The Role of State-Owned Enterprises in Economic Development: Practice in China

Workshop on State-Owned Enterprises in the Development Process

 Zhengjun ZHANGManaging Partner & CEO

KING PARALLEL Consulting

OECD Workshop on SOEs in the Development Process

Paris, France - 4 April, 2014

1. A review on development strategies, policies and industrial policies in China

2. SOEs development stages and current status

3. Public policy functions carried out by SOEs can be observed practically

4. Why relay on SOEs rather than subsidise and regulate private enterprises?

5. Effectiveness, shortcomings, and impacts of SOEs carrying out public policy functions

6. Other State-controlled entities playing role in development

7. Our conclusion: environment, principles, assessments, and conditions.

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Contents

(1) Development StrategiesBefore 1978: to sett up a planned economy, heavy industries was in priority development.

The fundamental form of industrial layout was established.After 1978: to establish the socialist market economic system; to build a well-off society.

The ways of pursuing these goals were also been changed, the government’s focus was transmitted to “taking economic construction as the center“, and the planned economic method was replaced by competition and market mechanism, SOEs reform was started.

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1. A review on development strategies, policies and industrial policies in China

(2)Development policies and industrial policies in different period

4

1978-1992 1993-1997 1998-2002 2002-Present

Institutions

Debates on road of China, and commodity economy was gradually accepted.

Socialism Market system; modern enterprise system; 1st corporate law; starting to establish social security system

Strategic Transformation as the directions of SOEs economy

Upgrading CG rules for listed firms and SOEs; new state-asset administration system.

Markets

Competition appeared and increased

Securities market opened;Competition intensified

Ownership transaction and market booming; competition intensifying continued

Exploitation of the west region; breaking of the obstacles of the regional market; multiple-layers of security markets; element market forming

SOEs reform

To expand SOEs’ autonomous right; various responsibility system, including contracting

Modern enterprise system pilot without ownership reform; M&A, split off non-core business assets, dealing unperformed debt assets; policy bankruptcy, employment lay-off.

keeping large while easing small; split off administrative function from some SOEs, Corporate governance.Large scale of selling SOEs.

New ownership supervisory and CG system for SOEs; scale and scope expansion of many SOEs, strengthened competitiveness of many SOEs; M&A activated in both government oriented and enterprise oriented.

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(2) Development policies and industrial policies in different period （ continued ）

1978-1992 1993-1997 1998-2002 2002-Present

Other sorts of ownership enterprises

gradually eased limitations on private firms development, and introduced foreign investments

Fast growing of private companies and foreign companies.

No. and production values of private companies surged;Listing opened to some private firms.

Continue developed fast; politically level underlined to fare competition among all sorts of companies.

Industry policy

Market mechanism in agriculture and light industries, several sub-sectors in heavy industries and energy sectors,are keynotes of industry policy

Strengthen fundamental role of agriculture sector and infrastructure sector; speed up development of pillar industries; adjust foreign trade structure; speed up high-tech industries development

Promote infrastructure; upgrading pillar industries; encourage M&A, corporatizing, listing and selling out.

Heavy industry development; global manufacture center; real estate industry development and price regulation; industry upgrading and innovation.

Contents

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1. A review on development strategies, policies and industrial policies in China

2. SOEs development stages and current status

3. Public policy functions carried out by SOEs can be observed practically

4. Why relay on SOEs rather than subsidise and regulate private enterprises?

5. Effectiveness, shortcomings, and impacts of SOEs carrying out public policy functions

6. Other State-controlled entities playing role in development

7. Our conclusion: environment, principles, assessments, and conditions.

2. SOEs development stages and current status

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1980 1992 199722% (Numbers) 20% 18%81% (Revenue) 65% 44%84% (Profit) 55% 25%70% (Employment) 64% 65%

