Transnational China Project Sponsored Commentary:
"The Nuts and Bolts of Transforming State Enterprises in China: Experiences of an Expert on Small Scale Privatization"

Mao Lai Talk Image One Mao Lai Talk Image Two

Talk by Mao Lai,
Advisor to Shanghai Municipal Government
James A. Baker III Institute for Public Policy, Rice University
June 17, 1998
Read Text of Talk in Chinese (GB Format)

(English Translation by Caroline Houng)

See Introductory and Biographical Note on Mao Lai:

Editor's Note: The following is the complete, prepared text of Mr. Mao's talk.

The collective economy in Shanghai was formed in the climax of the Socialist Transformation of the 1950s, enlarged with the women's-liberation movement of the 1960s, and developed with students returning to the city from the countryside in the 1970s. It lived a history of frustration, but it now has become an important pillar of the local socialist economy and a key feature in the local side of the national state-owned economy. According to the Municipal Statistics Bureau, by the end of 1996 there were close to 99,000 collective enterprises in Shanghai. They are half of all enterprises in Shanghai Municipality. They have a total of nearly 3 million employees, or one-third of all workers in Shanghai. Their capitalization is about RMB 90 billion (about $11 billion U.S. dollars), 14 percent of all enterprises. In 1997, output value of the local collective economy has increased to RMB 68 billion, or 20 percent of the local GDP. Among the collective enterprises in Shanghai, 25,000 of them are in the urban districts, with 727,000 employees. In 1996, they produced RMB 30 billion of industrial output, or six percent of the total industrial output in Shanghai. They produced RMB 35 billion in consumer goods, or 30 percent of the total consumer goods in Shanghai. They produced RMB 11 billion in construction value, or 25 percent. Collective enterprises have demonstrated their important role in the local economy.


In the recent 10 years, the collective economy has played an irreplaceable role in developing industrial production, increasing exports, pooling funds for development, boosting employment and making life much more convenient for many millions. It has also stimulated the national economy.

1. The collective economy has developed industrial production. From 1978 to 1997, when the state-owned enterprises have shrunk from 91 percent to 56 percent, the local collective economy has increased its share of industrial production from nine percent to 19 percent. In the 1990s, the local collective economy has been growing at an annual rate of 20 percent.

2. It has made life much more convenient. There are over 37,000 sales points in Shanghai's collective commercial economy, 60 percent of the total number (excluding small private ones). They provide a large amount of grocery, food, and general merchandise, with many stores conveniently located at intersections.

3. It has increased exports. Based on the statistics of 1997, the local collective economy in the urban area alone achieved industrial export values of RMB 4.4 billion (about $500 million US dollars), and 16 percent of sale values. For some districts they are the major exporters; for example, in Yangpu District they export 80 percent of all goods.

4. It has pooled funds for development: In 1997, the local collective economy paid RMB 9 billion (about US $1 billion) in taxes to the Shanghai government, 1200 percent more than in 1978 and about a quarter of all enterprise revenue. This is a major source of funding for urban construction and development.

5. It has boosted employment. At the end of the 1970s, 400,000 students returned to the city from the countryside and found employment, largely in the collective economy enterprises. Since the early 1990s, more and more people have been laid off. Among them,190,000 were re-hired by cooperative enterprises. In 1996, average annual wages in the local collective economy were roughly RMB 7,000 (about $900 US dollars). It also shoulders the responsibility for more than 600,000 retired employees. These figures demonstrate the critical role that it plays in community stability and security.

6. It has stimulated the national economy. Although the collective economy suffers from many problems, including ambiguous laws of ownership, outdated equipment and technology, and shortages of capital and human resources, it does not require investment by the government; it relies on the market for production supplies and sales, it is small-scaled and operates efficiently, and it has labor-intensive production. For each RMB 24 yuan invested, the annual output will be RMB 100 yuan, higher than other areas of the economy. And compared to other types of economy, it provides more social benefits.


