China's state-owned enterprises reform

Material Information

China's state-owned enterprises reform
Kobayashi, Takashi
Publication Date:
Physical Description:
x, 86 leaves : ; 28 cm

Thesis/Dissertation Information

Master's ( Master of Arts)
Degree Grantor:
University of Colorado Denver
Degree Divisions:
Department of Political Science, CU Denver
Degree Disciplines:
Political Science
Committee Chair:
Thomas, Steve
Committee Co-Chair:
Everett, Jana
Committee Members:
Ji, Chen


Subjects / Keywords:
1976 - 2000 ( fast )
Government business enterprises -- Management -- China ( lcsh )
Economic history ( fast )
Economic policy ( fast )
Government business enterprises -- Management ( fast )
Economic policy -- China -- 1976-2000 ( lcsh )
Economic conditions -- China -- 1976-2000 ( lcsh )
China ( fast )
bibliography ( marcgt )
theses ( marcgt )
non-fiction ( marcgt )


Includes bibliographical references (leaves 81-86).
General Note:
Department of Political Science
Statement of Responsibility:
by Takashi Kobayashi.

Record Information

Source Institution:
|University of Colorado Denver
Holding Location:
|Auraria Library
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
41470637 ( OCLC )
LD1190.L64 1998m .K63 ( lcc )

Full Text
Takashi Kobayashi
BA., Meijigakuin University, 1993
A thesis submitted to the
University of Colorado at Denver
in partial fulfillment
of the requirements for the degree of
Master of Arts
Political Science

1998 by Takashi Kobayashi
All rights reserved.

This thesis for the Master of Arts
degree by
Takashi Kobayashi
has been approved for the
Department of
Political Science
Steve Thomas
Chen Ji


Kobayashi, Takashi (M.A., Political Science)
Chinas State-Owned Enterprises Reform
Thesis directed by Professor Steve Thomas
This thesis will show the necessity and importance of the continued
reform of Chinas state-owned enterprises. Post-1978 reforms have
effectively established and developed the non-state sector and have begun
the modernization of the large state-owned enterprise sector.
Nonetheless, reform of state-owned enterprises is still incomplete. In this
thesis, I will examine the three most important areas of continued state-
owned enterprises reforms: Diversifying ownership and transferring from
state to non-state sector, reform of personal system, and overcoming
political obstacles. Without success in theses areas of reform, Chinas
economy may not continue to develop.

This abstract accurately represents the contents of the candidates thesis.
I recommend its publication.
Steve Thomas

FIGURES ............................................... ix
TABLES ................................................ x
1. INTRODUCTION .................................. 1
Review of Literature ........................... 7
ECONOMIC SECTOR................................ 16
History........................................ 16
Political Perspectives......................... 19
A Major Economic Role.......................... 24
FROM STATE TO NON-STATE SECTOR ................ 28
Non-State Sector............................... 31
Diversify Ownership and Transfer from State
to Non-State Sector ........................... 33
The Governments Efforts....................... 37
The Rise of Non-State Sector................... 39
Mergers of State-Owned Enterprises............. 39

Foreign Joint Ventures ............................. 40
Township and Village Enterprises................... 41
Individual Enterprises.............................. 44
Private Enterprises................................. 45
Bankruptcy ......................................... 48
The Contract Responsibility System.................. 49
Conclusion.......................................... 50
Labor Redundancy ................................... 52
The Governments Substantial Efforts................ 53
Employment of State and Non-State Sector............ 57
Political Perspective............................... 59
Conclusion.......................................... 60
AND LEGAL STEPS..................................... 61
Economic Policy..................................... 61
Various Regulations and Laws........................ 62
Political Obstacles................................. 69
Conclusion.................................... 75


1. The Evolving Objectives of Reform...................... 63
2. Chinas Ninth Five-Year Plan and
Fifteen-Year Perspective Plan......................... 64

1. Chinas Gross Domestic Product (GDP)................ 18
2. Output in Industry by Ownership..................... 29
3. Distribution of Staff and Workers in Industrial Sector-. 30
4. Increased Autonomy for State Enterprises
During the 1980s.................................... 34
5. Development of Township and Village Enterprises......... 42
6. Share of Rural Employment in TVEs and
Individual and Private ............................ 43
7. Development of Individual Enterprises,
1978-1994........................................... 46
8. Development of Private Enterprises,
1988- 1994.......................................... 47
9. Growth Rates of Industrial Gross Real Output,
1991-1993........................................... 47
10. Redundant Workers in 142 State-Owned Enterprises........ 54
11. Urban Employment by Ownership,
1989- 1995.......................................... 58
12. Management Autonomy in 128 Surveyed SOEs............ 67