/1998 2002 2010

39% 23% 4.5%52% 44% 28%36% 45% 28%60% 44% 19%

Statistic Range Changed

Stage 1 Stage 2 Stage 3 Stage 4

(1) Development of SOEs in Manufacture Sector

8

Number of subdivided industries dropped into sections in the left column

Revenue proportion of SOEs

1993 2005 2009 2012

More than70% 11 5 4 3

50%-70% 10 3 2 4

30%-50% 11 4 4 3

Less than 30% 6 25 27 29

(2) Changes of SOEs distribution in Manufacture Sector

Authorizing SOEs rightsNo ownership change

Start: SOEs were factory workshopsBroad social functionsSoft budget constrain

Establishing pro-market institutionsLarge SOEs kept State-owned

Ownership organisation reform SOEs restructuring: function, IPO, laid off

Centralized ownership function Corporate governance reform

The main stream of SOEs reform and development was trying to improve efficiency

Results: SOEs become real companies with: Profit oriented goals, Pro-market mechanisms, Resource advantage, Market Competition54 SOEs in Fortune 500 in 2012, while only 3 Chinese firms in 1995. SOEs were the Major actors of abroad investment

•Let SOE autonomy

•Introducing incentive

•No ownership change

•Market economy orientation

•CG legal Framework

• Stock market providing fuel

• Multi model of ownership function

•Less administrative function, Core assets IPO ,Laid off workers & exit over-capacity

• Control large while free small.

• Centralised model of ownership function

• BoD system prevailed.

• Strong outside supervisory

(3) Changes of SOEs

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1978: Deciding authorizing to SOEs

1979: Deciding let SOEs keep profits

1983: introducing business running contract

1988: Law on Industrial Enterprises Owned by the Whole People

1991, 1992: Opining of two Stock Exchanges.

1993:Political decision of building a market Economy; and to introduce modern enterprise system

1993: The first Company Law issued.

Large SOEs kept purely state owned, while some SM-SOEs became joint-stock companies.

1997: Political decision gave permission for SOEs to exit.

1998: Government system reform, some industrial ministries dismissed

1999: Political decision to set up CG and Multi-ownership structure in SOEs

2003: Central SASAC established

2004: Pilot action on Building BoD in SOEs

2005: Company Law revised

2008 :Law on the State-Owned Assets of Enterprises issued.

Until now-days, BoD establish continued, 52 central SOEs established BoD

Authorizing SOEs rightsNo ownership change

Establishing pro-market institutionsLarge SOEs kept State-owned

Ownership organisation reform SOEs restructuring: function, IPO, laid off

Centralized ownership function Corporate governance reform

(4) Milestones of SOEs reform and development

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11

124.5

68.6 24.5 18.7 37.6

(5) Status of SOEs in whole economy in 2010

All SOEs in all society: 1/3 Revenue, 2/5 in profit and taxation SOEs in central and local level shows a half and half in gross volume

In Year 2010

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(6) Status of SOEs in Service Industries in 2010

Non-finance service industry Finance industry

construction

Real estate

wholesale

retail communication

aviation

banking

securities

Revenue（％）

20 Around

30 27 8 95 80 —— ——

Net profit （％）

13 —— 33 10 62 91

Total asset （％）

21 Around

30 31 10 97 57 86

Net asset（％）

14 Around

30 34 9 97 57 87

Calculated by Mr. Chen Xiaohong, from 2011 China Enterprise Development Report.

