Information Disclosure of State-Owned Enterprises in China

• Author: Xu Xuelei and Xu Xin
• Pages: 3-42

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2012 INFORMATION DISCLOSURE 3

INFORMATION DISCLOSURE OF STATE-OWNED

ENTERPRISES IN CHINA

Xu Xuelei* and Xu Xin**

Abstract

State-owned entreprises (SOEs) of the People’s Republic of China are criticized for their

inefficiency. This article is dedicated to finding the appropriate solution to the conflict of

interests caused by state representation of SOEs. The article suggests that the SOEs should

build up a multi-level system of information disclosure to their ultimate owners, the Chinese

people. In this article, the author spends substantial effort in exmaining who owns the SOEs

and thus whose interests may be infringed for their limited liability. Through evaluation of

the past SOEs reforms, the article propses new goals for the information disclosure system. It

also discusses how ordinary people can make use of the information disclosure system to

maximize their goals.

I. INTRODUCTION

The state is a long-lasting and essential equity holder in both

socialist and capitalist economies in both the developing and

developed worlds.1 A state-owned enterprise (hereinafter referred

to as “SOE”) refers to a limited liability company invested and

formed solely or partially by a state organ, state-controlled

institution, state-authorized investment company or a department

authorized by the state.2 The SOE not only operates as a main

market player, but also undertakes the execution of fundamental

social mandates in China. Previous experience and the success of

the “China Model” demonstrate the importance of maintaining state-

ownership. However, despite its success, criticisms of state

ownership have not diminished. Side effects, including but not

limited to inefficiency, corruption and unreasonable costs threaten

the SOE system.

* SJD candidate, Tulane University Law School, USA.

** China law consultant, Weil, Gotshal & Manges LLP.

We want to take this opportunity to sincerely thank Professor Stavros Gadinis and Professor

Richard M. Buxbaum for their generous advice and valuable comments. Without their encouragement

and inputs, we could not reach this outcome. However, any defects or flaws are, of course, our own.

1 Notes from Professor Stavros Gadinis’s instructions.

2 See GU MINKANG, UNDERSTANDING CHINESE COMPANY LAW 79 (2006) (pointing that from this

definition, there are two major elements; firstly, a SOE is formed by special investors, i.e. the state-

authorized investment institution or a department authorized by the state ,secondly, SOE is a form of

corporation, with the nature of a normal corporation).

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4 TSINGHUA CHINA LAW REVIEW Vol. 4:1

One frequent criticism leveled against the SOE system is that

people such as the ordinary private shareholder who bear the risk of

business under the existing economic rules are not in an adequate

position to anticipate government officials’ behavior. State officials

3 who are not the ultimate “owners” of the SOE represent and act on

behalf of the SOE as its representative, and it is difficult to expect

these state officials to work in the best interest of the SOE, regardless

of its ownership. Therefore, the true owners in China are not

capable of knowing the actions of the company’s

representatives. The only restriction is internal, as no external party

is allowed to supervise the SOE, except for those listed in stock

exchanges. In such a system, the interests of the SOE are

compromised when the representatives do not share the same

principles.

The natural question then is who owns the SOE and whose

interests may be infringed. The short answer to this question is the

Chinese people or Chinese citizens. The concept of a social regime

of socialist and communist governors strongly affects some basic

characteristics of SOEs in China.4 The traditional theory regards the

people as the sovereign body, as all public assets belong to them

according to the abstract concept of the “people” as per the

Constitution of the People’s Republic of China (hereinafter referred

as “PRC”). As such, the SOE, as a public asset, belongs to the

people. In this article, we refer to the people as the Chinese

citizens.5

3 If not defined specifically, state officials refer to officials in all levels of governments.

4 Briefly, although in China, the problems derive from the similar agency conflict between

“shareholders” and “directors”, SOE in China dominate in the majority, or at least in the most

fundamental industries in China, such as the gasoline, chemistry, food and military industries. The SOE

should dominate and control following industries: state security related, monopoly industry formed

because of the nature of the industry, industries providing significant public goods and services, as well

as the fundamental industries and main companies in high technology industries, see Zhonggong

