Guo Lihong

The following understanding can be reached over economic restructuring: the major target is not to achieve a "more reasonable" economic structure through government mobilization of financial resources of the society, but to establish, through reform, transformation and system buildup, a mechanism that suits the needs of automatic and sustained adjustment of the economic structure. The basic approach of the government in economic restructuring should shift from the traditional one of "state-driven development" to "market buildup".

Chinese government has dual characters. As in all countries of market economy, the government, on the one hand, is both the organizer and administrator of the national economy. On the other hand, unlike in other market economy countries, the government possesses a commercially-active government capital of miscellaneous categories that is enormous in terms of aggregate and proportion. What's worse, a system of capital providers and institutions of ownership representatives have not been put in place. In the strategic economic restructuring, the government has its own responsibilities whereas the government capital operates with its own activities. Both are playing an extremely important role. However, a clear distinction should be made between them, which should not be confused with each other. Otherwise, it may intensify the traditional habitual force that capital operation is dominated by administrative means.

I. The failure to separate the functions of the government and those of capital is the root cause for the failure to separate those of the government and the enterprises.

A series of policies have been promulgated to separate the functions of the government from those of enterprises, but only limited results have been achieved. The root cause is that it is unrealistic for enterprises to operate with "complete independence", as any type of enterprises cannot possibly get rid of the guidance and supervision of their owners. For state-owned enterprises, where the owners are not in the due place, the government will naturally enhance its intervention in some or other form even though it has quit intervention in a certain way. No matter what changes may occur in the form of intervention, the process of intervention is a result of administrative choices instead of market, and the evaluation of performance is often determined by the will of those in authority instead of economic results.

In the process of the strategic economic restructuring, a system of government capital provider must be established. A number of issues can be understood and tackled properly under the precondition that the owners are placed in their proper positions.

1. There is the possibility of market access or withdrawal for government capital, but not sunrise or sunset industries.

Given the vast territory of China where economic development is uneven, earnest efforts should be made to join the competition so long as there is market demand for an industry. In this sense, there is no difference between sunrise and sunset industries, and no one should rush to give up an industry. In the wave of economic globalization, if we are unable to seek a place in certain high-tech industries or if some traditional industries move gradually toward decline, the only reason is that the government fails to provide system guarantee, and to a less extent, it is due to the internal law of the international division of labor.

While commenting on industrial structures, some government officials talked about market access and withdrawal. This is a total mixup between "the entry and phaseout of the government capital" and "structural adjustment". This clearly indicates that when the enterprise owners are absent, the government is often not clear about its own position.

2. It is improper for financial departments to represent the rights and interests of the shareholders.

The rights and interests of the shareholders mentioned here refer to the payable profits of enterprises, and the income earned from stocks sold. The two parts of the profits undoubtedly belong to shareholders in any enterprises. However, for the government capital, the profits will ultimately become part of government revenue in one way or another at a certain point when no one represents the owners. Financial departments represent the rights and interests, which is the financial root for the failure to separate the functions of the government from those of capital. One of the shortcomings is that the government capital lacks a unified and standard financial means that belongs to all owners during the strategic economic restructuring, it still has to turn to government departments for their favor as in the past. The fanatic "rush for money from the departments" since 1998 has evidently demonstrated this point.

Some government departments have exercised the power (usually when it comes to the rights) of the owners in one area, while in other areas (usually obligations) they cannot boast as the owner due to their limited powers. How difficult it will be to try to separate the functions of the government from those of the enterprises and to achieve strategic restructuring and reorganization under such circumstances!

3. There are too many negative effects resulting from eliminating losses and increasing profits through administrative measures.

To eliminate losses and increase profits through administrative measures is based on administrative punitive measures, and enterprises and officials at various levels have to obey administrative orders and act as dictated. While no fundamental solutions are found to a large number of system-related issues, the simplest counter measures are to cut the percentage deducted from depreciation costs. In 1994 when the depreciation system was reformed, the comprehensive depreciation rate of state-owned industrial enterprises that kept independent accounts reached an all-time high record of 7.2%, but the figure plummeted by three percentage points (3.8% in 1996 and 4.1% in 1997) in the next two to three years, making the depreciation rate of state-owned enterprises lower than that in the early years of the reform drive in China (4.3% in 1982). In 1999 when business conditions and operation performance were greatly improved, the comprehensive depreciation rate of state-owned and state-dominated stock-holding industrial enterprises stood at only 4.7%. Calculated by the figure of 1994, the depreciation funds fell by 132.9 billion yuan. In contrast, the discount interest of government bonds used for technical renovation reached 9 billion yuan in 1999.

Administrative orders are usually carried out by various departments and sectors. No matter what sectors or departments they may be, they would ask well-performing enterprises to reduce the percentage deducted from depreciation funds and report more profits so as to showcase the achievements by the entire sectors or departments when they are unable to turn enterprises with poor performances into profitable ones. Therefore, like all other administrative measures adopted in the past, any attempt to eliminate losses and increase profits through administrative measures will eventually lead to inverse adjustment of enterprise structures by subsidizing the poor at the cost of the rich and driving the fastest to run even faster.

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