State corporations, globally, have poor business performance stemming from competing loyalties of these firms: to the state as their owners and to capitalism as businesses. This is no different in china State Owned Enterprises, which previously, languished under operational inefficiencies, massive debt due to their ease in getting government debt and consistent losses for most of them.
These state corporations had to face restructuring to reduce production inefficiencies, improve management, increase their returns to the state, and compete with other organizations both at home and abroad.
The reforms in China State Owned Enterprises have been an ongoing process, which has taken place over many years. It began with the management reform between 1978 and 1984. The focus of this period was to increase the capacity of management in the state owned enterprises. Instead of all profits reverting to the government, the organizations would keep some of it for reinvestment after meeting state quotas. The reinvestment money was in technology, building expertise, and capital investment.
The second stage focus was on the dual track system (1984-1992). In the dual track, management had greater autonomy over human resource: they could employ and fire employees. However, this was only to implement government agenda and not with a business motive.
Secondly, the management could sell their products at 20% above state prices once they met production quotas set by the government, which were under regulation of state prices. Later in this stage, government relationship with management of state corporations had a change from general administration by the state to contractual contracting; Profit remittance also had a change to profit tax.
Third stage of Chinese State reforms begun from 1992 with a focus on organizational and management structure. The reforms gave state corporations the ability to overhaul their organizational structure to improve their industrial competitivity. Additionally, leasing state corporations were permissible by law; employees and the public could invest in them partially or entirely sold to private organizations or public.
In 1997, 500 largest state corporations held 37% of china industrial assets while contributing 46% of state tax. By 1998, 25% of Chinese state corporations had undergone restructuring, which rose to 86% 2001. 70% of state corporations had undergone some form of privatization in 2001.
The government state owned corporations share of GDP fell from 78% at the beginning of the stage two of the reforms in 1984, to 11%. This was, however, at the behest of massive layoffs within state corporations. Their redeployment and compensations have undergone further criticism by the people of China.
The result of the efforts of China to reform its public sector has been enormous, but it is now crossing national borders. Western countries are now wary of the increasing influence of China state corporations, which can now bid competitively for contracts in the west. The awarding of western government contracts, and approval for mergers and acquisition to china state corporations has become quite a tacky issue.
An example is China CNOOC intention to takeover Nexen oil (Canada) has undergone many political hurdles in its path to fruition. Given source of economic growth in china over the past three decades has been foreign investment that is now slowing due to a growing middle class; an increase of domestic investment is essential if China is to maintain its growth trajectory, Chinese State Owned Enterprises have a key role in this agenda.