006 suggested that the only exceptions would be large SOEs under central government control and coal mines. Until recently,

international co-operation in this province has been restricted to small- and medium-sized SOEs and private companies. Under the guidance of “Document No. 36”, Liaoning would designate around 200 enterprises for international co-operation, predominantly in petrochemicals, pharmaceuticals and general manufacturing. This policy, promoted in Liaoning via central government under the “Office for Revitalizing the Old Industrial Base in Northeast China under the State Council”, was designed to help the industries in the Northeast “rust-belt” attract more investment. To revive the region, the central government subsequently provided preferential policies for foreign companies willing to invest, with Document No. 36 being designed to encourage SOE reform by loosening the twin bonds of debt and redundancy (Hassard et al. , 2007). Given the reform developments outlined in this paper, at the time of writing (late 2009), it is no longer possible to characterise China’s SOEs in the simple bifurcated terms of decades past. As the date originally projected for end of the MES/GCS “experiment” looms (i.e. 2010) the distinctions between state-owned and private sector firms in China have blurred significantly. The “traditional” or “pessimistic” view of China’s SOEs – common at the start of MES and GCS reforms (Nee, 1992; Chen and Faure, 1995) – as industrial and commercial “dinosaurs” fit only for dismembering or bankruptcy, perhaps stands in stark contrast to the profile of those state enterprises that have engaged in global partnerships and acquisitions. A recent stark example of this is the Aluminum Corporation of China’s (Chinalco) projected $19.5 billion purchase of a stake in Rio Tinto in 2009, which raised fears about China’s agenda for the acquisition of Australia’s resources (Munroe and Miles, 2008). As noted, in the foreseeable future the traditional distinctions between elements of the Chinese economy will bleed even more, as SOE ownership structures become of secondary importance to the level of flexibility and receptivity displayed in corporate management and business practice. The contemporary business climate sees foreign multinationals being concerned less with Chinese political patronage and more the value added that a large Chinese SOE can bring to a global partnership, especially given the progressive ability of SOEs to attract managerial talent and develop innovative products and processes, factors perhaps reflective of a step change in state-enterprise competitiveness and reform. There are of course, relativities here in terms of economic sector, location and the degree of political influence in the business dealings of nationally important SOEs. For example, political influence in the Chinese utility State Grid Corporation of China or the oil company China National Offshore Oil Corporation would be far greater than in say the appliance giant Haier or computer maker Lenovo. Nevertheless, the general argument still holds – benefits conferred on SOEs by their particular relationship to the state are consistently, if gradually, being eroded. Further, with exceptions due to nature of global/regional economy, from the beginning of MES/GCS reforms in the early-mid 1990s, the policy of separating government/social functions from business operations has been followed fairly consistently. To prepare SOEs to be competitive in global markets, this zhengqi fenkai policy has been applied in strategic waves – initially to consumer goods, then to high tech and heavy manufacturing, and more recently to banking (Woetzel, 2008). As a rule, unlike earlier reform experiences – for example, the CRS programme (Hassard and Sheehan, 1997) – state patronage in SOE business affairs has been progressively fading. In the process, central government has made SOEs far more accountable for their profits and losses, with access to “soft” (below market rate) capital being far more restricted. Indeed, in the decade from

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the commencement of the MES programme in 1994, official statistics document the failure of 3,658 state enterprises (Hassard et al. , 2007; Woetzel, 2008), with the political runes suggesting that more SOE bankruptcies are likely. Finally, as for the future, the trajectory of large SOE restructuring would appear to reflect that already established in our analysis of the evolution of MES and GCS reforms. Although many SOEs remain hindered by social welfare burdens of healthcare, education and pensions, plus the legacy of archaic plant, equipment and technology assets, these issues are being addressed as government, for example, progressively develops social security measures and shifts traditional welfare burdens from enterprises to the state. Welfare assets such as hospitals and schools can be sold on the open market, this being part of the general “down-sizing of the danwei ” (Hassard et al. , 2006a, b) that has seen tens of millions of state enterprise employees laid off since the mid-1990s. This, however, is a process that has brought with it not insignificant social and political tension.

