China Investment Environment
State Owned Enterprises (SOE)

In 2003, the Chinese government accelerated economic reforms and restarted an ambitious campaign to reform SOEs as part of the shift from a socialist"central command" to a"market" economy. The SOEs were the backbone of China's "Iron Rice Bowl," the system of guaranteed lifetime employment in the socialist economy. The state firms are managed by political appointees, were never profit motivated and are burdened with excess labor and social issues like health clinics and schools. Half of all SOEs reported losses in 1997, a dramatic statistic.

These companies were and still are, largely dependent upon virtually free loans from large, state commercial banks to keep them afloat, which then weighed down China's big four commercial banks with hundreds of billions of dollars in non-performing loans. According to Standard & Poor, Chinese lenders are burdened with an estimated $846 billion in bad debt, approximately 60 percent of GDP.

One of the main challenges for the SOE reform process was pervasive corruption among local officials and firm managers. Today the issue of corruption is dealt with in a severe fashion, and the government has put into place significant safeguards to help overcome this challenge.

There are nearly 159,000 state-owned or state-controlled industrial and commercial enterprises in China, employing over 150 million people. Beijing has begun a multi-staged campaign to overhaul and privatize SOEs, reduce corruption, and clean up the state banks.

The first step in this process was the creation of the State-Owned Assets Supervision and Administration Commission ("SASAC") during the National People's Congress in 2003. This new central government body is charged with overseeing the assets and personnel of 189 of China's largest and most important SOEs to prevent corruption. Provincial and municipal bodies modeled after SASAC are also being established.

A significant number of China's SOEs have recently been legally and commercially restructured to accommodate the privatization process. This transformation in economic ownership profoundly impacts not only China's transition from a planned economy to a market economy and the sustainability of China's economic growth, but also the livelihood of millions of SOE workers.

For example, the provinces of Sichuan and Yunnan plan to put up roughly 1,000 local SOEs as candidates for acquisition or merger with foreign or private Chinese companies starting in 2006. These initiatives are indicative of gathering activism across the country to sell down stakes in state-owned companies, providing vast opportunities for foreign and private investors. If the sale of such stakes proceeds smoothly, officials and analysts have commented that the size of China's non-state economy will grow significantly.