The decline of state-owned enterprises in China: Causes, issues and challenges

Abstract

China has recognised that the benefits of growth are not being shared equally throughout the country. State-owned enterprises (SOEs) have been an expensive burden for the government, hampering both job creation and economic growth. The year 1999 signalled a deepening of structural reform in China towards an open market economy led increasingly by the private sector. A constitutional amendment in the summer of 1999 recognised the important role of the private sector and the rule of law, and the subsequent Fourth Party Plenum allowed controlling private ownership of large enterprises in all but a few strategic industries, which were in any case advised to corporatise. These policy pronouncements have been translated into an SOE reform strategy, concentrating on debt-equity swaps managed by the Asset Management Commissions (AMCs), changes in SOE ownership structures, restructuring of loss makers through mergers, bankruptcy, sale, downsizing, having various local government initiatives to either withdraw from selected enterprises or restructure ownership, strengthened corporate governance, stock market development, and reforms aimed at encouraging growth of small and medium enterprises (SMEs). This paper aims at providing a historical account of the challenges faced by the SOEs in face of macro-economic reforms, and examines the causes leading to its decline. The extremely rich data contained herein will provide ample evidence of the changes experienced by the SOEs over a period of two decades since the opening up of the Chinese economy in 1978. As a socialist country, SOEs have been the mainstay of the Chinese economy. Up to the present, over 60 per cent of the government revenue comes from the SOEs. However, since the initiation of the economic reforms in 1978, the state sector has declined in its performance and significance. In 1996 SOEs experienced the first net losses since 1949. According to the World Bank, among China's 102, 200 state-owned industrial enterprises, only 8,000 or 8 per cent are fundamentally viable enterprises. Even the Chinese officials have recognised that the performance of SOEs would look worse if their accounts are to conform with international accounting standards. The State Economic and Trade Commission has acknowledged that 50 per cent of the SOEs should be radically restructured, while the rest should be declared bankrupt, declare be merged or even auctioned off.