China has implemented a major transition from a command
economy to a market-based one through economic and political reforms.
These political and economic reforms have supported Chinas rapid
economic development with the Chinese economy expanding about four
times from 1980 to 1997. In 1997, although the growth of the GDP was
slower than the rapid pace of the preceding years, it still increased an
impressive 8.8 percent (International Monetary Fund, p.153). Exports
grew over 20 percent in 1997, contributing to an unprecedented $40.3
billion trade surplus (Nicholas, p.78). For 1998, the Chinese government
is predicting a GDP growth of 8 percent. In addition, in 1997, the grain
output in China reached 465 million tons, and contributed to an
agricultural growth rate of 4.5 percent and to the raising of real income in
Chinas rural areas.
Some scholars have argued that China will become a major
economic power in the next century. If Chinas economy merely continued
at a rate of 8 percent and other economies grew at their present rates,

China would become the worlds largest economy by 2010 (Mastel, 1997,
But even after 13 years of reform, state enterprises still have a
major role in the economy. In 1991 employed almost 107 million people,
73 percent of all urban sector workers, and absorbed 67 percent of total
Chinese investment (The World Bank, 1992, p.263-270). By 1996, state-
owned enterprises still accounted for one-third of production, over one-
half of the total assets, two-thirds of the urban employment and almost
three-quarters of the investment (The World Bank, 1997 a, p.xi).
Many scholars argue that the reform of Chinas state-owned
enterprises was a key point for post-1978 economic growth and as well as
Chinas economic stability. State-owned enterprises remain the key
drivers in industrial production, urban employment, and investment.
Therefore, more radical restructuring and reform of state-owned
enterprises is needed to continue to improve industrial efficiency, to
maintain the economys growth momentum, and to improve the financial
sector (Peoples Republic of China, p.63).
The state-owned enterprises reform program is centered on the
creation of a modern enterprises system based on the model of the
modern corporation (The World Bank, 1997 a, p.ll). Chinas government

has focused on improving a socialist market economy with Chinese
characteristics since 1993. The goal of Chinas these policy reforms is to
strengthen the five pillars of industry: machinery, electronics,
petrochemicals, automobiles, and construction. At the Ninth National
Peoples Congress in 1998, Premier Zhu Rongji announced that China
would solve the long-standing problems of money-losing state-owned
enterprises and weak banks within three years through an accelerated
program of privatizations, mergers, closures, and a series of steps that
would lead banks to operate on a commercial basis (Nicholas, p.86).
At the same time, the agenda for reforming state enterprises is long
and difficult. First, it is still hard to obtain reliable financial information
on their performance and they do not have adequate market-based
autonomy and risk-reward incentives (The World Bank, 1997 d, p.28).
Second, political factors are very important in determining the success of
reforms. Traditionally Chinese enterprises were controlled by a factory
director under the Chinese Communist Partys Committee leadership.
The Party had the highest power in every enterprise and organization
because the functions of the Party and government were not separated.
However, the Chinese government has gradually separated functions and
authorities from the Party. The government has played a major role in

formulating policy and carrying out these reforms and must continue to
do so in the future if Chinas economy is to maintain its high growth rate.
A legal framework is indispensable for the continued reform of the
state-owned enterprises. Adequate legal and regulatory principles are
effective to distinguish the rights and obligations of the government from
the firm, and to promote more business autonomy.
Also, state enterprises losses have become the hard core of Chinas
aggregate public sector deficit, which has failed a decline since 1990. One
major challenge is to stop the state-owned enterprises from losing money.
In 1994, about 40 percent of state enterprises still reported collective
losses of about one percent of the GDP. Even in 1995, companies
reporting losses rose to 44 percent (The World Bank, 1996 b, p.1-3).
The result was that state industrial enterprises languished, with
slow growth and declining profits. Several indicators point to the
generally poor performance of state industrial enterprises relative to
nonstate firms. State-owned enterprises have lagged in output,
employment, and productivity growth (The World Bank, 1997 d, p.28).
Total factor productivity (TFP) growth in State-Owned Enterprises has
lagged behind the rest of the industrial sector (The World Bank, 1996 b,
p.4). Small and medium-size state enterprises performed 6.5 percent of

