The state-owned assets law is an imperfect guardian

The SOAE Law confirms that the only companies permitted to manage operational state assets are state-owned enterprises (SOEs), state-owned companies (SOCs), state-invested companies (SICs) and joint stock companies with the state holding a majority shares of their shares (Article 2).

The state assets investors
Article 4 of the Law specifies that “the State Council and the local people's governments shall, in accordance with laws and administrative regulations, perform the contributor's functions for state-invested enterprises and enjoy the contributor's rights and interests on behalf of the state”. Confirming the role of state assets investors, the Law, at the same time, emphasises the role of state assets supervision. The State shall also “establish and improve the state-owned assets administration and supervision system” in order to meet “the requirements of the development of the socialist market economy, and establish and improve the evaluation and proper management accountability in relation to value maintenance and increment of state-owned assets”. (Article 8)

Based on Article 4, the state assets investment structure should be: the State Council → local governments → state assets management bureaus → state assets representatives working in SOCs and SIEs. As the State Council is a symbolic representation of the state, Sasac acts on behalf of the State Council and SAMBs act on behalf of local governments and play an important role in managing state assets. Sasac and local SAMBs were established in 2003 and 2004 respectively². Sasac's main tasks include, first, acting as a state assets investor to supervise preservation and increment of the value of state assets for enterprises under its supervision. Second, it is in charge of dispatching supervisory panels to some large size enterprises on behalf of the state and taking charge of daily management of the supervisory panels. Third, it is responsible for appointing and removing top executives of enterprises, evaluating their performance through legal procedures, either granting rewards or inflicting punishments based on their performances and establishing selection systems for corporate executives. Fourth, it is liable to establish and perfect the index system of the preservation and increment of the value of state assets and work out assessment criteria. Fifth, it is also liable for drafting laws, administrative regulations of the management of state assets and drawing up related rules and directing and supervising the management work of local state-owned assets according to law³. In addition to these tasks, Sasac also directly controls 156 gigantic and large size SOCs at a national level⁴. Local SAMBs' main responsibilities, similar to those of Sasac's, are managing SOCs and SICs under their supervision.

In addition to the above key Articles, the new SOAE Law contains a large number of Articles governing the rights, responsibilities and liabilities of state assets investors, managers and regulators (Sasac and SAMBs and their officers).

By the end of 2006, the total state assets in SOCs and SICs had reached Rmb29 trillion, proving the state assets management system works well. But does it mean the state assets management system is faultless? Is the institutional design of Sasac and the SAMBs appropriate? Is there any room for improvement? Why was the new SOAE necessary? The answer is that there were problems that needed to be addressed.

Is the Law a cure?
In the past thirty years since the start of SOE reform, as many as 22 relevant laws and regulations have been promulgated by the State Council. There include four regulations on general rules guiding SOE reform, nine regulations on state assets management, four on state assets evaluation, two on administration of state assets budget, and three on audit management of enterprises' economic liability. Adding regulations enacted by local governments and local SAMBs in monitoring local state assets, the number could be hundreds or even thousands. Taking the three SAMBs as examples, between 2004 and 2007, Beijing SAMB enacted 66 regulations on state assets management, Shenzhen SAMB 20 regulations and Zhejiang SAMB more than 30 regulations. From a legislative point of view, it is not exaggerating to say that China has some of the most detailed and sophisticated legislation for the management of state assets. But the central government and local governments had different approaches in corporatising SOEs and supervising state assets. For example, in 2006, the State Council and Sasac jointly issued their Guiding Opinion on Adjustment of State Assets and Restructuring SOEs (关于推进国有资本调整和国有企业重组的指导意见) which specifies that SOCs should play leading roles in important industries such as military, electricity, petroleum, telecommunication, mine, aviation and transportation⁵. Local governments' policy for developing the local economy is to attract more foreign investment and to accelerate the process of corporatising SOEs. Such difference inevitably led to wide variations, discrepancies, over complexity, confusion and unfairness. The whole system was too complex and too fragmented.

The new SOAE Law aims to rectify these anomalies. But several factors need to be considered. The first and most important factor is to develop a well-trained and experienced judiciary at all levels. As China is a civil law country, legal cases do not carry the force of precedent as is the practice in common law jurisdictions. Provisions (the laws) therefore play an essential role in guiding judges on how to decide cases. Over the past 30 years, judges have turned down many cases relating to disputes in management, transfer and sale of state assets due to the lack of an SOAE Law⁶. Now that the Law has been published, judges should have no excuse for refusing to deal with such disputes.

