An people doubt Premier Zhu Rongji's resolve to salvage state owned enterprises from their seemingly perpetual decline. But he faces a series of problems in trying to improve the sector's performance, one of which is the difficulty of motivating and retaining competent managers who were produced under the old socialist system.
The challenge would appear to have become more difficult following the recent termination of an experimental executive share option scheme in Shanghai. The ending of the experiment in the country's most important industrial centre carries considerable significance and represents another casualty of the inherent conflict between communist ideology and the free market.
Performance-related share option schemes, very common in the West-ern corporate world, are designed to reward senior executives who achieve profit targets. Their wealth is tied to the performance of the companies they manage. When executives exercise their options, the price to buy shares in their own companies is usually at a significant discount to the prevailing market price, thus allowing them the opportunity to make a large profit.
Chinese government opponents of the scheme argue that all senior managers in state-owned enterprises are appointed by the Communist party and as such they should be content to serve the people heart and soul' instead of seeking personal wealth. They criticise the scheme for diluting state assets without proper consideration, an issue which has already caused alarm among veterans in the party hierarchy.
"Because this model is about awarding individuals with what are essentially state assets, it has attracted a lot of debate so far," says Mr. Ju Xinxing, company secretary of the locally-listed Shanghai International Travel Agency.
The share option experiment was launched in 1994 in Shunde, Guangdong province, five years after the communist government set up its first stock exchanges. When Shanghai was subsequently allowed to take part in the experiment, it was widely regarded as a significant step towards rolling out the scheme on a national basis.
But implementing the scheme has posed many practical problems which the authorities failed to anticipate. For example, what type of shares are allowed in a share option scheme? The several hundred companies listed on the stock market all have several classes of shares: the ‘state share' held by a parent company and ‘the legal person's share’ by other state-owned entities, the combination of which make up the controlling stake in a listed company; the remaining ‘individual shares' are split into A-shares for domestic investors and B-shares, H-shares and N-shares for their overseas counterparts.
In theory only individual A-shares would be eligible for the share option scheme since they are the only shares that can be bought and sold by Mainland residents. However, it turned out that all Chinese public listed companies were ineligible since current rules do not allow companies to buy back their own shares from the market for the purpose of share options.
"We've explored the possibility of creating a share option scheme for senior executives and model workers, but to no avail. There is simply no way for listed companies to source these extra shares for their schemes," says Mr. Ju, who earlier this year attended a share option seminar hosted by the city's regulator before the ban was imposed.
This conclusion effectively limits the experiment to non-publicly listed shareholding companies. Only about 20 firms in Shanghai have participated in the experiment by giving their general managers share options, one of which was Aitong Textile Company.
At the end of 1996 Yuantong, a state-owned company which manufactured textile machinery in the western part of the city, was declared bankrupt, leaving tens of thousands of people out of work. One month later in January 1997, the Pudong-based Aitong Textile rose from Yuantong's ashes as a new firm, taking the latter's best staff and equipment.
Having eradicated surplus labour and antiquated equipment, Aitong was able to perform well in the first year of operation. Its general manager, Ms Wu Lingling, was awarded share options in her firm worth Yn880,000 (around US$106,000). She paid for the stock with Yn100,000 of her own money and borrowed the rest from her company at an annual interest rate of four percent.
With her initial investment of Yn200,000 worth of shares, she now owns eight percent of her company, while 30 of her managers hold smaller amounts. The state retains a controlling stake.
However, it was never clear how Aitong's management could benefit from their holdings. "Leaving aside the ideological arguments which are typically Chinese," says Ju, "the obvious problem is how to cash in eventually, remembering these shares are not listed on the stock market? Also, how do you realise your profits and whom can you sell to? What are the tax implications for borrowing funds from your own company for the purchase and after realising capital gains?"
It appears that bureaucrats were not sufficiently motivated to tackle these technical issues before ideologists won their argument and brought a halt to the experiment.
