• Fri
  • Jul 11, 2014
  • Updated: 1:13pm
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PUBLISHED : Saturday, 11 May, 2013, 12:00am
UPDATED : Tuesday, 03 September, 2013, 1:02pm

Creative managers get cooking when fanciful targets served up

A revised directive of 10 per cent profit growth for SOEs leaves bosses with little choice but to come up with inventive recipes for success

In the corridors of power at state-owned enterprises you will hear two new buzzwords these days - bao shi and cao zuo.

Bao, meaning guarantee, and shi (10) refer to the 10 per cent profit growth target set by the state-owned Asset Supervision and Administration Commission (SASAC) for state-owned enterprises. Cao zuo, meaning operation, applies to all the creative accounting - if not book-cooking - needed to achieve that target, which was announced two weeks ago.

The SOE managers don't have much choice but to toe the line. Four months ago, SASAC said the 2013 target was "to maintain a stable growth in business". No number was specified to reflect the new state policy that emphasised the pursuit of quality over quantity in production.

That soft target set at the start of the year was in line with the 2011 target: no less than the past three years' average profit. But with only eight months to the end of the year, an about-turn came with the directive for the 10 per cent profit growth target. This goal is unrealistic, given that earnings at the central government-level state sector have grown only 2.7 per cent this year.

In announcing the tough new target to top SOE managers, SASAC chairman Jiang Jiemin said: "Central SOEs must shoulder the responsibility of guaranteeing growth. This is not just an economic responsibility but also a political one. By guaranteeing your growth, you are helping to stabilise the country's economic growth."

His comments followed a State Council meeting on the economy. For SOE managers, the meaning was clear: Meet the targets or your political life is over. In the inaugural year of a new leadership, no mandarin will take this warning lightly.

The big question is, how can the new target be achieved with just over a half year to go? Price increases? The honest manager will say: "No. There is a weak market. There are stringent price controls. There is the low inflation policy. Price hikes drive up inflation." The creative one says: "Get the buyers to accept a high price this year and we will rebate them in different ways next year."

Sales increase? The honest manager says: "No. Given our low efficiency and weak market, we cannot possibly boost sales within months." Our creative manager says: "Get the buyers to move their 2014 orders to 2013 and we will extend the payment by a year. Let's not be bothered with the 2014 profit and receivables now."

Staff redundancies? Honest and creative managers alike find common ground here - "No". In announcing the new profit target, SASAC also said central SOEs should "generate jobs".

Cost controls? The honest manager says: "Yes, only if the head of procurement can give up his 5 per cent commission on the raw materials we are buying or we stop buying from the general manager's wife."

Our creative manager says: "That will be too complicated. There are better ways. We can sell the hotel to the SOE in the next province for 300 million yuan and make 100 million yuan. Yes, the market price is no more than 200 million yuan. Yet, if we agree to net the payment against the debt they own us, they will oblige."

How about buying land or some asset from a local authority at an inflated price in return for a subsidy? The subsidy will boost the bottom line while the land cost will be capitalised and not hit the cost. Renegotiating the interest rate for this year is another option for the creative manager. A rate cut in return for a promise to keep deposits there for two more years or a higher loan rate in the two years to come won't be too bad a deal for the bank.

A change in the depreciation and capitalisation policies will also help to cut costs. We may as well pay less towards the social security fund this year. That's even simpler, our creative manager would argue.

When it comes to window dressing and creative accounting, mainland managers are maestros. But isn't that just cooking the books? Nevermind, most central SOEs have no external auditors; their board members are handpicked by the Communist Party and appointed by SASAC.

The enterprises' financial reports go to SASAC, and the state auditor only comes in later. Moreover, its job is to check if state money has been stolen. Of all these gatekeepers, just who is to scrutinise or indeed penalise a manager who has tried "too hard" to achieve a state-set target? Such a question misses the key point: a manager who has fallen short will certainly be caught by SASAC.

In fact, Jiang said: "Growth guarantee is the joint responsibility of SASAC and central SOEs", adding that the commission had set up a group with a "with clear division of labour" to help do the job.

Book-cooking is the no-brainer response. But, as SASAC is no stranger to such tricks, its stance prompts a more troubling question: What pressures pushed the commission into setting such an aggressive target knowing it will be met with trickery? Is it a worse than expected economy? If so, then that's worrying.

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