The second concern is the close relationship between local governments and local courts. In China, local courts are financially supported by local governments, which may sometimes affect the courts' independence when handling cases⁷. A court's budgetary funds are mainly from two sources: funds provided by the government at the same administrative level and the extra-budgetary funds derived from the administrative income of the courts, which basically consists of litigation fees and judicial fines charged or imposed on relevant plaintiffs and defendants⁸. Because of this structure, courts in coastal and urban areas where the local government's financial revenue is adequate receive sufficient funding. They have little incentive to seek additional extra-budgetary income, while a court in a less developed area, due to lack of sufficient funding from the local government, has to explore other financial resources, which have been limited to litigation fees, enforcement fees, and minor criminal penalties.(Xin He) It can be imagined that, if a court in a less developed area receives a case relating to a local well-known SOC's hostile taking over of another local company, the judge who makes a decision may receive pressure from the local government to make a judgment in favour of the local SOC for the purpose of securing steady tax revenue. Such things happened quite often before the reform of the judiciary.(Xin He) Or if a case relates to a foreign-invested enterprise (FIE) or a private company merging with a local SOC, minority shareholders' and employees' interests in the SOC may possibly be compromised in the process of the merger. Some of the employees may lose their jobs. If such a case develops into a politically sensitive case, the local government, as an administrator of society, may consider social stability as a priority and so press the judge handling the case to make a judgment in favour of the employees and minority shareholders especially where injustice is obvious and the disruption of social stability is imminent. Such pressure may put a judge in an awkward position. If the judge refuses to accept the local government's suggestion, the court may lose strong financial support from the government (Xin He). But if the judge makes a decision under pressure from the government, the reputation of the court and even the judicial system will be questioned. There have been judicial reforms and judges have now become stronger and more independent. But as long as local government still has the responsibility to financially support local courts, such potential problems may still exist.

The third concern is the relationship between state assets representatives (SARs) working in a state-owned or state-invested company as majority shareholders, and other shareholders. A potential problem is that when the shareholders' meeting of the SOC or SIC needs to make an important decision relating to merger, splitting, increase or reduction of registered capital according to the SOAE Law, the representative cannot make an independent decision without getting an instruction from the SAMB (Article 13). If the SAR is not the only major shareholder, should other major and minority shareholders also respect and follow the decision from the SAMB? If the Bureau's decision is ignored by other shareholders and the decision made by the shareholders' meeting is not in favour of the SAMB's interests in the company, it would therefore cause the state assets' value to decrease. Should the SAR be held liable due to his incompetence and therefore be removed? Article 70 of the SOAE Law states “where any shareholder representative appointed by a body performing the contributor's functions fails to perform his functions according to the instructions of the appointed body, which has caused losses of state-owned assets, he shall be liable for compensation according to law.” Should the SAR in the above case be considered as failing to perform his functions according to the instructions of the appointed body (SAMB)?

The fourth concern is a local Bureau's role as both a state assets investor and a supervisor. Since the SOAE Law has confirmed that a local SAMB should play the double roles concurrently (Articles 8 and 11), the local Bureau must be careful not to confuse the two roles. When the Bureau acts as an investor, it should consider itself only as an ordinary shareholder without using its supervision power to press down other shareholders' legal rights. Fortunately, the SOAE Law has granted supervision power to local people's congresses to inspect local Bureaus' performance (Article 63). The SOAE Law also requires the State Council and local audit firms to “conduct audit supervision over the implementation of state owned capital operating budgets and the state-invested enterprises falling within the subjects of the audit supervision” (Article 65). The question is: who should have the power to supervise the State Council and local people's governments and how to conduct the supervision? Article 66 of the Law demands the State Council and local government disclose the status of state assets and the information about state assets supervision and administration to the general public. Entities and individuals also have the right to report and file accusations of acts causing losses to state assets. But the SOAE Law does not provide the general public, entities and individuals with detailed guidance on how to oversee both central and local governments' performance in management of state assets. The Law needs to be further amended in order to add more detailed instructions in this respect.

Milestone
China has a long history of SOE reform and management of state assets due to the implementation of the socialist planned economic system. Although the enactment of the SOAE Law should be considered a milestone in Chinese history, it will only be the first step because implementation of this Law will not be free of problems. The SOAE Law has indicated clearly that the Law only regulates operational state assets plus state assets in the finance industry. In the near future, a single national law should be passed in order to govern all state assets in China and to address the underlying problems mentioned above.

Cheng Wei-qi, Law School, City University of Hong Kong

Endnotes

1. State assets law under NPC review, China Daily, December 24 2007

2. http://www.sasac.gov.cn/n1180/index.html

3. http://www.sasac.gov.cn/n2963340/n2963393/2965120.html

4. China Daily, December 24 2007

5. http://www.51kj.com.cn/cksjfg/Shtml/gyzcgl/221119748_2.shtml

6. He Xin, Court Finance and Court Responses to Judicial Reforms: A Tale of Two Chinese Courts, Vol. 31,O3 Law & Policy (2009)

7. Xin He, Routinization of Divorce Law Practice in China: How Institutional Constraints Influence Judicial Behavior, International Journal of Law, Policy and the Family 2009

8. Oi, J, Rural China Takes Off: Institutional Foundations of Economic Reform. pp. 211-218 CA: University of California Press (1995)