Old ways of thinking
All this leaves Premier Zhu with a dearth of incentives to offer state company managers. There remain plenty of loosely-defined threats – for example, Zhu told the National People's Congress in March that managers of state-owned enterprises would be dismissed for financial losses for two consecutive years due to poor management. However, he must be aware that a policy of ‘all sticks and no car-rots' is unlikely to be effective in retaining quality managers in an economy where there are many more lucrative opportunities for employment in the private sector.
"We want to change to a market economy," Mr. Ju says. "We want our companies to be competitive. But our way of thinking, our way of management, still belong to the era of central planning."
He scoffs at Mr. Zhou Zhengqing, chairman of the country's top regulator China Securities Regulatory Commission, who had been quoted as saying that the sacking rules also applied to managers of state-owned companies listed in Hong Kong. "What is the board of directors for? Listed companies like ours are governed by law, no longer by the central government. Does he really think he can exercise so much power on individual companies like us?"
The ideological battle clearly has some way to go before Premier Zhu can claim victory and make significant progress in his bid to turn around the fortunes of the state sector.
In the heart of Shanghai is an idyllic retreat leaned, the Taiyuan Villa. Outside this secluded villa-and-garden compound are Shanghai's chaotic streets, with chronic traffic jams and teeming crowds. Inside is an elegant three-storey Western-style granite and brick house, built in the 1920s and originally owned by an English woman. It has features that cannot be found in new Shanghai houses: fireplaces, high ceilings, patio, separate rooms and a staircase for servants, and an 8,000 sq metre lush-green garden.
Taiyuan Villa is one of the few pre-1949 houses still in good condition despite several campaigns to purge symbols of Shanghai's colonial past. Other gems include Xingguo Hotel and Rui Jin Hotel, now favourite hotels among foreigners and local newly weds.
These hotels, architecturally admired and formerly owned by pre-war Western tycoons, have escaped destruction because the government used them as guest houses or private residences of Chinese leaders. Taiyuan Villa, for example, was a favourite hideout of Jiang Qing, wife of party chairman Mao Zedong, when she flew from Beijing to Shanghai.
While Taiyuan and a few other classical houses have been kept in good condition, tens of thousands of old houses have made way for the bulldozer. Others have been left to decay, occupied for decades by many families.
Ms. Tess Johnson, who has written eight books on Western architecture in Shanghai, has been busy taking photographs and notes of the remaining houses before they disappear. She says that local residents have little interest in historical preservation. Perhaps it is because these buildings are a reminder of Shanghai's humiliating past. "Shanghai was like a foreign country imposed on the Chinese" she reflects. "It was a terrible time in history to them."
Another reason for the apathy to these monuments is the poor living conditions their inhabitants now have to endure. A Western villa house might look beautiful on the outside, but its interiors often suffer from neglect and damage caused by overcrowding and lack of money for renovation. What used to be a quiet, spacious two or three-storey house for one family is frequently home to dozens of Chinese today.
Typically, the staircase has been turned into an open kitchen, with many stoves and utensils hanging from the walls. Everywhere one turns, belongings clutter the rooms and corridors. Sanitary conditions are poor and the paint is flaking from the walls.
Shanghai people wait for the day when they can move to high-rise apartments with flush toilets and proper plumbing. "Chinese do not understand why we like old houses thatare so shabby and run down. They do not see the details of the wonderful architecture they are living in," says Johnson.
A foreign couple has formed a group to get together interested people and organise study tours of select buildings. Businessman Patrick Crandley and his writer wife Tina Kanagaratnam decided to form the Shanghai Historic Houses Association last year. John-son is its senior adviser.
The association has 60-70 members who turn up regularly for its meetings and tours. Members are mostly expatriates but Crandley hopes there will be more local participants. "We also want to become involved in the process of saving some of these buildings, to build up expertise and advice on what can done [for similar situations] elsewhere in the world," Crandley says.
He notes that interest in historic preservation has been growing because Shanghai realises that there is a tourist value in doing so. "As more people understand the economic value of it for a city like Shanghai, the better the chance of survival for these houses."
Indeed, there are signs that real-estate companies are now motivated to keep fast-vanishing old properties in good shape. They have been getting more requests from expatriates that they would prefer to live in one of the older houses, instead of ubiquitous and colourless high-rise concrete blocks.