industrial output in 1994, down from 36 percent in 1978 (The World
Bank, 1997 d, p.30).
The unemployment and labor redundancy in state-owned
enterprises are also major problems. Employment in state-owned
enterprises declined by 1.3 million in 1995. Employment in individually
and privately owned enterprises increased by 4.8 million. Overall Chinas
state enterprises employ an estimated 15 million redundant workers or
more than 10 percent of Chinas state-owned enterprises workforce (The
World Bank, 1996 a, p.17). The implementation of the governments
substantial programs and new job assignments in non-state sector will
help the unemployed to find new jobs and contribute to a better allocation
of labor resources.
Diversification of ownership and transfer from state to non-state
sector will contribute to business autonomy, high productivity, and the
continued development of Chinas economy. State-owned enterprises have
lagged behind in economic growth and employment creation. Chinas
remarkable growth in the reform period has been mainly due to rapid
expansion of its private and collective sectors (Huang and Duncan, p.66).
Therefore, the key to successful enterprise reform in the future is
probably to change the system of ownership including changes in the

way in which existing ownership rights are exercised (Fan and Nolan,
p.37). State-owned enterprises will be required to play important roles in
key sectors which have a close bearing on the national economy and the
livelihood of the people (Hong, p.16). Therefore, to promote Chinas
economy, it is necessary to continue to implement reform of state-owned
The most crucial reform is to diversify ownership and transfer it
from the state to the non-state sector: through mergers of state-owned
enterprises, sales to collective or individually owned firms, leases, and
increases of foreign joint ventures. The management contract
responsibility system will enhance the economic performance and the
labor system. The governments substantial economic policy, legal
framework, and varied programs will contribute to the development of the
reform of the state-owned enterprises. Chinas first reform goal was the
removal of bureaucratic controls and interference over the enterprises in
the economy. In my thesis, I will explore the ways in which Chinas state-
owned enterprises must continue to be reform so that they have economic
success and they can support the continued economic development of

Review of Literature
The book entitled The Chinese Economy under Deng Xiaoping, by
Robert F. Ash and Y.Y. Kueh, discusses macroeconomic issues,
agricultural change, industrial performance, energy, foreign investment,
foreign trade and consumption, and living standards in China.
Feng Chen is Assistant Professor in the Department of Political
Science at Upsala College. His book entitled Fmnomic Transition and
Political Legitimacy in Post-Mao China approaches the structural reform
of Chinas political economy from a radically divergent and analytical
perspective. He discusses the origin and consequences of the Chinese
Communist Party using capitalist economic policies to enhance Leninist
political control. He demonstrates how the Chinese Communist Party
leaders were beneficiaries of economic reform carried out under political
authoritarianism. The problem, he says, is that China lacks the legal
system, price system, and other institutions essential for comprehensive
privatization, a situation most likely to facilitate transfer of state assets
into the hands of the few government officials and their relatives who
have accumulated wealth through official speculation. The book is an
analysis of the ideological debates and policy approaches to public

ownership, state-owned enterprises reform, expansion of private
enterprises, and increased income concentration.
Shangquan Gao is a leading economist in China and holds a
number of important official positions, including a seat on the Economic
Committee of the Chinese Peoples Political Consultative Conference.
His book entitled Chinas Economic Reform provides the Chinese
perspective on the introduction of major reform policies, discussing their
successes and failures. It clarifies Chinas vision of a socialist market
economy which roughly can be characterized as maintaining public
ownership while promoting market competition and greater managerial
autonomy. It also outlines the broad achievements of reform, describes
remaining imbalances and structural contradictions, and reviews specific
aspects of reform: the open door policy, rural, enterprises, and marketing
reforms, macroeconomic management, and income redistribution. He
offers a very positive account of Chinas reform experience and the
governments leadership role in the reform processes.
Alan R. KLuver is Assistant Professor of Speech and Rhetoric and
Director of the Asian Studies Program at Oklahoma City University. His
book entitled Legitimating the Chinese Economic Reforms attempts to
offer an innovative interpretation of the legitimate transition from Mao

Zedongs first revolution of planned economy, through Deng Xiaopings
socialism with Chinese characteristics, to Jiang Zemins second revolution
of socialist market economy. By refocusing on the economic
modernization, recreating Mao Zedong and redefining ideological
orthodoxy, renewing the correct line, and revising the myth and ideology,
Deng Xiaoping seems to have been successfully reengineering the political
legitimacy of the Chinese Communist Party.
Greg Mastel is vice president for policy planning and
administration at the Economic Strategy Institute. He is also an Adjunct
Professor at the University of Maryland UC Graduate School of
Management and Technology. His book entitled The Rise of the Chinese
Economy is cautiously optimistic but not wide-eyed about Chinas future.
While expecting China to evolve into a hybrid mixture of
authoritarianism, democracy, socialism, and capitalism, it recognizes the
range of internal problems that could befall the country; environmental
disasters, political struggles both between cities and countryside and
between the central government and provinces, and tensions between the
emerging entrepreneurial economy and the vast parts of China still under
state control.

