China Briefing

Party's over for state-firm fat cats

Pay reductions for bosses at government-controlled companies signal start of bigger reforms down the roadfor the ventures

PUBLISHED : Monday, 01 September, 2014, 7:14am
UPDATED : Monday, 29 February, 2016, 12:18pm

When Xi Jinping came to power in November 2012, his vows to crack down on corruption and pursue far-reaching economic reforms were greeted with widespread scepticism and cynicism among the overseas media and China-watchers.

Nearly two years later, some doubts may still linger but Xi's unprecedented and forceful anti-corruption campaign has given reason for optimism amid signs that it is about much more than merely consolidating his power.

He has already become the most powerful leader in recent decades in China, with state media often comparing him to Mao Zedong and Deng Xiaoping . But he has shown no signs of relaxing the relentless anti-corruption drive.

Hardly a day goes by without an announcement that senior officials at the central or local government level have been detained over allegations of corruption.

The latest examples involve the detentions last week of three senior officials in coal-rich Shanxi province and the former party chief of Yunnan province.

While mainlanders heap praise on Xi and encourage him to press on, some have started to wonder when he will start to undertake crucial reforms. After all, his supporters have led people to believe that the anti-corruption campaign is an effort to help clear a path for reform.

So it was encouraging to see Xi unveil measures last week to tackle major state-owned enterprises by first taking aim at top executives' pay and perks.

Broadly speaking, this fits in with the drive to curb extravagant government spending and largesse.

Specifically, it signals the start of what promises to be a difficult task to tackle the state sector and turn major state firms into modern enterprises with better oversight and more professional management.

More importantly, it is the first step in a long-overdue process to remove Communist Party interference in the management of these enterprises.

According to the reform plans, first reported by the South China Morning Post, the salaries of top executives will be cut by as much as half and most of their perks will be removed.

This will prove very popular with mainlanders who have long complained that executives are overpaid.

Most of the state firms are profitable, but they are shielded from competition and enjoy preferential treatment, including easy access to bank loans. In short, the executives' business acumen and skills are less-decisive factors in the success of their companies.

It is true that their salaries are a fraction of what Western corporate executives earn for managing businesses of a similar size. For instance, Jiang Jianqing , the chairman of Industrial and Commercial Bank of China, the world's largest lender, earned nearly 2 million yuan (HK$2.5 million) last year, compared with the tens of millions of US dollars awarded to his counterparts at the major American banks.

But critics have argued that Chinese corporate executives have access to many additional political and commercial perks and privileges such as the "executive compensation" enjoyed by managers. This enables them to spend company money financing an extravagant lifestyle of fine dining, travel and luxury homes, not only for themselves, but for their family members, too - outlays that can run into millions of yuan each year.

More importantly, top executives of the major state-owned enterprises are directly appointed by the Communist Party's Organisation Department and carry the government rank of a cabinet minister or a deputy minister. This has traditionally made it easy for the leadership to move executives to senior cabinet posts or vice versa.

Understandably, the latest announcement to limit the pay of executives has given the impression that it will undercut previous efforts to allow companies greater freedom to offer incentives to executives.

What people have yet to grasp is that bigger moves are in the pipeline as mainland leaders mull measures to reduce the party's interference in the day-to-day management of state firms. One proposal is for the government to limit its direct influence to the board level, with officials taking up positions as directors to represent the interests of the state. This would give the board more freedom in the running of the company because it would not have to heed directives from central government departments.

It would also mean that top executives below the board level could be recruited on the open job market with competitive salaries instead of being appointed by the party's Organisation Department.

The end result would be the abolition of government ranks for most executives at state firms.

With professionals managing and transforming state firms into modern enterprises, the country's leaders might have more confidence to eliminate monopolies, one of the major stumbling blocks to putting the economy on a healthier growth track.