While building on the positive aspects, we have to address the serious problems faced by the collective economy and examine their root causes.

Collective economy enterprises are confronted by three serious problems:

1. Their number of employees has been shrinking: In the middle 1980s, Shanghai's urban collective economy employed 107.5 million employees, but in 1997 this fell to 727,000, a 39.7 percent decrease. Of all local workers, from 22 percent to 16.3 percent. There are newer forms of collective enterprise -- shareholder cooperatives and others, which are not included in these figures. But even if the newly developed forms are added, the total number of employees has still fallen dramatically. This may stem from reshaping the economic structure, but it also reflects the shrinking ability of old collective enterprises to accommodate employment needs.

2. Their influence in the national economy has decreased: The output value of the local collective economy as a portion of the national economy has decreased from 7.9 percent in 1990 to 6.2 percent in 1996. Collectives' share of retail value has fallen from 33 percent in the early 1990s to 29 percent in 1997.

3. They are losing profitability. It is estimated that over ten percent of collective enterprises are very profitable, about 30 percent are slightly profitable, and over 50 percent are loss-making. Of those loss-makers, 60 percent are in the urban districts and 48 percent are in the suburban areas. In six of Shanghai's 18 urban districts and suburban counties, collectives across the board are in the red. Nearly all collective industries in the "Second Light Industry" sector are loss-making. Forty percent of the collective businesses are loss-makers, and another 40 percent are profitable on the surface but are losing money underneath. Many enterprises have halted production, slowed it down, or have laid off employees. Some have no funds to pay the wages of their workers. More and more cannot afford to pay for medical treatment for employees, and some are almost bankrupt.

The main causes of these problems are:

(1) The problem of control structure and ownership: The local collective economy has been controlled by administrative agencies under the traditional planned-economy system. For a long time, the ideology of "The Bigger the Better, and Communism is the Goal", dominated governmental agencies in their every action, such as: business operations, human resource management, investment, taxation, etc. Meanwhile, the shares that employees owned in their enterprises were returned to them, no dividends were drawn, and property was tightly controlled and integrated into a system of quasi-state ownership. All of these actions were done without the participation of property and management from the employees, thereby depriving them of their rights of ownership as the masters of the enterprise. As a result, collective enterprises became much like state-owned enterprises, their distinction vague. Still, everyone had guaranteed employment and a fixed, equal income. But employees lacked motivation and enterprises lacked energy. Although newer forms of collective enterprise have reformed some of these problems, the core issue of ownership has basically changed little. Therefore, collective enterprises have been stagnant, without realizing any new dimension.

(2) The problem of economic structure and the market: Collective enterprises have poor technological foundations, too many employees, including too many retirees, the handicapped with heavy needs for pension, and so therefore most of their income goes straight toward paying various fees. Not having enough capital of their own and carrying a heavy burden of debts have prevented them from updating production. (In 1996 the capital of local collectives stood at 66.2 percent of their debts, obviously higher than the 59.3 percent for state-owned enterprises, 54.6 percent for foreign-invested enterprises, and 45.2 percent for shareholding enterprises.) For a long time, the collective enterprises were deficient in capital and technology and low in pay and welfare of the employees. [The average annual income for a collective employee was RMB 7,051 (about US$900 dollars) in 1996, but RMB 11,015 (about US$1,300) for state-enterprise workers, and RMB 14,756 (about US$1,800 dollars) for foreign-invested enterprise workers.] Of course this makes it very difficult to attract and retain skilled people.

Consequently, most of these factors force collectives to stay with their traditional products and old industrial structures, thereby making it nearly impossible for them to change and adapt to market conditions. Because it used to be a sellers' market, it was possible for them to live and even to develop. But now it is a buyers' market. There is steep competition from those in suburban counties and foreign-invested enterprises. The problems of urban collectives have markedly surfaced. Even in business, as urban supermarkets develop quickly and attracted more customers, many of those convenient, corner collective shops are also in serious trouble.