Ryoshin Minami is Professor of Economics at the Institute of
Economic Research, Hitotsubashi University, Tokyo. His book entitled
The Economic Development of China addresses a topic of the growing
importance in todays changing international political and economic
landscape: the emerging global power of China, and the present and
future prospects of its economic development. No assessment of economic
growth in East Asia would be complete without consideration of Chinas
current transformation and performance. His main questions are: What
are Chinas current economic problems and their causes? What are the
difficulties regarding Chinas economic reforms? Where should Chinas
economy go? He provides information about several vital aspects of the
Chinese economy. He identifies the problems that China must face to
develop its economy and elucidates the structural deficiencies which lay
behind these problems. If China is to have some lasting economic
prosperity and growth, it has to continue and to expand the reform of its
economic and financial structures.
Barry Naughton is Associate Professor at the Graduate School of
International Relations and Pacific Studies, University of California at
San Diego. His book entitled Growing Out of the Plan : Chinese Economic
Reform. 1978-1993 is a study of Chinas economic reforms from 1978 to

1993, focusing primarily on the reforms that affected the state-owned
enterprises. He describes the reform process as growing out of the
economic plan. Piecemeal reform measures were adopted in the 1980s
that froze planned activities while they allowed market activities to grow.
State-owned enterprises were given greater autonomy, and with their
planned activities fixed and with most prices liberalized, they faced
market prices at the margin. In time, as the non-state sector grew and
the market activities of state-owned enterprises increased, the share of
the non-plan, market transactions in the economy increased and China
found itself moving steady toward a market economy. He recognizes that
Chinas reforms have not been entirely successful. The reform of the state
sector is still incomplete, therefore, state-owned enterprises continue to
face soft-budget constraints and many of them need to be restructured.
The party and the enterprises are still not completely separated.
David J. Pyle is Dean of the Faculty of Social Sciences and
Professor of Applied Economics at the University of Leicester. His book
entitled Chinas Economy from Revolution to Reform analyses that reform
began with agriculture, where the oppressive and unpopular commune
system was replaced with what amounted to privatized tenant farming
over the period between 1978-1984. After substantial initial

improvements, productivity declined. Manufacturing industry came next,
with state-owned enterprises being replaced by more flexible township
and village enterprises as well as with some effective private enterprises.
But in many cases, results have been disappointing mainly because the
state has refused so frequently to harden the budget constraint facing
state-owned enterprises or to move to a full- fledged, market-based pricing
Clement Tisdell is Professor of Economics and Head of the
Economics Department at the University of Queensland in Australia.
His book entitled Economic Development in the Context of China
attempts to accomplish two goals: to present general economic
development issues illustrated by the experiences and policies of China;
and to analyze various Chinese approaches to economic development and
draw conclusions about these approaches. He examines Chinas economic
development in international perspective and offers an overview of major
policies and reforms.
China : Reform and the Role of the Plan in the 1990s by the World
Bank (1992) reviews the reforms of the 1980s and assesses development
policies for the 1990s. Many of the economic problems in the 1980s were
the result of incomplete reforms. Although the decision-making power

was delegated to provinces, local authorities, and even to enterprises and
individuals, the problems created by reform generated pressure for
further reform. The accelerated reform scenario envisages substantial
reform of prices and of the financial sector and trade, leading to a
sustained growth of 8.5 percent and inflation of only 6 percent. The slow
reform scenario assumes that the ability to manage the macroeconomy
will not improve rapidly enough and that reforms at state-owned
enterprises will lag, leading to higher investment, lower consumption,
inflation of about 10 percent and a boom and bust pattern of growth.
Their conclusion, that without changes to the present policy framework it
is unlikely that the current problems facing the economy can be solved, is
being borne out.
Bureaucrats in Business : The Economics and Politics of
Government Ownership by the World Bank (1995) examines systemic
economic and political obstacles to reforming state-owned enterprises
operations in the developing countries. It imaginatively combines general
analysis and case studies to explore the very mixed success of state-owned
enterprises reform. Despite the consensus that state-owned enterprises
are, for the most part, operated inefficiently and that either internal
restructuring or privatization can restore economic health to moribund

