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China Defense Industry - 21st Century

Even after decades of economic reform and liberalization, the state continued to own and manage the "commanding heights" of the Chinese economy, particularly heavy industry. The basic framework of government institutions remained based on the planned economic system. Problems arising from this framework included the absence of a separation of government functions from those of enterprises in order to maintain the direct involvement in production and management of enterprises by the government. Over time this led to indistinct responsibility for policymaking, as the government took upon itself matters belonging to enterprises, establishing a large number of special economic management departments resulting in duplicate departments and functions. As a result, it was difficult to give scope to the role of market in the allocation of resources. The mechanism of direct management over enterprises by special economic departments was increasingly ill-suited to the requirements of building a modern enterprise system.

As noted by Luo Gan, state councilor and secretary general of the State Council in a speech on the Plan for Institutional Restructuring of the State Council delivered at the First Session of the Ninth National People's Congress on 6 March 1998:

"Many problems which should have been resolved by legal means or through social intermediary organs have also been taken up by the government through the establishment of government management organs, with the result that the government has undertaken excessive social responsibilities, affairs, and contradictions. The government has taken up the management of many affairs which it should not have managed, is not in position to manage, or actually cannot manage well. As a result, the government cannot concentrate on dealing with matters that should be dealt with."

Failure to separate government function from that of enterprises generated red tape and bureaucracy and encouraged corruption and other unhealthy tendencies. Under the reforms announced in early 1998, the functions of the government would be separated from that of enterprises. The government would its function to macroeconomic regulation and control, social management, and public services while returning the responsibility for production and operation to enterprises.

At the sector level, most military industrial enterprises are involved in both military and commercial production as China has emphasized the exploitation of defense facilities for overall national economic growth. The Torch Program is a leading government effort promoting the shift of scientists and engineers from traditional projects to those with greater commercial potential. By the mid-1990s it was reported that nearly 70% of the output from Ministry of Ordnance Industry facilities and 80% of shipbuilding and repair activities were for nonmilitary use.

1999 Restructuring

With the approval of the State Council on 01 July 1999, the Chinese government split the top five Defense and Technology Corporations into ten new enterprises. These corporations are all large State Owned Enterprises (SOE's) under direct supervision of the State Council. These SOE's are the China National Nuclear Corporation (CNNC); the China Nuclear Engineering & Construction Group Corporation (CNEC); the China Aerospace Science and Technology Corporation (CASC); the China Aerospace Machinery and Electronics Corporation (CAMEC); the China Aviation Industry Corporation I (AVIC I); the China Aviation Industry Corporation II (AVIC II); the China State Shipbuilding Corporation (CSSC); the China Shipbuilding Industry Corporation (CSIC); the China North Industries Group Corporation (CNGC); and the China South Industries Group Corporation (CSG).

In each case, two new enterprises were formed from each of the five pre-existing corporations. In general, the pattern was to consolidate defense-oriented subsidiaries under one enterprise [which in some instances retained the old name], while splitting off a new enterprise that typically included a more commericial orientation that subsumed many non-core business lines that had accreted over time.

The military-industrial corporations being restructured into the new groups represent an important step in reforming management structures of the science and technology industry in national defense, improving competitiveness of related enterprises, and accelerating national defense modernization. The Commission of Science and Technology for National Defense Industry continues to play a role in supervising the industry and drawing up policies, laws, regulations, and standards governing the development of these groups.

According to Chinese Premier Zhu Rongji, the newly-established groups should make an effort in five areas: separating government from businesses; setting up a mechanism of fair competition; concentrating scientific research on ensuring production and development of weaponry and equipment; promoting better military-industrial layout and restructuring; and creating a good environment for enterprises to free themselves from difficulties and get reinvigorated. He said the groups should be shaped into economic entities that are solely responsible for their own profits and losses and urged that they act according to the rules of the market. He urged the industry to develop products and technology for both military and civilian purposes, adding that more advanced technology should be introduced to boost the industry. The "Decision Of The Central Committee Of The Communist Party Of China On Major Issues Concerning The Reform And Development Of State-owned Enterprises" was adopted at the Fourth Plenum of the 15th CPC Central Committee On September 22, 1999. It stated "Since the Third Plenum of the 11th CPC Central Committee, the Party has opened up a new way of building socialism with Chinese characteristics, guided by Deng Xiaoping Theory. To overcome the defects of the traditional planned economy, we have consistently emancipated our minds, sought truth from facts, advanced gradually in due order, and constantly deepened the reforms of SOEs and the whole economic system to push forward the modernization drive. Profound changes have taken place in the SOEs' management system and operational mechanism, and a large number of enterprises have grown strong amid market competition..."