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(7) Sector Distribution of State Assets in All industries in 2010

Industries

State Asset distribution

Industries

State Asset distribution

Total(BillionYua

n)

Proporation （ %）

Total(BillionYuan

)

Proporation（ %）

1 、 Agriculture, Forestry, Husbandry, Fishing

2171.7 0.58% 9 、 Real estate 20430 5.46%

2 、 Manufacture 14248.8 38.11% 10 、 IT Service 955 0.26%3 、 Construction 14143.8 3.78% 11 、 Social Service 59011.5 15.78%4 、 Geological Exploitation and Water Conservancy

1856.2 0.50%12 、 Heath, Sports and Welfare

278.8 0.07%

5 、 Transportation 62678.8 16.77%13 、 Education, Culture and Media

2941.1 0.79%

6 、 Warehousing 1140.4 0.31%14 、 Scientific Research and Technology Service

2219.8 0.59%

7 、 Post and telecommunications

33413.1 8.94%15 、 Gov. Department, Society and others

7063.8 1.89%

8 、 Whole Sell and Retail, Catering

23060 6.17%

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Top 10 Subdivision

Industries

Production Value AssetsData

（ Billion Yuan）

Proportion（ %）

Data（ Billion Yua

n）Proportion

（ %）

Electric Power and

Heating

3,742 20.1 6,803 27.5

Transportation

Equipment

2,579 13.9 2,595 10.5

Oil Processing and

relevant

2,074 11.2 934 3.8

Black Metal 2,019 10.9 2,614 10.6

Coal mining 1,249 6.7 2,191 8.8

Oil Exploitation 939 5.1 1,613 6.5

Chemical Products 925 5 1,219 4.9

Nonferrous Metal 796 4.3 876 3.5

Tobacco 581 3.1 544 2.2

General Equipment 464 2.5 608 2.5Total of SOEs in the Top 10 Subdivision Industries

15,367 82.8 19,996 80.6

SOEs in all Manufactory 185861 100 247760 100

(8) Subdivision Industries Distribution in Manufacture in 2010

Proportion of

SOEs in

Subdivision

Industries

Subdivision Industries in Manufacture

> 50%

Tobacco （ 99%）， Oil & Gas Exploitation （ 95%）， Electric

Power and Heating （ 92% ） ， Oil Processing and

relevant （ 71%），Water Supplying （ 69%）， Coal Mining

（ 56%）。

30-50%Transportation Equipment （ 47% ）， Gas Supplying （ 44

% ） , Black Metal （ 39%）

10-30%

Nonferrous Metal （ 28% ）， Nonferrous Metal Ore （ 27% ），

Special Equipment （ 22% ） ， Chemical

Products （ 19% ） ， Drinks （ 16% ） ， Black Metals

Ore （ 14% ） ， General

Equipment （ 13%）， Pharmaceuticals （ 13%）， Rubber （

13%）， Non Metals Ore （ 11%）， Printing and Duplication

（ 12% ）， Metal Ore Products （ 10% ）， Instrument and

Meter （ 10%），

Other 15 subdivision Industries which production value lower

than 10%.

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(9) SOEs Proportion in Subdivision in Manufacture in 2010

Contents

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1. A review on development strategies, policies and industrial policies in China

2. SOEs development stages and current status

3. Public policy functions carried out by SOEs can be observed practically

4. Why relay on SOEs rather than subsidise and regulate private enterprises?

5. Effectiveness, shortcomings, and impacts of SOEs carrying out public policy functions

6. Other State-controlled entities playing role in development

7. Our conclusion: environment, principles, assessments, and conditions.

In the past 35 years, the fact that SOEs are the carrier of public policy objectives had never been clearly announced by Chinese government. Most of the policies were to realize the reform, reorganization and transformation of SOEs, which enabled them to become qualified part of the market. Meanwhile the function of SOEs in implementing public policies can be observed.

(1)The SOEs are objects of the reform and transformation, of which the goal is to build up real market competitive bodies.

(2)Considering the large proportion of SOEs in economy, better performed SOE contributed greatly to the whole economy growth in China.

(3)The main public policy functions that SOEs undertake includes: to promote economic development; to take up a dominant position in important sectors; to develop a cooperating and competitive relationship with non-state-owned enterprises; to avoid abusive usage of the dominant market position and to reward the society.

