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The Privatization of State Owned Enterprises in China

July 2004
Research Fellow Long Ke



The moderation of government intervention in corporate management was one of the accomplishments of China's "open-door reform" policies, begun in 1979. At the heart of these measures was the liberation of state-owned enterprise (SOE) management. Formerly, whether it be financing, product procurement, production, sales, or personnel, the government kept tight controls over a wide range of SOE management activities. In such a system, far from pursuing the maximization of profits, SOE management would merely execute the economic plans handed down to them by the government.

The SOE reforms of the 1980's focused on improving management through such measures as the adoption of production contract responsibility systems and a thorough implementation of self-supporting accounting systems, but did nothing, however, about the general system of government ownership. From the 90s onward, government ownership started to become a hindrance to these reform initiatives, and brought about a deterioration of the governance system as a result. Currently, in an effort to resolve this problem, a policy is now being adopted to privatize SOE's based on corporate law. Referred to as the "construction of the modern corporation system," this initiative's first step is to separate the management and the ownership of SOEs and thereby establish a governance system based on profit maximization. Meanwhile, fixed laws are used to regulate such things as the evaluations and the employment terms for managers and employees. The second phase of this reform initiative consists of changing theses SOE's into public corporations. As of now, approximately 1,200 SOEs have gone public on domestic or foreign stock markets.

This being said, however, the dilemmas of SOE management continue to bottleneck the progress of economic development in China. While the economic environment continues to develop into a free and open market, the management mechanisms of SOEs have still not been fully liberated from the planned economy model. For instance, although SOEs have adopted self-supporting accounting systems, the monitoring systems needed to support them are ineffective. The problem is twofold: first, there are insufficient penalties for corporations that fall into management trouble, and second, there are only limited rewards for managers and employees of SOE's that show solid management performance. Such circumstances undermine the impetus to improve. Many Chinese economists point out, moreover, that the problem of management corruption is tied to the way SOE assets can be transformed, through various means, into private assets.

With reference to the background issues outlined above, this report intends to elucidate the current status of SOE and government administration reform in China, and discuss in further detail the problems pertaining to these initiatives

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