State enterprise reform in China: what is the best path for future reform?

Abstract

State-owned enterprise (SOE) reform in China is entering its third decade. The Chinese government's strategy to reform the SOE sector has been modified a number of time over the last two decades. At the CCP's 15th Party Congress in September 1997, Chinese leaders outlined the current SOE reform strategy. Termed "zhua da fang xiao" (grasp the large, let go of the small), this policy calls for the SOE sector to be split into three groups: key large SOEs are to be "grasped" and managed better; small SOEs are to be "let go"; and large and medium-sized SOEs which are determined not to be key enterprises are to undergo ownership diversification. Outside of China, SOE reforms have been dominated by privatization, programmes. In many cases SOEs that have been privatizated have significantly improved their financial performance and efficiency. Hence many academics, international institutions, and financial commentators have called for China to implement a programme of widespread privatization. This paper attempts to determine whether the current Chinese SOE reform strategy of "grasp the large, let go of the small", or a programme of widespread privatization will be the best path for future SOE reform in China. This paper argues that the current Chinese reform strategy is the best strategy to improve the performance of the SOE sector, and to providing solutions to outstanding problems in the SOE sector. However, the success of the current Chinese SOE reform strategy is not guaranteed. The Chinese government will have to ensure that key large SOEs focus on improving efficiency rather than blindly expanding so they can become giant conglomerates. Moreover, large SOEs which are "grasped" must be transformed into modern corporations, and an effective state-asset management structure must be established.