3. Public policy functions carried out by SOEs can be observed practically

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continued to previous point (1)

SOEs Characteristics

In 1978 In 2012

Status

There hardly existed privately-run economy and the output value of SOEs attained about 78%

Publicly-owned enterprises almost accounted for 99.9% of the total industrial and commercial enterprises

the proportion in number of SOEs in the field of industry decreased to 5%; revenue and profit accounted for about 1/4

In service industry, the revenue proportion of SOEs in construction, business, and real estate was not high, while in communication, aviation, publishing and finance industries, the revenue proportion of SOEs accounted for more than 80%.

Business competition

The SOEs were the workshops of the big social factory: plans were transmitted by leaders; goods and materials were allocated; finance revenues and expenditures were unified; all goods are purchased and marketed by state commercial agencies; price was fixed; staff were deployed by the state; wages were same

The SOEs were almost in competitive fields and the market mechanism in majority of fields was playing the major role; many state-owned and non-state-owned enterprises practiced the method of cooperation and division of labor in the upstream and downstream of the industry chain; the expansion of invest was strongly promoted; diversification of enterprise business and collectivization of enterprises; social functions had been split from most enterprises.

A comparison of the characteristics of SOEs In early period of reform & opening-up and at the present

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SOEsCharacteristics

In 1978 In 2012

Propriety right

Ownership by the whole people

Such patterns of propriety right as solely state-owned, state-controlling and state-owned capital joint coexisted

On the level of the parent company of the national enterprises, except 6 enterprises that were controlled by more than one state-owned capital organizations, others were all wholly state-owned enterprises. Among the listed enterprises, the proportion of SOEs was 38%; the proportion of market value was about 51%.

Governance

soft budget constraint

social organizations were set up by enterprises, including schools, hospitals, etc

lifetime employment system

unified and average wages

About 20% of the enterprises were registered according to the Law on Enterprises and practiced the system of general manager responsibility without board of directors. Other enterprises were all registered on the basis of Law on Enterprises, and set up such governance systems as the board of shareholders, board of directors and board of supervisors. On the level of parent company of SOEs, quite a few were still solely state-owned, but the board of directors was quite common.

continued to previous table

continued to previous point (3)

The Constitution of China has made clear the leading position of state-owned economy in national economy. Besides, the 16th, 17th and 18th national congress of our party have stressed several times that our country practices “the basic economic system of keeping public ownership as the mainstay of the economy while allowing diverse forms of ownership to develop side by side”. According to the basic economic system, the SOEs and state fund are in nature the tools for national economic development.

The Fourth Plenary Session of the Fifteenth Central Committee of the Communist Party of China, pointed out that state-owned enterprises take a dominant role in important industries and key areas which are related to the lifelines of the national economy. They sustain and lead the development of the economy, exerting a significant influence on the state macro-control goal. In facts, it shows the leading function of state-owned enterprises.

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Contents

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1. A review on development strategies, policies and industrial policies in China

2. SOEs development stages and current status

3. Public policy functions carried out by SOEs can be observed practically

4. Why relay on SOEs rather than subsidise and regulate private enterprises?

5. Effectiveness, shortcomings, and impacts of SOEs carrying out public policy functions

6. Other State-controlled entities playing role in development

7. Our conclusion: environment, principles, assessments, and conditions.

In fact, in a transmission from China’s planned economy to the market economy, the intervention of government is steadily decreasing. In the past, the government had an overall intervention in term of enterprises’ production, sale, personnel, salary, distribution, etc. But now the government intervention has gradually focused on public administration, formulation development strategy and industrial policy.

As this process was a long and gradual one, the intervention still exist, however, it could be observed with features of growingly respect market rules and the legal environment, and market mechanism played more and more important roles in resource and elements distribution.

In China, there were no authoritative explanations on the government’s intervention in economy and it’s relying on state-owned enterprises rather than other methods to achieve public policy functions. But we can borrow the market failure theory and the research results of the OECD.

4.Why relay on SOEs rather than subsidise and regulate private enterprises?

