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Issue 21, April 2010

This newsletter is a monthly supplement to ChinaAnalysis.Com, a new website that aims to promote knowledge sharing in China-related analysis. This newsletter contains original content and may not be reproduced without exclusive written permission. If you have any questions, comments and suggestions, please email support@chinaanalysis.com.

Tip of the Month - China’s State-Owned Enterprises: new policy and executive compensation

This year, China’s largest state-owned enterprises (SOEs), including China Petro, China Mobile, Sinosteel, State Grid, and other industrial giants, are facing a new 3-year Performance Evaluation policy from the Chinese state. Effective Jan. 1, 2010, this new policy requires the SOEs governed by SASAC (State-owned Assets Supervision and Administration Commission of the State Council) to calculate their net profit by taking into account the opportunity cost of capital, both debt and equity. The initial cost of capital is set as 5.5%. In essence, the concept of EVA (economic value added) is being used to evaluate the performance of the SOE top executives. SASAC now governs 128 central SOEs, with US$3 trillion in assets, US$3 trillion in sales, and 12 million employees, concentrated in sectors of national priority, such as energy, transportation, communication, and heavy machinery (the 30 national financial companies are not governed by SASAC).

The new evaluation policy represents an attempt to constrain executive compensation at SOEs. With the transformation of SOEs into huge profit centers over the last decade, SOE executive compensation has grown rapidly. Government officials disclosed that in 2007 senior managers earned 18 times the average pay of workers in China’s SOEs. Although this number is well below the US ratio (360 in 2007), the official survey may well underestimate the gap. In Beijing, the annual salary of a fresh graduate is 40 to 80 thousand RMB annually, and of a middle manager in SOEs 200 to 400 thousand RMB. There are many news reports of SOE top executives who are paid more 2 million RMB. In 2006 Jiafu Wei, CEO of COSCO (HKSE 0517), was reportedly paid 18 million RMB, making him the highest paid SOE executive in China. In 2007 China Ping An Insurance Co. (HKSE 2318), an ex-SOE and publicly traded company, paid Mingze Ma, the CEO, 66 million RMB, which is 1,000 times more than an entry-level position. Executive pay in SOEs is becoming a highly controversial issue in the Chinese society, particularly with regards to companies that enjoy a position of regulated monopoly.

The new policy may restrain the compensation of top executives. But if the experience of executive pay in the United States is a guide, Chinese executives will counter with financial behavior and accounting tricks that will produce positive EVA, and justify their pay increases, even if the sustainable growth of the companies they oversee is compromised. More generally, a focus on “bottom-line” measures such as EVA is a poor way to evaluate the performance of a company. Rather, the state should provide “patient capital” to encourage sustainable growth, and evaluate company performance in terms of the actual development and utilization of productive resources.

Top News of Last Month
March 03 China's defense budget to grow 7.5% in 2010
March 04 China Premier details economic plan
March 05 China forecasts $154.4 billion deficit
March 11 Obama issues new call on China over yuan
March 22 Google shuts China site in dispute over censorship
March 25 China tops USA in spending on clean energy
March 26 China says stock futures trading to begin April 16
March 28 China's Geely agrees Volvo takeover deal: report
March 30 China sentences 4 Rio Tinto workers to jail, signaling stance to foreign firms
March 30 Senior Chinese leader stresses economic restructuring, innovation
New Books
China's Automotive Modernization: The Party-State and Multinational Corporations

By Gregory T. Chin

"As a window for understanding the relationship between globalization and the state's pursuit of national industrial development, this book examines how and why the Chinese government succeeded in leveraging China's international competitive advantages to modernize the country's automotive industry from 1978 to 2001." - from Amazon.com


By Wang Jun

"'This insider's look at the inner workings of China comes from an author who has seen the growth of the modern accounting profession from the start to the present day, as his country prepares for the age of global accounting and auditing standards. Wang Jun's stories of the growth of accountancy in China - and its importance to the expansion of his country's economy - are first and foremost about the cultivation of talent, but also about the importance of accounting standards, ethics and knowledge structures. At an historic juncture during which China 'takes a greater leap, exerts a greater influence and pursues excellence,' as Mr. Wang puts it, it is good to see that it expects professionals who are well above the ordinary.' - Robert L. Bunting President, International Federation of Accountants (IFAC)" - from Amazon.com

The China Strategy: Harnessing the Power of the World's Fastest-Growing Economy

By Tse Edward

"'In The China Strategy, Edward Tse pulls together observations that have previously been handled separately?on Chinese markets, entrepreneurs, government trends, and the ever-more-integrated global economy?and combines them into a viable strategic plan for corporate leaders everywhere. I recommend this book for anyone trying to build a business in China?or to make that business successful.' - Douglas A. Jackson, President of Coca-Cola Greater China" - from Amazon.com

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