Zhongyang Guanyu Guoyouqiye Gaige He Fazhan Ruogan Zhongdawenti de Jueding (中共中央关于

国有企业改革和 发展若干重大问题的 决定) [Several Decisions of the Central Committee of the

Chinese Communist Party Regarding the Reform and Development of SOE], GUANGMING RIBAO (光明

日报) [GUANGMING DAILY], Sept. 27, 1999, at 1 (explaining that the SOE should dominate and control

following industries: state security related, monoplogy industry formed because of the nature of the

industry, industries providing significant public goods and services, as well as the fundamental

industries and main companies in high technology industries).

5 The population of China is highly involved in the activities related to these companies, from

employment and education to consumption, social welfare and social insurance, all of which are highly

reliant or related to the activities of the SOE, see Guoqi Lirun Fenpei you Lifa he Guanli Bumen Juece:

Ying Rang Quanguo Renmin Gongxiang (国企利润分配由立法和管理部门决策: 应让全国人民共

享) [Distribution of SOEs’ profit to be determined by the Legislature and the Administration: It Shall be

Shared Among the People], 2011 Quanguo Lianghui (2011全国两会) [Two National Coference of

2011] (Mar. 5, 2011, 20:32),, http://2011lianghui.people.com.cn/GB/214392/14069361.html

(explaining that the profit of SOE should be distributed between the government and the public, with a

ration of 10%, 15%, or even 30%).

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2012 INFORMATION DISCLOSURE 5

The final question is how to solve the conflict of interests caused

by state representation. One solution would be

privatization. Countries and governments in Europe have chosen to

privatize state owned enterprises through a number of

approaches.6 Nevertheless, empirical evidence has shown that these

approaches, albeit well developed in Western countries, have been

ineffective in a number of Eastern countries,7 whose reasons are

extremely complicated. Most importantly, privatization is

impracticable under the current Chinese regime and unlawful under

its Constitution. Thus, here, we propose a more realistic solution:

sufficient and adequate information disclosure by SOEs to their

ultimate owners, the Chinese people.

II. REFORMS OF SOES AND ITS INFORMATION DISCLOSURE REGIME:

EX ANTE AND EX POSTE

A. Setting Objectives: Ex Ante

During the preliminary stages of SOE corporate governance

reform, objectives of such corporate governance should be clearly

defined. A list of general objectives of corporate governance

includes, but not limited to, maximization of profit, production or

management efficiency (reduction of costs caused by a conflict of

interests), and protection for investors’ or shareholders’ rights.8

However, these objectives have not always been consistently

pursued by SOEs in the past reforms. First, a fundamental dilemma

of these objectives stems from the fundamental state policy of

maintaining control of various enterprises across several sectors,

even at the cost of sacrificing other objectives. In addition, the state

also wants these SOEs to operate efficiently, as per the list of

objectives above, but not solely for the purpose of wealth or

production maximization for the people. Thus, the basic objectives

of the government are not aligned with those of the people, the true

“shareholders” of the SOEs (will be discussed below).

The list of current objectives of the government can be traced

back to a comprehensive concept of “development” (fazhan)

6 Examples are England, France and Soviet Union, see John C. Coffee, Jr., The Rise of Dispersed

Ownership: The Roles of Law and the State in the Separation of Ownership and Control, 111 YALE L.J.

1 (2001).

7 Dieter Bos, Privatization in Europe: A Comparison Of Approaches, 9 OXFORD REV. ECON.

POL’Y 95 (1993).

8 See Jian Chen., Ownership Structure as Corporate Governance Mechanism: Evidence from

Chinese Listed Companies, 34 ECON. OF PLANNING 53 (2004).