China State Owned Enterprises - Case Study Example

China is country with a culture and traditions that are considered to be one of the oldest standing civilizations in the modern world whose history dates back over three thousand years. The country has a population of 1.31 billion with a life expectancy of 72 years of age (CultureGrams, 2007). China has always been a socialist nation. The country is currently ruled by the Chinese Communist Party (CCP) and its president is Hu Jintao. This nation was one the biggest success stories from an economic growth perspective during a two decade period dating from the late 1970’s to the early 1990’s. The country achieved economic growth of an approximately 10% per year. The state own enterprises were the main source of which help bring prosperity to this nation along with the introduction of foreign investors into the country. These new investors of large corporation such as Motorola started to gain a lot political power among governmental officials. With the introduction of Mr. Jintao as president of China the country began new political reforms and policies to change the way business was performed in China. The state owned companies started to become a second priority for the country and foreign investors became the top priority of the government. These statement state industries which represent a large portion of the economy are struggling due to variety of reasons including the globalization movement, a more competitive environment and the political changes that occurred in the People’s Republic of China. The purpose of this paper is to analyze the state owned enterprises in China to find strategies and solutions to solve the problems these enterprises are encountering. The Chinese people have always emphasized their social system as one in which the collective benefit goes above the needs of any particular individual. Karl Marx one of renounce socialist of the 19th century believed that in democratic nations the ruling class uses it superior intellectual resources to control the flow of information and convince the oppressed classes that their interests coincide with those of their oppressors (NesSmith, 1995). The Chinese State Owned Industries historically serve the best interest of the people by providing a certain level of stability which included jobs and lots of state sponsored benefits. The growing population of this country forced it to implement political reform such as the one-child act of 1979 which limited couples to give birth to only one child per matrimony. It might seem like a cruel imposition, but considering the country population is more than four times larger than the US population whose territory is just about the same the same size it was the only thing the government could do. Just as the political leaders of China took these types of radical decisions 28 years ago to for the good of the people, other reforms came that change business infrastructure on the country in the mid 1990’s and at the start of the 21st century. The Chinese government realized that the growth the economic growth the country had enjoyed in the 1980’s was beneficial for society and there was no turning back. The government started by experimenting with semi-open market which brought a lot of benefits. The new policies were geared towards moving changing the system from semi-open towards becoming a hybrid open market. A communist nation typically would never attempt these types of reforms since their political structure and economic system is not geared or prepared for such an environment. Hu Jintao is an open minded innovative leader that realizes that communism is not supposed to be a synonym of poverty. The well being of the people is what his political regime is all about and bringing in more resources for the people is a good sign and will benefit the country in the long run. In order to move ahead the Mr. Jintao utilized his political power to influence the members of the standing committee and the Chinese Congress to implement a series of new reforms and policies to change the way business infrastructure and balance of the People’s Republic of China. The reforms the country implemented included deregulations, eliminating restrictions in imports and exports, lowing tax rates and a privatization movement. A lot of the moves were geared towards bringing in more foreign investments. In 2001 China accomplished one of the best political benchmarks any country in our world can achieved. In this year the People’s Republic of China gained entrance in the World Trade Association (WTO). The World Trade Organization is one of the most powerful global organizations worldwide which as of September 2007 has 151, including the all members of the G8, countries enjoying the benefits of belonging to the organization. The importance of becoming a member of the WTO was that prior to its entrance the country did not have the ability to negotiate deals with a lot of countries and many investors were simply weary on entering China. The WTO provides lots of protection to foreign investors since it regulates areas such as trade and imposition of tariffs. The global political achievement came at a cost for the internal politics of China. In order to be accepted the country had sign a deal with the WTO which stipulated major changes had to be implemented in China in the near future. The main clause of the deal was that China would be accepted based on the condition that by the year 2004 China had to allow foreign firms to perform business to form their own fully owned subsidiaries without the requirement of entering into joint venture arrangements with state owned Chinese enterprises (Wiseman, 2006). The state owned industries no longer had the competitive advantage of having a foreign partner which to rely on to gain access to additional resources and to administer their operations. On top of that the state owned enterprises suddenly were competing directly with the foreign firms in their own land. In the mid 1990’s the state owned enterprises (SOE) become lackluster units whose productivity was very low which led to large losses for the state. In the year 1996 the reported losses of the SOE in China were nearly the equivalent of one percent of the overall gross domestic product of the country (Zichterman). The political leaders in this country were faced with a huge dilemma concerning these enterprises. The country could not afford to have these units affecting the country’s finances. In order to change the path the country had to implement major philosophical and political changes in the way the government administer its resources. One logical solution which implied a policy change that was unheard in a socialist nation is a privatization movement. “Privatization is interpreted in China as having a very narrow meaning with severe political implications such as the selling off of all