SOARING PROFITS MAINTAIN THE CHINESE STATE'S ECONOMIC GRIP

Tweet

A few years ago, when he was appointed to oversee China's big state companies, Li Rongrong could hardly be blamed for thinking he had been handed a poiso- ned chalice. Mired in debt, stained by scandal and weighed down by large, permanent workforces with bulky pension entitlements, state enterprises were held up as the example for all that was wrong about the Chinese economy. Mr Li admits that in many quarters, expectations were low. “We faced big challenges,” he said, in an interview in his Beijing office. “Many people said we could not do a good job.” As it turns out, Mr Li's timing appears to have been excellent. Buoyed by consecutive years of double-digit growth, large-scale lay-offs in the years before and possession of the commanding heights of the industrial economy, the state sector has become more powerful and profitable than ever. Mr Li is chairman of the State-owned Assets Supervision and Administration Commission (Sasac) and the profits of Sasac's com-panies have tripled since the commission's formation in 2003, from Rmb240.5bn ($30bn) in 2002, to an expected Rmb750bn this year. Mr Li's job is to represent the interests of the shareholder, the Chinese government, in the enterprises. The aim is to separate the investor – the government – from government officials, who have long been accustomed to meddling in the affairs of the enterprises. Mr Li's background, as an engineer who made a career in economic planning, first in Jiangsu and later Beijing, makes him a comfortable fit to head such a body. He has 161 companies in his bailiwick – he started out with 169, but they have been winnowed back through mergers and closures – which control the most powerful sectors of the economy. “The numbers of companies have shrunk but the quality of capital under our supervision has improved,” he says. He is clear about the need for the state to stay in control of so-called strategic sectors which, in China, translates into large swathes of the economy. “Many enterprises in the sectors in which the state should not have control any more should exit from the market,” he says. “However, some enterprises should be enhanced and those enterprises should be controlled by the state.” For all the growth of the private sector in China, the state still controls all or most of the oil, petro- chemical, mining, banking, insurance, telecommunications, steel, power and aviation sectors. One of the biggest changes under Mr Li's watch has been the investment behaviour of state companies. Once almost totally reliant on bank loans, many of which went bad, Mr Li says state companies now fund 61 per cent of investment through retained earnings. “One of my requirements is that the enterprises should fund their investment mainly from their own profits to prevent risks,” he says. “The loans from the banks have been greatly decreased.” The state companies have also been forced to concentrate on their core businesses and pull back from their favourite speculative playgrounds of real estate and the stock market. “Few could make money from the non-core businesses,” he says. “In the stock market, for every one person who makes money, two people lose money. So the general result is that they always lose money.” Another change has been in personnel, in attempting to stamp out the common practice of buying and selling official jobs, and bringing in executives from outside into senior positions. “One reason why the multinationals are so good is that they have a global distribution of talent. We have to do the same,” he says. Given the entrenched political culture of the state enterprises, this is an ambitious programme. So far Sasac has recruited 81 outsiders and even held exams for possible recruits at the Chinese embassy in Canada this year. They cannot offer competitive salaries, and Mr Li tells the story of one possible recruit offered Rmb600,000 by Sasac, higher than the chairman of the enterprise. “At the same time, he also had another offer for $600,000 from a foreign company, and so he finally chose to work there,” he says. But that was an exception. Most of the new recruits, invariably overseas Chinese, are happy to take a position with a local salary, perhaps recognising that it is the job that confers on the occupant power and benefits rather than the take-home pay. “If you are hired from the market, you will be paid a market price,” says Mr Li. “But in practice, up to now, there is nobody raising the request of a salary higher than that we offered.”