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(1) Why government intervene economic activities?

An Market Failure explanation on roles of SOEs : Using ownership control to remedy market failures of

Externalities – airport, aviation, infrastructure, public transportation; public R&D platform

Natural monopoly– telecom, electric grid, etc.

Public goods supplying, and public asymmetric information– city utilities such as water supply, gas supply, road construction and

maintains. Huge sunk costs

– large infrastructure, such as airport, subway system

Inefficient market mechanism in a developing economy.– General infrastructure; certain sector development or industry upgrading.

Insufficient legislation, regulation or public governance in a transition economy.– Food Safety; competiveness promotion; national industry growth up.

(2)

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(2) Why government chose means of ownership rather than the industrial policy or industrial regulation?

“Ownership control could be seen as a sort of economic tools implemented by the government replacing others, such as industry policies, industry regulation, market mechanism, and market regulation”

Ownership control, industry policy, market mechanism and industry regulations could be complementation of each other. They could be used to solve certain failures in the ineffective market and used to accelerate economy development especially in early stage of development.When there is a lack of industry policy, market mechanism or industry regulations, ownership control could be serve as a flexible implement; The boundary of state-ownership or private ownership on a certain enterprises, theoretically lies in the range and degree of market failure, and well the effectiveness of industry policy, market mechanism and industry regulations.Along with improvement of market mechanism, industry regulations and industry policy in China, such as strengthening consistency of government intervention with market mechanism, the boundary could be further moved to more privatization.

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Contents

25

1. A review on development strategies, policies and industrial policies in China

2. SOEs development stages and current status

3. Public policy functions carried out by SOEs can be observed practically

4. Why relay on SOEs rather than subsidise and regulate private enterprises?

5. Effectiveness, shortcomings, and impacts of SOEs carrying out public policy functions

6. Other State-controlled entities playing role in development

7. Our conclusion: environment, principles, assessments, and conditions.

5. Effectiveness, shortcomings, and impacts of SOEs carrying out public policy functions

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(1) Effectiveness and shortcoming from the perspective of performance

The performance of state-owned enterprises has a huge influence on the increase of economy.SOEs production in terms of GDP proportion in 2006

First Industry

Second Industry and Construction

Third Industry

Whole Nation

Proportion in Industry (%)

5.8 33.3 50.6 ——

Proportion in Whole Nation (%)

0.68 16.31 19.92 36.9

AGR of SOEs in manufacture Sector during 2005-2010Total Industry

ProductionTotal profit Net Assets

All manufacture Sector (%)

22.7 29.1 19.5

All SOEs in manufacture Sector(%)

17.3 17.7 14.1

SOEs in top 10 output manufacture industries (%)

17.9 39.2 19.2

27

26. 36%

32. 59%

16. 08%

11. 42%12. 42%

16. 97%15. 53%

22. 12%

26. 08%30. 06%

0. 00%

5. 00%

10. 00%

15. 00%

20. 00%

25. 00%

30. 00%

35. 00%

2006 2007 2008 2009 2010

国有及国有控股工业企业 私营工业企业

ROE

0. 941

1. 096

1. 038

1. 105

1. 003

0. 985

1. 085

1. 171. 214

1. 079

0. 8

0. 9

1

1. 1

1. 2

1. 3

2006 2007 2008 2009 2010

国有及国有控股工业企业 私营工业企业

TFP

101. 21

81. 3180. 2468. 67

54. 8344. 67 64. 41

54. 4847. 4741. 73

34. 1128. 24

0. 00

20. 00

40. 00

60. 00

80. 00

100. 00

120. 00

2005 2006 2007 2008 2009 2010国有及国有控股工业企业 私营工业企业

Gross industrial output value per capita

0. 780. 70

0. 780. 780. 750. 73

1. 781. 721. 731. 691. 60

1. 51

0. 60

0. 80

1. 00

1. 20

1. 40

1. 60

1. 80

2. 00

2005 2006 2007 2008 2009 2010

国有及国有控股工业企业 私营工业企业

Turnover of total assets

SOEs in Manufacture SOEs in Manufacture

SOEs in Manufacture SOEs in Manufacture

Private firms in Manufacture Private firms in Manufacture

Private firms in Manufacture Private firms in Manufacture

he ROE, TFP and the total assets ratio were clearly lower than that of the private sector. The gross industrial output value per capita was the only one who is higher than private enterprise, which is mainly because of the increasing level of intensification