2002 "The Three Represents"

The Party's Constitution mandates the establishment of a Party committee in any organization, including privately owned firms in China, that has more than three full Party members. The CPC has all along attached great importance to "party building," but previously the overwhelming majority of party organizations were based at traditional strongholds such as government agencies and state-owned enterprises, but now party organizations are becoming more prevalent in the private sector. In November 2002, "The Three Represents" was coded into the Party Constitution at the 16th Party Congress, which required the CPC to represent the development trend of China's advanced productive forces, the orientation of the advanced culture and the fundamental interests of the overwhelming majority of the people.

Accordingly, party membership has been broadened to absorb outstanding personnel from the new social strata. President Hu Jintao, also the general secretary of the CPC Central Committee, in 2010 urged efforts to build grassroots party organizations in all social sectors to realize "universal coverage" of party organizations.

Party organizations in private companies help soften internal conflicts, safeguard employees' rights and interests, thereby promoting the healthy growth of these companies. Instituting party organizations in non-public enterprises would help accommodate rights and interests of various groups within the company.

Among China's Internet companies, Le Holdings was not the first and would not be the last to have its own Party committee, raising eyebrows among people expecting less State involvement in the fast-growing and innovative technology sector. The private sector Party committees are more than a reflection of the CPC's engagement with the public; it's also expected to help propel the companies' growth. The committee does not meddle in the company's operations, but it is important because it ensures the enforcement of government policies. Party committee usually holds regular meetings on measures and regulations issued by both the ruling Party and central government. After being briefed on the Internet business' targets, Party-member employees can set a good example for others and help the company establish order and discipline. CPC membership or actively participating in committee activities are not directly linked to a career growth and higher salaries.

2017 Restructuring

The State Council, China's Cabinet, issued an implementation plan in July 2017 to make all central State-owned enterprises corporate enterprises by the end of the year. The reform restructures SOEs into limited companies or corporations in order to separate their governmental and business functions. The project is a significant measure to propel State-owned enterprise reform. It aims to promote an effective and balanced governance structure for the central SOEs as well as make them more flexible and market-oriented.

The reform involved 69 central State-owned groups with about 3,200 subsidiary companies. The State-owned Assets Supervision and Administration Commission has drawn up the timetable for the reform. By the end of September all the group companies involved in the reform should report their corporate system reform plan to the commission, and the subsidiary enterprises should report their corporate reform plans to their parent companies. All the parent companies and subsidiary companies should complete their business registration before the end of November 2017.

2019 Restructuring

In December 2014, the two largest state-owned train manufacturers in China - CSR Corp and China CNR Corp - announced their merger. The merger was further implementation of China's mixed-ownership enterprise reform to build larger and stronger enterprises. In the first half of 2019, the mergers and acquisitions and reorganization of the listed companies on the Shanghai Stock Exchange (SSE) showed a new look and pattern. The reorganization logic based on the integration in the same industry and of upstream and downstream companies became the main theme in the market, and the cases of blind and me-too cross-border reorganization prevailing in the past few years were further reduced.

From the perspective of the industry, the industries with active mergers and acquisitions mainly included communication and information technology, basic chemicals, medicine, nonferrous metals, and national defense and military, which are characterized by significant scale effect.

By early 2019 it was apparent that the main tendency was to reverse the divisions that were implemented in 1999, and to re-combine Chinese firms into single national champions. The merger of China Shipbuilding Industry Corporation (CSIC) and China State Shipbuilding Corporation (CSSC) began when senior executives at the respective corporations swapped positions in March 2019. State-run China Cosco and CSG were believed to be in the process of consolidation, and their listed units have suspended their shares trading since 10 August 2019. Similarly, China Merchants Energy Shipping (CMES) and Sinotrans & CSC Group were also reported to be in merger talks.

The valuation premium dropped, and the “three high points (high valuation, high goodwill and high commitment)” in restructuring were effectively eased. Going forward, the Shanghai Stock Exchange (SSE) would resolutely implement the requirements put forward by the China Securities Regulatory Commission (CSRC) for the “four awes” (stand in awe of the market, rule of law, professionalism and risks).

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Page last modified: 24-08-2019 18:42:59 ZULU