A Real Picture of State-owned Enterprises

Sheng Hong

Unirule Institute of Economics, Beijing

EFN Asia 2011 Conference

Kuala Lumpur, October 11, 2011

A Research on State-owned Enterprises in China

• “The Nature, the Performance, and the Reform of State-owned Enterprises in China”, by Unirule Institute of Economics， April 12, 2011.

Background of the research

• There is a tendency in recent years that the state-owned enterprises has been expanding while the private sector has been withdrawing.

• There is a controversy about SOEs in China. One opinion maintains that the rise of SOEs is a good example of so-called “China’s Model”, and advocates that the country should continue to make SOEs stronger and stronger.

• Another opinion argues that good-looking performance of SOEs is not a result of fair play with private firms, but has been gotten by monopolistic powers, varies of favored policies which allowing them to use resources at very low prices or even at free, and subsidies by the governments. The SOEs should be reformed again.

Book profit of SOEs

• The SOEs made a total profit of 5846.2 billion yuan from 2001 to 2009, with the total book profit of 2009 increased by 3.89 times over that of 2001.

Lower than private firms

• From 2001 to 2009, the average return on equity of SOEs was 8.16%, while that of non-state-owned enterprises was 12.9%. Therefore, the nominal performance of state-owned and state-holding enterprises was not high enough.

Comparison of nominal ROEs between state-owned enterprises and other enterprises 2001~2009 Unit: %

The performance is not real

• Even the performance of SOEs is not their real performance, but one after enjoying various preferential policies and under such a management environment which is unfair to non-stated-owned enterprises. The unfairness is mainly embodied in fiscal subsidy by the government, financing cost, and land and resource rent, and so on.

Land rent

• If we compute the industrial land rent at 3% of the price of the industrial land, the industrial SOEs should pay a total rent of 3931 billion yuan from 2001 to 2009, accounting for 67.2% of the total nominal profits made by SOEs. Only in 2008, the SOEs should pay 1210 billion yuan rent for the land if we add the land for commercial and service use into the whole amount.

2001 2002 2003 2004 2005 2006 2007 2008 2009

Land rent payable (billion yuan)

376.9 385.6 397.0 408.9 401.9 423.2 492.7 516.8 528.2

Land rents payable by state-owned and state-holding industrial enterprises 2001 ～ 2009

Interest rate

• The real interest rate for SOEs is 1.6%, while that average market interest rate is 4.68%. If we recount the interests which should paid by industrial SOEs with the market interest rate, the total interest difference will be 2297 billion yuan from 2001 to 2008, accounting for 47% of the total nominal profits made by the SOEs.

• Unit: billion yuan

01000200030004000

5000600070008000

Di ff erence i npayment

2180 2201 2087 3092 2351 2756 3509 4822 4542

I nterests pai d 1134 1145 1085 1608 1223 1433 1825 2508 2362

2001 2002 2003 2004 2005 2006 2007 2008 2009

Resource Royalties

• The real royalty of oil the SOEs paid is less than 2% of its price, far below the ratio of 12.5% which is imposed on the joint ventures in China. Even collection proportion for special oil gain levy above 40 dollars per barrel is too low to fully realize interests of resource owners. From 2001 to 2009, the SOEs lack to pay 244 billion yuan of the oil royalty. Together with those of coal and natural gas, the SOEs lack to pay 498 billion yuan of royalty of resources.

• Unit: billion yuan

0

500

1000

1500

2000

Oi l rents payabl e butnot pai d

165. 2 161. 4 189 249. 9 409. 7 305. 4 289 250. 8 416. 3

Rents pai d 47. 63 47. 97 51. 41 58. 94 89. 76 518. 3 733. 8 1471 434

2001 2002 2003 2004 2005 2006 2007 2008 2009

Subsidies

• From 1994 to 2006, the state fiscal subsidy for the losses of SOEs accumulated to 365 billion yuan. According to incomplete data, from 2007 to 2009, the state-owned and state-holding industrial enterprises received fiscal subsidy is about 194 billion yuan.

• Unit: billion yuan

Fi scal subsi di es

0

20

40

60

80

100

120

Fi scal subsi di es 26. 2 21. 4 19. 4 18. 2 16. 7 18. 0 17. 8 95. 6 81. 0

2001 2002 2003 2004 2005 2006 2007 2008 2009

Real performance of SOEs

• The real performance of state-owned enterprises can be estimated through deducting those costs without paid but should be paid and governmental subsidies, together achieving about 7491.4 billion yuan, from nominal profit of the state-owned enterprises. According to our estimation, the average real return on equity of state-owned and state-holding enterprises from 2001 to 2009 is -6.29%.

A nominal pie of SOEs

Depreciation of fixed assets18.2%

Nettaxes on production23.2%

Laborer’s remuneration

36.4%

Total norminal profit22.3%

A real pie of SOEs

Total real profits

-6.3%

Profit turning over

• SOEs did not turn over any profits from 1994 to 2007. In 2009, only 6% of SOEs’ profits were turned over, and the rest was all distributed within enterprises. In 2010, it decreases to 2.2%.

Average Wage

• In 2008, the average staff wage of SOEs is 63% higher than that of private enterprises.

Proportion of the per capita income of SOEs to that of private enterprises

Tax

• From 2007 to 2009, the average tax burden of 992 state-owned enterprises was 10%, while that of private enterprises was as high as 24%.

Conclusion

• SOEs is not only inefficient, but also unfair.

• Public ownership, or state ownership is much worse than what we imagine.

Thank you!

• SHENG Hong• 盛洪• 天则经济研究所， www.unirule.org.cn• 天则公用事业研究中心， www.ccppp.org• 中评网， www.china-review.com• 山东大学经济研究院• shenghong@unirule.org.cn