(3) The problem of an unfavorable policy environment: Collective enterprises have to deal with a policy environment that makes it very difficult for them to survive and develop. First, taxation policy. The eight-grade system of taxing enterprise income has been in operation for 31 years (For example, a 1986 research revealed that the actual rate of taxation was 50.17 percent for collectives.) This has seriously harmed their potential for development. Since 1994, a unified tax rate has been in effect, but special policies, such as deductions per worker for loss-making enterprises have also been canceled. This has lead to a heavier tax burden for enterprises already in hardship. In recent years, to encourage small enterprises to change into shareholder cooperatives, there are 10 special policies, but the bulk of collective enterprises are excluded from these. Second, finance policy. Banks are limited by loan scales. Also, it has always been banking policy to serve state-owned enterprises first and collectives later. Even though the banks are being commercialized in recent years, they do not provide measures to help poor enterprises. Collective enterprises that are in financial trouble but still contribute to the community are finding it hard to get loans. Since 1994, local credit unions have been merged by commercial banks, and they cater to big enterprises and big projects. No institutions pay attention to small enterprises any more. Third, the problem of re-employment policy. Those laid off from state-owned enterprises are encouraged to go to "Re-Employment Centers" and enjoy preferential policies, while those laid off from collective enterprises have no access to these. Finally, the problem of merger and insolvency policies. State-owned enterprises have the right to merge under insolvency or to file for insolvency voluntarily, but collective enterprises are not allowed to do these.

(4) The lack of a guiding policy agency for collectives. That all these problems cannot be solved has something to do with the fact that there is no high-ranking researching and policy-directing agency in the Shanghai government. As the expression goes, "There are many children, but no parents". Because of this, there is no channel for communication between collectives and the government. Now, some state-owned shareholding groups have begun to merge with profitable collective enterprises once their "capital has been re-arranged".

It should also be pointed out that there are ideological roots to these problems. Many officials think that cooperatives serve the collective, and the collective serves the nation. No matter the form of property ownership -- collective or state-owned -- everything belongs to the nation. This has been the fixed ideology of the government officials. Because of this way of thinking, the collective economy has always been made subordinate to the state-owned economy, during the planned economy period and today. Now, the collective economy is again ignored as it is made subordinate to private and foreign-invested enterprises.


We must not only deal with the serious problems faced by the collective economy and their causes, but also understand the goals of developing the collective economy as laid out at the 15th Congress of the CCP in November1997. Understanding the basic features of China's national economy is the key to understanding the critical reasons for developing the collective economy. Still more, we must seize the opportunity to develop during this period of "two basic changes".

First, developing the collective economy was emphasized in the 15th Party Congress meeting. It was made clear that China is in the primary stage of socialism, and then went on to describe the nature of this stage and the future of development. "This is the basic form of economic system of the primary stage socialism -- state-ownership as the principal, with co-development by many forms of ownership". The collective economy here plays a mediating role in "adjusting and improving the structure of ownership". The basic national conditions in China are a large population, poor infrastructure, unbalanced development and production levels in the primary stage. These conditions make it necessary and inevitable for the development of the collective economy. In the national economic system, state-owned shall be the critical and strategic parts while private and foreign-invested forms can only be a part. Between the two shall be the large collective economy, which serves the strategic need for socialist construction with Chinese characteristics.

Second, Shanghai must come to play a key role in the mouth of the Yangtze River Zone: as an international, national and regional economic center. As an enormous city with international ties, Shanghai needs a large-scale industrial base, a flourishing consumer goods market, and state-of-the-art commercial facilities. But it also needs ordinary, community-level commercial shops and stores. Shanghai needs high-tech and capital-intensive industry, but it also needs labor-intensive industry with close ties to traditional neighborhood economies. This does not mean that the collective economy is necessarily low-tech or labor-intensive, but it certainly has a role to play in the transition to a major metropolitan center.