SOE” (Zichterman). Privatization is the convergence of transferring a state owned enterprise to the private entity either by being administered by the private sector instead of governmental officials or the sale of state enterprises to the private industry. Privatization a lot of times entails the sale of public services such as electricity, water and garage government operation to the private companies. The public many times does not like the state moving their responsibilities to other hands. These types of services are essential services and at time the private companies do not private the same level of service and the raise the price. Privatization is a governmental decision which often faces a lot of opposition from citizens. In the country of MonteNegro the government started a privatization movement which sparked controversy among its residents. In order to calm public opinion down the Parliament in this country created a special commission to supervise and control the privatization transition (Montenegrin Assembly Decides to Appoint Commission to Supervise Privatization, 2007). Privatization is a hot topic and political leaders across the world know that in order for these types of strategies to succeed they need to learn from the mistakes other country have made in the past in the implantation of these types of initiatives. On October 2006 leaders from Japan, Mexico, Canada and the United States met in Tokyo to discuss the impact and expansion of privatization worldwide (Blake, 2006). Privatization is not always a bad political strategy; it can bring benefits to countries. Privatization is an effective strategy to implement when a country has a struggling industry which they need to maintain running, but can’t find a way to effectively turn a business around due to lack of resources or expertise. In Egypt a privatization program create by its political leaders allowed the country to obtain over $6 billion of capital in the fiscal year 2005-2006 fiscal (Open for Business, 2007). Starting a privatization movement in a communist nation is visualized by scholars as a very improbable move. Gong Hantian, a Beijing University Law Professor, claimed that implementing privatization in a socialist country such as China is not a gospel, but a disaster (The Coase Theorem Invades China, 2007). The reasoning is that the political agenda of a nation with a socialist tradition is to have absolute control of its resources and operate in a manner to provide as many jobs as possible in order to comply with the social goal of full employment. Despite the disbelief of many on implementing a privatization initiative to save the struggling state owned industries, the strategy which the Chinese president choose to pursue paid great dividends for China. The government objective was to covert the majority of its state owned enterprises into profitable entities. The privatization of these entities was enabled by changing the operating structure of the state owned enterprises into corporate structures. By the year 2000 the privatization movement in China helped to turn around 70% of the 6,599 chronically inefficient large state owned enterprises into companies that ended with year end profits (CountryWatch, 2007). The reforms implemented in the ownership system of the Chinese companies continued in the 21st century. In fiscal year 2006 the global assets of China’s top 423 state owned enterprises increased by 14.7% in comparison with the previous year (Xinhua: China’s Major SOE see Total Assets Reach 16.4 Trillion Yuan, 2007). The enterprises became more efficient with the help of the private sector and the change in business philosophy which enable the new corporation to meet corporate goal of increasing its shareholders wealth. The enterprises success also indirectly accomplished the original traditional government objective of the SOE. They were able to meet the social agenda of generation large amounts of employment with social benefits such as housing, healthcare, education and pension payments for employees and their families (Economist Intelligence Unit, 2006). The financial success of the companies enabled the government to realize its political agenda despite utilizing a method which is not aligned with a socialism regime. Privatization many times is not a very accepted governmental policy in democratic nations. The common perception is that privatization reduces jobs since downsizing occurs to increase efficiency. In China this was not the case and privatization worked in an opposite manner. It led in greater job creation for the Chinese people. Politics is a game that is played in order to find the best possible solutions for the people governmental officials represent. Politicians can not let cultural biases or traditions keep a nation from progressing. Change is a simple occurrence that id not assimilated instantly. It takes time for the people to accept change. Results are the cure that can provide evidence for the citizens that justifies the moves of its political leaders. In China the government had the problem of a crop of governmental enterprises that were struggling to survive. The bad productivity of these enterprises was hurting the collective. The Chinese political leaders decided to make the unorthodox decision of starting a privatization movement to revitalize the struggling state owned industries. The high roller political move helped the nation a lot. Hu Jintao proved that a communist nation can be flexible and innovative in its political decision in order to benefit its residents. References Blake, N. (2006). Acting Globally to Defend Public Sector. Australian Nursing Journal, 14(6), 19. Retrieved September 7, 2007 from EBSCOhost database. CultureGrams (2007). China. Retrieved September 4, 2007 from CultureGrams database. CountryWatch (2007). China. Retrieved September 4, 2007 from CountryWatch database. Economic Intelligence Unit (2006). China. Retrieved September 8, 2007 from Economic Intelligence Unit database. Montenegrin Assembly Decides to Appoint Commission to Supervise Privatization (2007). World News Connection. Retrieved September 7, 2007 from EBSCOhost database. NesSmith, W.C. (1995). Social Sciences: An Introduction. Harcourt Brace. Open for Business (2007). Global Finance, 21(3), 31. Retrieved September 7, 2007 from EBSCOhost database. The Coase Theorem Invades China. EclectEcon. Retrieved September 7, 2007 from EBSCOhost database. Wiseman, P. (2006). U.S. Companies Profits Take Off in China. USA Today. Retrieved August 31, 2007 from http://www.usatoday.com Xinhua: China’s Major SOE see Total Assets Reach 16.4 Trillion Yuan. World News Connection. Retrieved September 8, 2007 from EBSCOhost database. Zichterman, A.J. China State Owned Enterprises: Reforming the Corporate Governance Structure. George Washington University. Retrieved September 3, 2007 from http://www.gwu.edu/~ylowrey/Zichterman.htm Read More