enterprises, reform efforts have fallen well below expectations. The
studys conclusion that political obstacles are the main reason for the lack
of state-owned enterprises reform is hardly surprising. However, its
analysis in terms of political desirability, feasibility, and credibility of
reforms neatly summarizes some of the more important conditions for
successful state-owned enterprises reform.
China 2020 : Development Challenges in the New Century by the
World Bank (1997) describes the reform process from a rigid command
economy to an innovating, market-based system, increasingly integrated
into the global economy and from traditional agricultural subsistence to a
modern urban-dominated society. These are the two grand transitions
that have transformed China since the death of Mao Zedong in 1976 and
transitions have been spectacularly successful. The World Bank believes
that China can meet the challenges of continued transformation and that
it can sustain rapid growth during the first two decades of the next
Xun-Hai Zhang is a Research Fellow in the Research School of
Pacific Studies at the Australian National University in Canberra. His
book entitled Enterprise Reforms in a Centrally Planned Economy
describes that there are some reforms that are most vital inasmuch as

they are keys to determining the degree of the enterprises autonomy
achieved and the nature of the dependency relations and constraints that
remain. He suggests that Chinas reformers will need to defend local
enterprises and workers against state interventions that would reduce
employment or living standards although the reforms were supposed to
strengthen the enterprises responsibility for profits and losses. In fact
much of the decentralization of control over financial and material inputs
was diverted to local governments rather than given directly to the
enterprises. He is quite dismayed by the central governments loss of
control over the proportions of spending on investment and consumption.
He describes how enterprise managers have used their increased
authority over enterprise spending to not reinvest retained profits in
productive assets but rather to increase workers wages, bonuses, or
iringe benefits. The book concludes with a speculative comparison of
managerial behavior in the context of state ownership, collective
ownership, and individual ownership.
These works together offer important insights into the reform
process. I will draw on them in the following chapters to develop my
thesis about the role of continued state-owned enterprise reforms in
Chinas future economic growth.

In this chapter, I will show how state-owned enterprises are related
to Chinas economy from the perspectives of history and politics, why
state-owned enterprises play an important role in Chinas economy, and
the reasons for reform of state-owned enterprises.
Before China implemented the economic reforms of 1978, the
Chinese economy had been controlled by the centrally-planned economy
since 1949. Central planning was widely extolled as an important facet of
the superiority of socialism over capitalism (Minami, p.19). Production
and distribution were under the direct control of the central government.
The workers had no incentive to work because the wages were fixed and
job tenure was secure.
Between 1949 and 1978, China quickly built large industrial state-
owned enterprises. Chinas state-owned enterprises were typical of
production units in a central planning economy: the government
determined the production plan, allocated the investment and materials

supply, directed the products to designated purchasing units at planned
prices, and controlled employment, wages and prices. State-owned
enterprises transferred all their surplus funds to the state budget, and
relied on the budget for subsidies to cover losses and grants for
investment. Under this system, state-owned enterprises had extremely
limited autonomy in decision-making. The inefficiency associated with
this highly centralized decision-making system and firms lack of
incentives to improve productivity seriously dampened the growth
potential and technological progress of the Chinese industry.
Since the beginning of the reforms in 1978, the Chinese economy
has grown rapidly (See Table-1). In 1979, 84 industrial enterprises in
Sichuan province were allowed, on an experimental basis, to retain a
proportion of profits for their own discretionary use. This reform was
soon formalized in a state reform plan, calling for government agencies to
transfer decision-making powers to state-owned enterprises in ten major
areas. As a result, state-owned enterprises managers began to enjoy
more autonomy in decisions related to production, pricing, materials
purchasing and employment. Enterprises were also allowed to sell their
above-quota output directly at negotiable or market prices.

Table-1. China's Gross Domestic Product (GDP)
Year GDP (annual percent change)
Average 1980-89 9.5
1990 3.8
1991 9.2
1992 14.2
1993 13.5
1994 12.6
1995 10.5
1996 9.7
1997 8.8
1998 7.0
Source : International Monetary Fund,
World Economic Outlook. 1998, p.33 and 153.

