Farewell, Red Hats(1)

Though privately-invested, they are registered as collectively or state-owned. In the past, they sought government sponsorship. Now, more and more are moving back to private-ownership status. All the rage during the eighties and nineties, they are quickly and quietly disappearing...

They are the Red Hats, companies whose curious ambiguity is a product of China's gear-changing economic system. The State Council is now pushing for a special re-registration program for just such businesses, and if all goes as planned, dusk will soon fall on their historical era.

In the last week of October, You Pingzhou, vice president of the Ministry of Industry and Commerce (MIC), divulged that a new registration system was being developed in order to level the playing field for businesses of all ownership status. The Economic Observer has learned that as early as the end of 2005, senior officials at the highest levels of the State Council were concerned about privately-invested firms obfuscating their ownership status. Ultimately, they left the task for developing a new registration system to the MIC.

In the beginning of this year, teams led by You fanned out across various major Chinese cities to conduct research on Red Hat businesses. The investigation revealed that during the past five years in Shandong Province alone, approximately 10,000 businesses "hung up" their Red Hats.

This past May, the MIC presented the results of their inquiry in a report that was distributed widely among various government organs including the Development and Reform Commission, the Ministry of Finance, and the Ministry of Agriculture. The MIC asked for feedback, but neither the report nor the feedback has yet been made public.

According to insiders, this document includes minute details for a new registration process. Businesses must first go to their local MIC branch to obtain an application and provide all proof of property rights. They then must wait for approval from the concerned administrating body before finally applying for a change in status.

The document is silent on who will arbitrate the property rights disputes that will be inevitable in such cases. According to one property rights lawyer interviewed for this article, this is possibly why the document has not been made public yet, and that in actual practice the Ministry of Finance, the National Asset Management and Supervision Council, industry supervisors, and local courts will all play roles in the process.

In principle, when defining property rights, whoever invested is considered the owner. But anyone with controlling interests will unlikely be willing to forfeit control of their share in rapidly developing industries. In China, neutral arbitration in property rights disputes has historically been nearly impossible.

According to the MIC registrar, statistics show that China's collectively-owned businesses reached a peak in 1995 at 5,340,000. By 2005, there were only one million.