China's economic reforms: some unfinished business

Abstract

One of the most important remaining issues in China's transition to a market economy is the reform of state-owned enterprises (SOE's). When reforms started in late 1978, SOE's dominated China's industrial sectors in every aspect. After 18 years of gradual transition, the SOE share in China's total industrial output has declined from 77.6 percent in 1978 to 28.8 percent in 1996. However, in 1996 SOE's still employed 57.4 percent of urban workers and possessed 52.2 percent of total investment in industrial fixed assets. Improving SOE performance is crucial for social stability and sustained growth in China. However, over 40 percent of SOE's are losing money. In this paper, the authors will argue that the root of the SOE problem is the separation of ownership and control and that the often-criticized soft-budget constraints arise from various state-imposed policy burdens, which make the state accountable for the poor performance of SOE's. The key for a successful SOE reform is to remove the policy burdens and to create a level playing field so that market competition can provide sufficient information for the managerial performance of the SOE's and make the managers' incentives compatible with those of the state. [ABSTRACT FROM AUTHOR]