Problems and Benefits of Privatization of Public Sector Organizations in China Essay

Custom Student Mr. Teacher ENG 1001-04 18 October 2016

Problems and Benefits of Privatization of Public Sector Organizations in China

Privatization as an important role of economy , has great contribution for all over the world. So what is privatization? Privatization means transfer of assets of economic activity from public sector to private sector, it has been seen by many governments as a means of revitalizing inefficient industries and as an opportunity to raise revenues to ease budgetary problems; however, privatization in China is very complicated.

When reform started in 1978, almost of the productive assets were state-owned in China. But reforms since then have not included privatization. Today, there is more than 70 per cent of Chinese productive wealth which belongs to Chinese government. During the first 20 years of reform, the government concentrated the country’s assets with a great purpose of development which helped to achieve the creation of infrastructure and expansion of industrial capacity. We can image, if the state assets had been privatized, it would become a big trouble for China to mobilize resources during the tremendous industrialization between 1980s and 1990s.That’s why the initial marketization-without-privatization approach has been successful. Also because of that, China has emerged a robust infrastructure and become an industrialized economy.

However, this industry-first, government-investment-driven and export-oriented growth model which has been highly resource intensive has run its course. China has expanded export almost of the world, not only the developed countries, also Latin America, the Middle East and Africa. But this growth model is limiting the speed of export. China has to turn towards growth driven by domestic demand, not exports, and one led by service not industry to shift its economy. So what can help to stimulate the transformation? The answer is privatization.

Privatization remains a thorny issue in a country where private property became a constitutional right only in 2004 and where the right to own productive assets remains unclear. Many vibrant, purely private companies have sprung up despite this uncertainty, but take care to stay out of the limelight. For example, the most famous Chinese private company is Legend Holdings Ltd, is Chinese investment holding company in IT, investment, and real estate formed by the Chinese Academy of Sciences- the best-known of which is the Lenovo Group in which Legend is the controlling shareholder. In 2006, the volume of its business was 4,033,096 million RMB. Another famous private company is Huawei which makes and sales telecommunication equipment. It is biggest supplier who provides the solution of telecommunication network. Until 2011, the whole company had 146,000 employees, and the annual sales volume was 203.9 billion RMB. Obviously the kinds of private companies become a main power to improve Chinese economy and increase national income.

Proverbially, privatization can help to reduce the government financial and administrative burden. The best example is Legend Holdings Ltd. Legend Holdings Ltd was based on the Chinese Academy of Sciences. Chinese government only invested 200 thousands to organize the company. However, until now, the company has developed to an international holding company with the influence from all over the world. The Chinese government doesn’t manage the company directly but it controls a part of stock of the company. According to an analysis suggests that privatization of China’s state-owned enterprises is achieved with limited compromise on the social welfare responsibilities, and much of the improvement in the firm performance comes from the reduction in the agency cost at the management level. The state-owned enterprises generally have bloated management structure with excessive amount of managerial expenses. It is because the State Assets Agency has multiple objectives, and so long as the management meets those objectives it is neither motivated nor disciplined for profit maximization. On the contrary, private companies have their own management systems, they don’t have so much social welfare duties as state-owned enterprises.

Rapid development of privatization also can help government to increase their financial income. According to the data suggests, in 2004, mainly to the private economy of small and medium-sized enterprises created 58.8 per cents of GDP, 68.3 per cents of exports and 48.2 per cents of revenue in China. Also we can see the data from Legend Holdings Ltd. Until 2003, this private company handed over to the national tax 5.45 billion RMB. As the state-owned enterprises, the government has to invest by themselves to get profit; however, as private company, government can get revenue without investing or management.

Increasing efficiency and productivity in certain public sector is the third advantage of privatization in China. Some state-owned enterprises sale to specific purchasers through MBO(Management Buy-Outs). The managers cooperate with foreign companies which can help to import high technology equipment and improve the manufacturing technology. Obviously, this can increase the efficiency and productivity of company. The most famous example in China is Haier. Haier as a global electrical appliances brand, cooperate with 28 companies from difficult countries like America, Japan and Germany. As of 2008, Haier has surpassed rival Whirlpool as the world’s top refrigerator producer in terms of sales, according to Euromonitor, an independent business intelligence provider. Haier said it sold 12 million refrigerators worldwide last year, up 20% over the previous year. Its market share reached 6.3% globally.

On the other hand, with the development of privatization in China, there are many problems which disturb the road of privatization. As I talked before, MBO is a kind of form of state-owned enterprises privatization. The government selling the state-owned enterprises to private organization or individual is another form. The biggest problem for this form is the individual will change the enterprise to family business. The Chinese Social Science Center had a research about Chinese private economy. The data showed 61.82 per cent companies admit that they are family business. Only 27.4 per cent of enterprises’ stock was controlled by family under 90 per cent. In China, family business enterprises’ average life is only 2.8 years. Why? Many bosses of private companies provide management job to their family. However, with the development of enterprise, importing the skills of manufacture and the experience of management become more and more important. Family members are not enough for the development of business.

The crisis of stock is another problem for privatization in China. A while back Huawei company was in trouble of old employees demanded the stock of enterprise. According to this event, we can notice there is more stock crisis in privatization of China. The owners of enterprises want to control the whole company; however, when the state-owned enterprises change to private enterprises, the distribution of stock is very confused. The lack of clear strategy of cooperation and the lack of coordination system make the partner scramble for stock, which can make the management layer into disarray.

The developing of enterprise is seriously for entrepreneur. However, the growth of enterprise is not only expanding the company or increasing the number of employees, it appears in many aspects. Chinese entrepreneur always want to control their companies, this means they do not want to decrease their stock of the company. This phenomenon result to the lack of investment. For example, we can connect to family business. The lack of investment and management skills make the enterprises’ average life only 2.8 years. How to affect foreign investment and increase the capital is big challenge for Chinese entrepreneur because when the enterprises become private, the government cannot control or manage or invest to the companies directly.

China’s privatization has developed more than 20 years, the private company increase the government financial income and develop Chinese economics. However the privatization in China is still not mature. A state-owned enterprise which changes to private enterprise has to face many problems. In general, the trend of Chinese privatization is optimistic. This also can help to develop the world economics.

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