By Xisi (席斯)
News, page 2
Issue No. 529, July 25, 2011
Translated by Zhu Na
Original article: [Chinese]

The EO has learned that various central government ministries and commissions are currently engaged in negotiations about expanding the number of state-owned companies that are required to submit dividends to the Ministry of Finance.

One of the companies that might be required to submit dividends to central government coffers in the future is the highly profitable Capital International Airport Co., Ltd, which operates under the control of the Civil Aviation Administration of China (CAAC).

The expansion of the number and range of SOE required to pay dividends is part of broader reforms aimed at shifting industrial profits on to the government's books in order to help fund an expansion of China's social services.

The Ministry of Finance (MOF), the Civil Aviation Administration of China (CAAC), the Ministry of Water Resources (MWR), the Chinese Academy of Sciences (CAS) and the State-owned Assets Supervision and Administration Commission (SASAC) began negotiations in August aimed at adding companies that currently operate under their direct control to the list of companies required to submit dividends to the state. 

This is the second round of negotiations since the Ministry of Finance launched a program aimed at expanding the number of SOE included on the list. During the first round negotiations which were held last year, 1,631 enterprises under the control of 5 central government ministries were added to the list, and the central government began collecting dividends from them in Jun this year. 

According to one person close to the negotiations, "most of state-owned enterprises that operate directly under the control of central ministries are small, and are less profitable, so, at the most, it will only result in an additional few hundred million yuan in revenue, but that's not really the point, it's more about the principle of ensuring that these state-owned enterprises be should be paying their fair share of dividends to the state."

It's estimated that there are about 6,000 SOE that operate directly under the control of some 82 separate central government bodies that have been marked as targets for the policy. One of the talking points surrounding this year's negotiations is the fact that CAAC will be taking part.

This is largely due to the fact that the well-known and highly-profitable Capital International Airport Co., Ltd (BCIA), is under CAAC's control. BCIA's profits have surged in recent years, with annual profits for 2011 hitting 595 million yuan, an increase of over 100% over the previous year.

If the company is to be formally added to the list of those required to submit dividends to the state, it would be required to handover about 30 million yuan a year from 2012, according to the current method of calculation which involves 5% of company profits being handed over to the state.

Second Round of Negotiation

CAAC is not the only central government body to be called to take part in this year's negotiations.

Although SASAC is charged with managing China's biggest centrally-controlled state owned enterprises, there are also more than 100 enterprises directly under SASAC's control that have not yet been added to the "state capital management budget" (国有资本经营预算) as the list of companies required to submit dividends to the Ministry of Finance is formally known. Companies that don't appear on this list are not yet required to pay any dividends. 

There are also 112 public institutions (事业单位) that operate directly under the control of the Chinese Academy of Sciences (CAS). Most of these companies are research institutes such as the Institute of Computing Technology (中科院计算机所), the Institute of Software  (软件研究所) and many others. All these institutes also have enterprises operating under their control. 

The deputy secretary of CAS, who was also the general manger of Chinese Academy of Sciences Holdings Co., Ltd or CAS Holdings (国科控股), Deng Maicun (邓麦村) told the EO that CAS had investments in about 500 enterprises, of which only 21 were directly controlled by CAS. However, only about 40 of these companies, less than 10 percent, had annual sales revenue of more than 100 million yuan. Most of these enterprises are small and not very profitable.

Data from the Ministry of Finance revealed that state-owned enterprises supervised by SASAC have made profits of 618.7 billion yuan in the first half of the year, while state-owned enterprises under ministries only made 146.76 billion yuan in profits. 

"This year's negotiations will be harder than last year's, as the easier ones were already included last year," an official who is involved with the negotiation process told the EO. 

Last year's expansion work took 7 months to complete, with the Ministry of Finance successfully bringing an additional 1,631 companies from 5 central government bodies onto the official budget. The additions were only completed after a complicated procedure of collecting materials, requesting feedback, official negotiations, and passing the plan to the State Council for approval - a process that was consistently met with various kinds of opposition. 

The process adds to the workload of both the MOF and the central government body that is being targeted. Although most of these enterprises aren't profitable, their financial books are very messy, and their personnel situation is "complicated," which causes plenty of headaches for the departments involved. 

Before negotiations begin, the MOF firsts launches a full investigation into the companies - looking at how many companies there are, their business performance, their asset holdings, and the type of business they're engaged in etc. 

Negotiations are then conducted according to the statistics collected during this investigation. 

The negotiations hang on the question of whether there are any reasons why this particular company should not pay any dividends and the negotiations attempt to weigh whether the reasons for exemptions are sufficient or not. 

Investigations Run Into Problems but Restructuring Moves Ahead  

The Ministry of Finance organized a full investigation into the enterprises being considered for inclusion in this latest round of expansion last Oct, but there hasn't bee much progress since then. 

According to a person familiar with the situation, progress has been interrupted by the impact of ongoing reform of "public institutions" (see this earlier EO article). These ongoing "public institution" reforms have made in difficult for the MOF investigators to determine the number of employees and assets under the control of certain companies. 

A source from the Ministry of Finance told the EO that "it's very important to first get a clear understanding of the basic data of these companies, how many there, their assets, what they're responsible for, their business performance" and "it's only based on these fundamentals that we can produce a series of policies aimed at supervising and regulating" these companies. 

Because of these difficulties, the Ministry of Finance has required these enterprises to submit documents about their property registration, delimitation of ownership, valuation of assets and other details to the ministry's Administration and Politics and Law Division (行政政法司) or Education and Science and Culture Division (教科文司). 

Restructuring the Companies 

Officials from these two divisions told the EO that the handling of these SOE would be completely different to what happened with earlier reforms of grassroots public institutions. 

Although the investigations by the MOF of companies marked for this second round of expansion have been suspended, the handling of companies that were added to the list last year has already started. 

The main approach to dealing with the restructuring of these companies it to "optimize and integrate - integrate those enterprises that are engaged in a similar type of business, restructure or merge those that repeatedly run an annual loss and ultimately cut any ties with the related central government body." 

The restructuring of these enterprises will mainly involve mergers with other companies operating under the control of various central government bodies, though occasionally these SOE maybe incorporated into the larger SOE that operate under the control of SASAC.

One official from the MOF told the EO that some central government ministries have already started to push ahead with plans to restructure the SOE operating under their control. However, as management of personnel and company direction is still under the control of the relevant central government body and the MOF is only responsible for the management of the company's property rights, they can only offer various incentives,  that is - "provide convenience, but not control."

The EO has learnt that the MOF believes that in the future, if these companies that once operated under the control of various central government bodies are able to be reformed, then according to the principle of "as a company becomes successful, pass on a company" (成功一家、移交一家) it will pass management of such companies to SASAC. 

Another source told the EO that there are currently two main sources of opposition to the ongoing reform of these SOE.

Firstly, these enterprises and their ministries are inextricably linked to each other. Some staff of the enterprises have come over from "public institutions" operating under the ministries; the ministries have also invested assets into these SOE. In some cases, the offices of the companies are located within the grounds of the central government body - meaning that any move to either shutdown or merge the company would not be easy.

The other obstacle is that most of these enterprises are very small, as they're not profitable, none of the parties are actively motivated to push ahead with the reform and restructuring. Most of them are thinking "it's not worth the trouble."