China Emerging_ 1978-2008 - Xiao-bo , Wu [12]
Spring Festival (Chinese New Year), 1986. At the same department store, but goods are becoming more abundant.
By 1998, the scene was totally different at this department store.
began to demand from it an increasing percentage of its profits.
The conflict between factory and state authorities on who took what percentage escalated until it erupted in 1986. In December of that year, the BeijingMunicipalGovernment issued an order to Capital Steel, saying that it had to hand over an additional RMB 108.99 million in profit. Capital Steel refused to comply. Instead, the head of the factory sent a letter directly to the State Council and to Deng Xiaoping, saying, “If I were to hand over RMB 1 million, the technological improvements currently underway would have to stop; the improvements in housing and benefits for our employees would be put on hold; and some funds would have to be retrieved from workers who were paid bonuses on the basis of their performance. What’s more, we would have no chance of paying workers this month.” One month later, Deng Xiaoping issued a notice, saying that all contractual terms of Capital Steel would remain the same.
The Capital Steel episode was in fact a contest between two different interest groups within one state-owned asset group. Since then, the same conflict has been played out between virtually all state-owned enterprises and their administrative overseers. People quickly discovered that although the cheng-bao system worked to the extent that productivity increased, there was no clear definition of profit division; therefore, there was no way to resolve the conflicts with administrative superiors. The flip side of this issue was that an enterprise could spend money at will and not be held accountable. Investments made by many state-owned enterprises surged upward, with part of the money going into “business outside the Plan.” Expenditures were uncontrollable, since no one was forced to take responsibility for the consequences of investments. Profits could be pocketed, but losses were someone else’s problem. The idea was, “First make the cake bigger, and we’ll figure out how to divide it later.” As to who was going to pay the bills, that was the state’s problem.
In order to gain control of the situation, the central government decided to reform the taxation system. The first major initiative in steering the state-owned enterprises in the direction of becoming modern companies with corporate governance systems was therefore called, “substituting tax payment for profit delivery.” This was meant to release the enterprises from the paternalistic system of “one big pot,” even if the so-called release was a very small beginning and “Daddy” still took the lion’s share of the earnings. Viewed in hindsight with an objective eye, the “tax-in-lieu-ofprofit” reform helped to ameliorate the conflicts between enterprises and their administrators to a certain extent. Further, it also aroused the enterprises’ enthusiasm. However, the inherent problems in the overall system were not addressed. Tax categories were too uniform to function as a macro-economic tool. The allocation of after-tax profits continued to be extremely complex, with a great deal of latitude for certain interest groups. Even more importantly, the reform did not address the problem of the consequences of an enterprise running into trouble and serious losses. It did not set any parameters on who was accountable. State-owned enterprises still ate from the same big pot; the profit-to-tax reform merely addressed part of the issue of who got how much from that pot.
As part of the debate surrounding the reform of the state-owned enterprises, the theory of the “bird-in-a-cage