Third, we need to be clear on the best opportunities for developing the collective economy. Nowadays, Shanghai's collective economy is undergoing a dramatic change. While old, traditional types of collectives are shrinking, new forms of collectives which can meet the current needs of society are flourishing and growing vigorously. For example, there are 3,551 technical-dominant enterprises with 67,000 employees and annual sales of RMB 7.1 billion (about US 900 million dollars). The production rate per person has exceeded 100,000. They contribute a great deal to new product research and serve a key role in implementing government policies that emphasize the integration of science and education with industry. And then, the production-service cooperatives that accommodate jobless people try to be very flexible. Since there are no guarantees of employment or assistance from the government., they operate based on the needs of the society. And they create new businesses based on the kinds of people employed there. They have sprung up spontaneously in many areas and are highly specialized and developed within their areas. The annual sales of these cooperatives are RMB 24.3 billion (about US $3 billion dollars), with profits of RMB 1.34 billion (about US $150 million dollars) in 1997. Again, there are over 300 worker cooperatives operating according to the practice of "self-cooperation, self-operation and self-responsibility for profits and losses." Most of them are relatively successful. The cooperative Hua Sheng Chemical Plant, for example, began with only "3 vats, 6 bars and 9 persons", and now is ranked among China's 500 top companies. In 1997, profits and taxes per person were RMB 790 thousand (about US $95,000 dollars), an international front runner in this line of business. Finally, there are shareholder cooperatives. These currently number 13,000 in Shanghai, and they have become the primary form of reshaping small state-owned and old collective economy enterprises. It is clearly evident that most shareholder cooperatives have great vitality and high profits. This whole group of collectives are worth watching. Nowadays, the economic structure is being adjusted in Shanghai. More and more people have to find new jobs and lots of old enterprises need to be reformed. If we can seize this opportunity, under the leadership of the Party and Municipal Government and directed with the spirit of the 15th Congress of the Party, we can surely push the new development of the collective economy to new heights.


For the development of the collective economy, we would like to make the following suggestions:

First, adjust the structure of ownership so that the collective economy can fill the void the state-owned economy has left. The state-owned economy is currently undergoing a strategic reformation. It is merging and consolidating to construct large-scale, highly-efficient areas of business.

In Shanghai there are 1,600 small state-owned factories and almost 10 thousand small stores, representing only six percent of the capital of state-owned enterprises. Although small, they employ a large amount of people and are focal points in the economic lives of many millions of common people. How they are to be transformed must depend upon their individual situations, but the direction of their development should be clear. Practice has proven that contracting or leasing by private individuals tends to lead to short-term profit-seeking and plundering of assets. Sales or auctions lead to drastic increases in unemployment. Mergers are a good method, but they place a heavy burden on their more profitable partners. The fundamental way to change state-owned enterprises is to let them reform by themselves. The shareholder cooperatives, representing a union of labor and capital, are the most successful means of doing so. Of course, reforming state enterprises is only the first step and not a solution to every problem.

Second, allow the collective economy to energize in many forms of ownership. The troubles faced by the collective enterprises, such as guaranteed employment and fixed, equal salaries, stem from the fact that employees have no relationship with their enterprise. They are collective in name only, and owned, in reality, by the government agencies in their locality or sector. The 15th Party Congress issued a clear criterion for reforming enterprises: "We shall try to look for actual forms of public ownership which will most promote production". The principle of public ownership shall be adhered to, and at the same time the actual forms of public ownership must be boldly sought and created. We must focus on the ownership system in collective enterprises as a way to re-establish the relationship between employees and their enterprise and give them structure as they forge their collective future. Only then can the fervor of workers and the vitality of business exist. There could be various forms, but the general direction has to be salient. When state-owned enterprises are transformed into shareholder cooperatives, a certain portion of the existing capital should be mixed with that raised by employees to form an independent basis of ownership and operation. In this way, many of the old problems of ownership, management and control over property can be solved. Only then will these enterprises be able to enter the market, produce for the market and compete in the market. Surely shareholder cooperatives are not the only way to successfully transform small state enterprises, but they are a superior way, in that the government and the media should take an active role in directing such reforms so that people are not left wondering about their futures.