Important changes occurred in the government-enterprise revenue
sharing. In 1983, mandatory profit remittances to the central government
were replaced by a system in which enterprises paid income taxes and
shared their profits with their supervisory authority. This system allowed
the enterprises to retain a portion of their earnings for their own
purposes, including new investments, workers bonuses, and welfare
benefits. A clearer relationship between enterprises financial
performance and their retaining profits was established.
Political Perspectives
In 1978, Chinas government began drastic reforms to adopt an
economic structure regulated mainly by planning mechanisms and
supplemented by market mechanisms (Minami, p.20). After
implementing the economic reforms, the Chinese government gave its
views on the reforms: whereas in orthodox Marxist economics socialism
and a market economy can not coexist, the new explanation is that a
planned economy and a market economy are two sides of the same coin
under socialist conditions. Hence the Chinese economic structure after
1984 was called a socialist market economy (Minami, p.20).

Chinas enterprises traditionally were managed by a factory
director, under the Chinese Communist Partys Committee leadership,
together with a committee of staff and workers. The Party was the
highest organization of power, creating a condition in which the functions
of the Party and government were not separated. The Party secretary had
power but no responsibility; the director had responsibility but no power.
The status of the committee of staff and workers was very unclear, and
often it existed only in name (Nolan and Fureng, p.158).
The Third Plenum of the 12th Congress emphasized the need for a
strong unified, efficient production command and administrative system,
and pointed out that only the director responsibility system can meet
these requirements (Nolan and Fureng, p.158). The essential task of the
Partys organization in enterprises is to ensure the implementation of the
Party and state policies, promote the Partys ideological work, and assume
political work among staff and workers. In 1986 the Central Committee
and the State Council promulgated three further sets of regulations and,
while confirming the director responsibility system, clarified the functions
of and relations between the Party, the government and the workers. At
present these regulations are being implemented in state-owned
enterprises throughout the country (Nolan and Fureng, p.158).

Chinas long tradition of being ruled by a strong leader dates back
for centuries (Mastel, 1997, p.58). From 1949 to 1976, the Chinese
Communist Party has been dominated by a charismatic leader, Mao
Zedong. Deng Ziaoping, Chinas Post-Mao leader, attempted to promote
economic reforms while stubbornly insisted on upholding the Four
Principles which were the social path: the leadership of the Communist
Party, the dictatorship of the proletariat, and the Marxism-Leninism and
Mao Zedong thought: Maos socialism wanted to achieve a rapid
industrial expansion based on collectivized agriculture, central planning
with decentralized management, and a stress on heavy industry in the
Third Front of more defensible interior provinces (Fairbank, p.414).
Deng7s opposition to bourgeois liberalization and his desire to preserve
Maos overarching ideological and political framework were clearly at odds
with his economic goals. It was inevitable that eventually either economic
reform would break through the old political order, or the old political
order would act as a brake on economic reforms.
Deng seemed uncomfortable with the tradition of vesting power in
one man as opposed to institutions. He spoke against the Chinese
tradition of the strong leader and gave more power to institutions (Mastel,
1997, p. 58). After his return to power in 1978, he was faced with an

economy devastated by the Gang of Four. He resolved to dismantle the
Maoist economic structure and introduce practical reforms that would
arouse peoples enthusiasm for production. At the time, the conservatives
were very influential. Some provincial Party committees simply refused
to go along with the new policies. Others adopted a wait-and-see attitude.
In 1984, the Party changed the focus of its reform from rural to
urban district. The Seventh Five-Year Plan had three main goals: to
transform the state-owned enterprises from being the administrative
subsidiaries of the state into independent business firms capable of
making their own management decisions and responsible for their own
profits and losses, to develop a competitive market system, and to
institute macroeconomic controls (Galenson, p. 20).
In May 1988, the Politburo decided to implement price reform in
spite of mounting inflation. However, because of rampant inflation, the
leader relinquished the reform. Then its focus moved to the improvement
of the economic situation and rectification of the economic order.
In early 1989, China was the scene of massive demonstrations
calling for democratic reforms and an end of official corruption. However,
in June, the army brutally suppressed the Beijing demonstrators, killing
perhaps 1000. Tiananmen Square was the inevitable result of a

