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.  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.  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.

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 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.  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.  

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.  Nevertheless, empirical evidence has shown that these approaches, albeit well developed in Western countries, have been ineffective in a number of Eastern countries, 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.