Third, develop urban business in line with economic restructuring and re-employment projects. Shanghai's economy is rapidly becoming a service sector economy. Industrial relocation and development is being done in such a way as to reform the city and gradually make it a more community-oriented and comfortable place to live. At the same time, the technical structure of the economy is moving toward high-tech, high-quality service. Most traditional collective enterprises, however, are still forced to emphasize quantity over quality, and they must learn to restructure to face the demands of the market. Form now on, the jobless people need to make themselves more versatile, organize themselves into collectives, and connect themselves to helpful government resources. There are several areas, regardless in old or new collectives, that need to be emphasized:

A. Urban services: For example, community organizations might be able to use cooperative forms and modern computer net technology to connect the daily needs of households with surplus labor resources in their areas. And then, city garbage could be classified from the source, then collected, recycled and disposed of by collective cleaning and recycling companies that will replace inefficient individual scrap collectors. And then, developing senior citizen housing communities are a good way to re-employ laid-off women laborers with training and also make use of an empty house. Finally, gardening cooperatives are another possibility.

B. Services in daily lives: For example, currently almost all the breakfast eateries in the city of Shanghai are run by people coming from outside of Shanghai. This line of business can be easily taken back by small Shanghai collectives,

C. Household handicrafts, including souvenirs, embroidery, synthetic jewelry, etc.

D. Technical businesses in the city that consume little energy and create little pollution, such as clothing, food, printing.

E. Self-motivated entrepreneurs in technology. The Bill Gates of China should be encouraged by all levels of government agencies to promote economy of knowledge.

All of these can create more jobs.

Fourth, specify policies that will create an environment more favorable for existing and future collective enterprises. Just as Party General Secretary Jiang Zemin said, "The collective economy can show the principle of making everybody affluent, can attract scattered funds from society, relax the pressure of employment and increase the public accumulation of funds for government development plans." Following these principles, we should consider these proposals in the following policy areas:

1) Taxation Policy. Shareholder cooperatives that are formed from small state-owned enterprises enjoy ten preferential tax breaks, and collective enterprises should be treated with the same.

2) Finance Policy. Set up a "Service Center for Small and Medium Businesses of Shanghai" to provide guaranteed loans for small and medium businesses. Allow individuals and small businesses to rebuild their own credit unions. These cooperative banks should have a special section devoted to helping private enterprises engaged in technology development. And we must revamp the financial system. Since the main commercial banks tend to ignore small businesses, we want to encourage employees to become involved in the direct financing to make their own money more productive.

3) Re-employment Policy. The funds for the "re-employment centers" comes from government, social security and the enterprises of the collective economy as well as state-owned, so the employees laid off from the collective shall be equally treated with those from state enterprises and given services provided by these centers.

4) Merging and Bankruptcy Policy. Laws and regulations on merging and bankruptcy for the collective economy enterprises should be the same as those for state enterprises.

5) Policy of Interest-Free Government Lending. Those collective enterprises engaging in technical reform with good prospect should be supported and encouraged by local government with interest-free loans.

6) Policy of Capital Valuation for Enterprises Undergoing Restructuring. The valuation process for assessing the capital of enterprises undergoing restructuring must be reasonable and rationalized to promote reforms.

Finally, establish an organ of policy research to guide the transformation of the collective economy. Such a government organ must be set up to provide policy advice and not to run enterprises. It should address ownership issues and not manage the sources of capital, and be a macro-advisor and not a trade leader. It should have high quality in supervision and coordination but limited in personnel. In addition, there should be a "General Association of Cooperatives of Shanghai" formed by cooperatives themselves. This association can serve as a channel to connect "Small Government" and "Big Society" in order to make these two entities strive together for the development of the collective economy.

NOTE: Translated and Transcribed from English/Chinese Text by Caroline Houng.