An Analysis of the Political Economy of China's Enterprise Conglomerates: A Study of the Reform of the Electric Power Industry in China

By Chow, Daniel C. K. | Law and Policy in International Business, Winter 1997 | Go to article overview
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An Analysis of the Political Economy of China's Enterprise Conglomerates: A Study of the Reform of the Electric Power Industry in China


Chow, Daniel C. K., Law and Policy in International Business


INTRODUCTION

The sweeping reform taking place in the electric power sector of the People's Republic of China (PRC) provides a timely opportunity to analyze an important practical application of the PRC's Company Law.(1) The Company Law, which was enacted with great fanfare in 1993 as a solution to the problems long troubling China's stagnant state sector, allows restructuring of state-owned companies as stock corporations.(2) At the same time, the electric power industry is also being organized into "enterprise groups," which are conglomerates composed of both corporate and government entities clustered around certain industrial sectors.(3) These conglomerates seek to exploit economies of scale and overcome the bureaucratic barriers that limit effective cooperation among government entities.

These two major reform initiatives -- the conversion to stock corporations under the Company Law and the creation of large-scale conglomerates -- are both based on international capitalist models of corporate organization and would have been rejected by China not long ago as antithetical to socialism.(4) Today, these initiatives are examples of China's new "cadre capitalism"(5) and represent the most ambitious attempt to date to reform the moribund state enterprise sector.(6) The recent announcement that the Ministry of Electric Power (MOEP), China's mammoth national agency, will be disbanded and replaced by a series of new corporate bodies extends a reform process that began on local levels to the highest echelons of the PRC government.(7) Reform of the electric power sector may become a model for reform of other major industrial sectors. A study of the restructuring of the electric power sector will be useful in providing an assessment of the effectiveness of corporatization and the use of enterprise groups as a long-term solution to the problems of inefficiency, monetary losses, and lack of productivity that are chronic throughout the PRC state sector.

An assessment of the reform of the electric power sector is also timely because, by the turn of the century, China's ability to meet its pressing power needs will depend vitally upon the investment of foreign capital and technology. Since 1979, the electric power sector has attracted more foreign investment than any other industry in the PRC.(8) Yet, China cannot even come close to meeting its energy needs without massive further injections of foreign capital.(9) A study of the reforms, then, provides an assessment of whether recent developments will create a hospitable business and legal climate for the needed foreign investment and participation.

Part I of this Article begins with an overview of the PRC electric power sector. Despite impressive progress in recent years, the electric power industry is still unable to meet the nation's power needs.(10) Since the proposed changes to the MOEP and the reform of the electric power industry are part of a long-range plan to transform the state sector, Part I then turns to a discussion of state-owned enterprises. Part I also reviews the process of corporatization under the newly enacted Company Law and the use of enterprise groups, which provide the basic legal structures for the reform of the electric power industry. Eventually, the entire power sector at each level will be organized into corporations under the Company Law.(11)

Many of the problems associated with the state enterprise sector are due to the current structure of China's political economy, which allows government entities to both regulate and manage industrial enterprises.(12) This intermingling of government and management functions, typical of centrally planned economies, results in a chronically mismanaged and inefficient industrial sector. In China, inefficiency in the electric power industry is especially significant because of the importance of the industry in sustaining the general growth of the economy. The new enterprise reforms are designed to improve the performance of this moribund sector by separating regulatory and management functions through the use of corporate and enterprise group organizations that compartmentalize these functions in separate entities.

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