The activeness in economy of state-owned enterprise can be seen from the activeness of merger and acquisition

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No. of M&A by Large Companies in 2010

Buyer company

No. of Companies

No. of companies being merged

No. of Companies being merged per buyer company

Chinese 500 182 1112 6.1

SOEs in Chinese 500

134 903 6.7

Private Firms in Chinese 500

48 209 4.3

From the perspective of SOE reform, the effectiveness of the reform in the state-owned enterprise is mainly becoming market participants, which participated in the market competition actively. Some SOEs have gotten rid off the overall losses situation and showed the flexibility activeness to the market competition.

The reform of state-owned enterprises, especially the strategic reorganization after 1998, most mid and small sized SOEs privatized. Such privatization imposed two effectiveness: one is giving room for the development of private enterprises; the other is enhancing the techniques and managements of private enterprises.

But in some fields, especially in natural monopoly, and administrative monopoly sectors, sector reform and SOE reform lagged behind. Thus market mechanism had not been effective and the efficiency of the company needs to be enhanced.

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(2) Effectiveness and shortcoming from the perspective of SOE reform

In the field of natural monopoly, such as power network and communications which are mainly owned by the state and they have shouldered the responsibility of stability of the network and system and universal service. But the problem of price, efficiency and the deepening of reform has been the focus of various controversies.

In the service field of public goods, some typical ones like postal service, urban road construction, urban public transport, water supply, electricity supply, and heating supply and so on, state-owned enterprises are taking charge. In those fields, state-owned enterprises have a good performance on general and stable services. The main critics are about the enterprise’s inefficiency and the low-quality of direct services.

In typical externality fields, the government is pursing externality directly which enjoys merits and demerits, such as airports, many cities had built the airport in advance which later contributed to local economy development, but in some cities, those airports had been operated like unused because of the lacking of the passengers.

Under certain circumstances, state-owned enterprises have played a significant role as steady supplying and general services: electricity generation; petroleum supply; “Every Village Projects” carried by grid companies and by telecommunication companies.

Because of the multiple aims of those monopoly enterprises and public products, and government has not given enough subsidies for carrying out public functions, plus assessment indicators are mostly scale and financial return, Thus, enterprises which are responsible for the public policy functions also have a strong incentive for profits.

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(3) Assessment on public policy functions carried out by SOEs

Problems in sectors with strong entrance limitation: lacking reform impetus, because of lacking competitive stress and

rich profits. And it is possible that these companies trying to prevent those reforms that will eliminate interest of the company.

SOEs in those areas are mostly the wholly state-owned enterprises or the majority shareholder enterprises, lacking pressure from private capital, thus could be easily result in administrative intervention, the management personnel being administrated, and the inflexibility in personnel appointing, dismissing, and salary mechanism.

There are double need of industry system reform as well as SOE reform in those these sectors. But because of its huge influence on national economy and the social operation, reforms were usually lagged behind because of cautiousness.