fundamental breakdown in Chinese internal political, economic and social
structures: the Chinese Communist Party could not lead the centrally
planned economy more than a certain part of the way down the path to
market economy (Fan and Nolan, p. 4). Overconcentration of the Chinese
Communist Party brought the difficulties of democracy and economic
reforms in China. From one perspective, Chinas economic reforms in the
1980s marked an important beginning in its transition to a market-based
economy. The results were mixed, and formidable problems lay ahead in
the 1990s.
In the 1990s, the pace of the transition of reforms accelerated after
Dengs 1992 Journey to the South. In 1992, the experiment of
corporatising SOEs began formally, and a document on Transforming the
Management Mechanisms of State-owned Industrial Enterprises was
issued which again emphasized the expansion of enterprise autonomy,
economic liberalisation, and a further separation of government
administration from enterprise management (Zengxian, p.1239). Chinas
experience in transformation spanned a period of 15 years during which
the Chinese Communist Party abandoned the centrally planned economy
in favor of a market-based economy (Zengxian, p.1240).

A Major Economic Role
State-owned enterprises are still a major economic mainstay in
China. By the end of the 1970s, when the governments emphasis had
shifted from political movements to economic development, improving
efficiency and productivity in the state enterprises had become very
important (Huang and Duncan, p.68). State-owned enterprises remain to
be the key drivers of Chinas industry, accounting for one-third of the
industrial production, two-thirds of the urban employment, and almost
three-quarters of the investment in 1997. State-owned enterprises
provide essential raw materials and dominate such capital-intensive
sectors as power, steel, chemicals, and machinery (The World Bank, 1996
b, p.l). China requires that the publicly-owned enterprises must remain
dominant in Chinas society (The World Bank, 1992, p.61). State-owned
enterprises are required to play their roles in key sectors which have a
close bearing on the national economy and the livelihood of the people
(Hong, p.16). Therefore, although the non-state sector has grown rapidly,
state-owned enterprises have continued to play a major economic role in
Chinas economy.
Many scholars argue that the reform of state-owned enterprises is
necessary to improve Chinas economy and to continue high economic

growth. Gao, a leading economist in China, argues that China needs to be
reform of state-owned enterprises:
Why is reform of enterprises central to the overall process of
economic restructuring? First, the enterprises, especially the large-
scale ones, play a very important role. The purposes of reform are
to establish a socialist economic system that possesses vigour and
vitality, and to promote the development of the productive forces
(Gao, p. 69).
State enterprise reform has remained a top priority in Chinas policy
agenda (Huang and Duncan, p.66). There is virtually complete agreement
among Chinas policymakers that reform of industrial state enterprises is
of the highest priority (The World Bank, 1996 a, p.15). Considerable
government attention has been given to reforming state enterprises in
China (The World Bank, 1997 d, p.32). Reforms of state-owned
enterprises can improve enterprise profitability and productivity, increase
the share of investment financed from retained earnings, and thus reduce
the borrowing required under partial or full sovereign guarantee (The
World Bank, 1996 b, p.37). Rongxia, a staff reporter of Beijing Review,
asserted the following:
Enterprise reform is highly significant during the Ninth Five-Year
Plan period (1996-2000) due to the fact that large state-owned
enterprises are vital to the national economy. Enterprise reform
has emerged as a key issue related to improving the operations of
the national economy and establishing a new economic system.
(Rongxia, 1996, p.15).

Chinas approach to reform of industrial state-owned enterprises is to
maintain state ownership of the key enterprises but improve their
performance by establishing market-oriented incentives (The World bank,
1997 a, p.l). Its major focus and policy relevance is to identify which of
Chinas recent enterprise, market and ownership reforms have been most
effective in improving the productivity performance of Chinas state
owned enterprises (Perkins, p.414).
Although Chinas government has implemented various economic
reforms, reform of state-owned enterprises is still slow and partial. The
governments programs have provided some important advances:
In March 1996, at the Fourth Session of the Eighth National
Peoples Congress, Prime Minister Li Peng said that the
Government would give priority to reform of the 1,000 state
enterprises and group companies. These would be transformed into
autonomous corporations, responsible for their own profits, losses,
and debt. In addition, he announced that smaller firms would be
reorganized via acquisition or merger into joint stock companies, or
through leasing, management contracts or forming cooperatives
(The World Bank, 1996 b, p.l).
Chinas reforms have been gradual, but their cumulative effect has been
large; and they have been remarkably successful (McMillan and
Naughton, p.130). It is necessary to maintain progress in structural
reforms in order to sustain economic growth and the continued stability in

Therefore, China requires reform of state-owned enterprises so as
to solve the chronic performance problem of state-owned enterprises.
Various reforms of state-owned enterprises will improve the incentive and
performance of these enterprises. I will discuss specific areas of reforms
of state-owned enterprises in the following chapters.

