Information Disclosure of State-Owned Enterprises in China

AuthorXu Xuelei and Xu Xin
XU & XU (DO NOT DELETE) 12/3/2012 7:51 PM
Xu Xuelei* and Xu Xin**
State-owned entreprises (SOEs) of the Peoples 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.
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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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 companys
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
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 Peoples 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
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
) [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),,
(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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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.
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.
POLY 95 (1993).
8 See Jian Chen., Ownership Structure as Corporate Governance Mechanism: Evidence from
Chinese Listed Companies, 34 ECON. OF PLANNING 53 (2004).

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