Conclusions We have described how the economic reform process in China has taken a vastly different form from the “shock therapy” approach to marketization practiced in other transitional economies, especially the post-Communist states of the former Soviet Union and Eastern Europe. In China, the preference has been for gradual reform based on a large measure of experimentation. In part, this reflects the wider context of reform, one where large-scale economic restructuring has not been accompanied by greater expression of political democracy. Differences in the nature of economic reform, however, are also related to the forms of business organization emerging. In the evolution of economic reform, property rights have often remained weak and opaque, and moves towards clarification tentative. Indeed, the establishment of clear property rights has long remained one of the four major obstacles to achieving the kinds of reform suggested under the MES and GCS programmes, the others being enterprise debt, surplus labour and the social welfare burden. Lurking behind all of these obstacles has been the historical reluctance of government to offer a genuine sense of autonomy to SOE managers. In this context, an awareness of the institutional context is crucial to understanding the transformation of SOEs and the Chinese economy in general. On the ground, the scale and conduct of SOE workforce reductions resulting from wide-ranging organizational restructuring has brought about an increased incidence of unrest, strikes and other protests among the workers affected. Over the last decade, the level of unrest has often become so significant that it has hindered the implementation of other major reform measures, such as the end of subsidized housing. The Chinese Communist Party leadership has taken the trend of frequent labour unrest very seriously, rating it the third most worrying threat to stability in China (after the activities of separatists in the Muslim Northwest of the country and the Tibetan independence movement) with the formation of independent workers’ organizations cited as a particular cause for concern. Although concerned senior managers at some large SOEs slightly extended their deadlines for achieving workforce reductions, so as not to aggravate the situation further, small and medium SOEs tended to press ahead with such large-scale organizational change regardless (Hassard et al. , 2007).

In terms of our case companies, the use of service sub-companies as method of organizational change aimed at absorbing unemployed SOE workers has proved a successful method up to a point, but many of these companies have also been reported to be losing money themselves, and there are concerns about market saturation. Thus, this major method of dealing with potentially restive surplus labour appears problematic as a sustainable solution. Neither is the diversion of redundant SOE workers into self-employment without difficulties. It is striking how often in reported instances of unrest, including many where violent clashes with police are alleged to have occurred, taxi and pedicab drivers have been involved, many of whom are former SOE employees. Already among the obvious losers in the state organizational restructuring process, they do not take kindly to any further official action which makes it more difficult for them to earn a living. On the whole, however, the trend for future SOE restructuring is established. The policy of separating government functions from business operations will continue in the drive to prepare SOEs to be competitive in global markets. State patronage in SOEs’ affairs will progressively fade as instead central government makes SOEs more accountable for their successes and failures.

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Further reading Hoskisson, R.E., Eden, L., Lau, C.M. and Wright, M. (2000), “Strategy in emerging economies”, Academy of Management Journal , Vol. 43, pp. 249-67.

About the authors John Hassard is a Professor of Organizational Analysis at Manchester University and Senior Research Associate in Management Learning at Cambridge University. His research interests are in organization theory and comparative studies of management (especially, transitional economies). John Hassard has published 13 books, over 100 research articles, and received a large number of awards from UK research councils. John Hassard is the corresponding author and can be contacted at: Jonathan Morris is a Professor in Organisational Analysis at Cardiff Business School, Cardiff University. His main research interests lie in fields of work and organization in East Asia, new organizational forms and managerial work and critical perspectives in new public management. He has written a number of books on HRM and employment studies. Jackie Sheehan is an Associate Professor in Contemporary Chinese Studies at the University of Nottingham, UK. Her research interests include China’s contemporary labour and political history, particularly the cultural revolution and the democracy movement, and the reform of SOEs. Jacuie Sheehan is the author of Chinese Workers: A New History (Routledge, 1998). Xiao Yuxin is the Manager in the Information Systems division of Baosteel, Shanghai, where his work also concerns organizational change programmes at this large SOE. A graduate of the University of Science and Technology Beijing, he also holds a doctorate from Keele University, UK. Prior to joining Baosteel, Xiao Yuxin was a Lecturer in Management Studies at Aberdeen University, UK.

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