Along with improvement of market mechanism and legal system, if we are too obsessed with public policy function carrying out by SOEs, the efforts of establishing effective industrial regulation and market regulation might be squeezed out, and thus may prolonged the effective conditions needed to deepen SOE reform.31

(4) Impacts on ownership and governance by carrying out public policy function

Contents

32

1. A review on development strategies, policies and industrial policies in China

2. SOEs development stages and current status

3. Public policy functions carried out by SOEs can be observed practically

4. Why relay on SOEs rather than subsidise and regulate private enterprises?

5. Effectiveness, shortcomings, and impacts of SOEs carrying out public policy functions

6. Other State-controlled entities playing role in development

7. Our conclusion: environment, principles, assessments, and conditions.

Development Banks:

Three policy banks were set up in China, namely, the China Development Bank, the Export Import Bank of China, Agricultural Development Bank of China, and they are directly under the control of state council. The main purpose of the establishment of the National Development Bank is :

① to prepare the circulate necessary funds for key constructions in nation, in order to guarantee the smooth progress of key construction which concerns the overall situation of national economic and social development; ② to centralize the state investment funds which have been managed separately in the past, and establish investment loan review system, which gives the investment credit decision-making power to development banks, and requests it to undertake the corresponding responsibility and risk, in order to prevent blind investment and redundant construction.

6. Other State-controlled entities playing roles in development

33

Economic Development Zone:Economic Development Zone generally includes several types, such as Economic and Technological Development Zone, high-tech industrial park, high tech Development Zone, and all kinds of industrial parks (such as agriculture development zone, chemical industrial park, automobile industrial park, etc.). According to the scale of development zone, it can be divided into national development zones, development zones at the provincial level, municipal development zones and so on. Up to May 2011, the number of national economic and Technological Development Zone reached 128.

The purpose of establishing economic development zone is different, some of them are for promoting scientific research and developing high technology industry, some of them are for attracting foreign investment and expanding export. Development zone are generally in accordance with relevant national industrial policy on foreign investment, and cut taxes on the encouraged projects invested directly from foreign enterprises (such as policy on corporate income taxation that the exemption will be in first two years, and reduction half for next three years), preferential land and other preferential policies to attract industry, various funds and real investment to develop factory, office. Some places promote the local economic development by opening development zone, such as the Shenzhen Special Economic Zone, Shanghai Pudong New Area, Suzhou Industrial Park, Tianjin Development Zone, etc. 

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Contents

35

1. A review on development strategies, policies and industrial policies in China

2. SOEs development stages and current status

3. Public policy functions carried out by SOEs can be observed practically

4. Why relay on SOEs rather than subsidise and regulate private enterprises?

5. Effectiveness, shortcomings, and impacts of SOEs carrying out public policy functions

6. Other State-controlled entities playing role in development

7. Our conclusion: environment, principles, assessments, and conditions.

(1) It should be a stage regularity of government’s intensive intervene in economic activities; SOEs operations in many jurisdictions are becoming increasingly market-oriented.

(2)It is better to assign the public policy functions to SOEs, based on the market failure rather than random wishes

(3) There is a need to assess the cost and return, between the way of using ownership control and the way of implement industry policies & regulation, before making strategic decision on country’s development strategy and development policy, there should be a way suitable for one certain country.

(4) There are conditions for using SOEs and other state-controlled entities, and a more appropriate development policy should be considered when conditions changed.

7. Our conclusion: environment, principles, assessments, and conditions

36

37

Condition for Development stage: Relatively lagged behind development level, or weak economy——strong

incentive for development Shortage of finance, shortage of skills Imperfect market mechanism Strong needs to overcome shortage of public goods providing, weak

investment in externality industries, and weak industry regulation.  Conditions for government：

Strong Catch-up goals set by government Rather large sum of resources (including nature resources) controlled by

government yet under being exploited Weak government capability in term of legislation, regulation and market

mechanism building, but perhaps strong in administration power in some countries.

 Conditions for SOEs: Strong ownership peering from government department rather that weak

or dispersed ownership rights. Efficient corporate Governance mechanism Profit or value oriented for most SOEs in general industries sector, clear

separation between commercial and non commercial objectives in one SOEs in term of accounting, operation objectives and clear accountability.

Hard budget constraint and market competition pressures, competition neutrality important

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