Diversification of ownership and transfer from state to non-state
sector will contribute to business autonomy, high productivity, and the
continued development of Chinas economy. It is very effective to
implement reforms to promote internal governance and diversify
ownership: mergers of state-owned enterprises, sales to collective or
individual firms, and transfer from state to non-state sector through the
contract responsibility system. In this chapter, I will discuss how these
reforms will effect Chinas state-owned enterprises.
From 1978 to 1997, state industrial enterprises have languished,
with slow growth and declining profits. Several indicators point to the
generally poor performance of state industrial enterprises relative to
nonstate firms. State firms have lagged in output, employment, and
productivity growth (The World Bank, 1997 d, p.28). After the economic
reforms began in 1978, the productivity and labor force of non-state
enterprises grew much faster than state-owned enterprises during 1978-
1994 (See Table-2 and Table-3).

Table-2. Output in Industry bv Ownership
Share of gross output value (%) (of which
Year State- owned Collective- owned Individual- owned Joint Ventures TVEs enterprises constitute)
1978 77.63 23.37 9.1
1979 78.47 21.53 9.0
1980 75.97 23.54 0.02 0.48 9.9
1981 74.76 24.62 0.04 0.58 10.7
1982 74.44 24.82 0.06 0.68 11.1
1983 73.36 25.74 0.12 0.78 11.7
1984 69.09 29.71 0.19 1.01 16.3
1985 64.86 32.08 1.85 1.21 16.8
1986 62.27 33.51 2.76 1.46 21.8
1987 59.73 34.62 3.64 2.02 23.5
1988 56.80 36.15 4.34 2.72 24.8
1989 56.06 35.69 4.80 3.44 23.8
1990 54.60 35.62 5.39 4.38 25.3
1991 52.94 35.70 5.70 5.66 30.8
1992 48.09 38.04 6.76 7.11 36.8
1993 43.13 38.36 8.35 10.16 44.5
1994 34.07 40.87 11.51 13.55 42.0
Source : Zengxian, Wu. How Successful Has State-Owned Enterprise
Reform Been in China Europe-Asia Studies. November, vol. 49, 1997,

Table-3. Distribution of Staff and Workers in Industrial Sector (%)
Year State- owned Collective- owned Individual & Private Joint Ventures (of which rural-based constitute)
1978 51.54 19.95 0.05 28.46
1979 50.94 21.09 0.09 27.88
1980 49.66 21.27 0.14 28.93
1981 50.01 21.43 0.16 28.40
1982 49.72 21.28 0.22 28.78
1983 49.11 21.27 0.32 29.31
1984 46.46 20.78 0.48 32.28
1985 45.69 20.42 0.62 0.44 32.83
1986 44.26 19.93 0.68 35.13
1987 43.73 19.56 0.80 0.62 35.29
1988 43.77 19.15 0.93 0.82 35.33
1989 44.66 19.28 0.88 1.15 34.03
1990 45.00 19.34 0.94 1.42 33.30
1991 44.95 19.08 1.29 1.83 32.85
1992 44.24 18.22 1.27 2.33 33.94
1993 42.98 16.17 1.74 4.16 34.95
1994 40.83 14.99 2.54 5.67 35.97
Source : Zengxian, Wu. How Successful Has State-Owned Enterprise
Reform Been in China Eurone-Asia Studies. November, vol. 49, 1997,

Non-State Sector
Chinas non-state sector includes the collective and private
sectors. The collective sector consists of urban collectives and township
and village enterprises (TVEs). The private sector includes individual and
private enterprises.
Table-2 shows that the share of gross value in state-owned
enterprises dropped from 78 percent in 1978 to 34 percent in 1994. The
most spectacular phenomenon is the expansion of township and village
enterprises. The collectively owned enterprises or the township
and village enterprises have significantly outperformed state-owned
enterprises in terms of productivity growth. In the early 1980s, the non-
state sector was relatively small in Chinas industrial production and
economy as a whole. However, by 1994, it accounted for about two-thirds
of the gross national product and over half of its total value of industrial
output. As a result, by 1990 the non-state sectors accounted for over 40
percent of total industrial output and more than 63 percent of industrial
employment (Fan and Nolan, p.138).
Non-state sectors rapidly increased the productivity growth and
stimulated state-owned enterprises. State-owned enterprises return on
assets is estimated at just 6.0 percent, compared with 8.4 percent in

collectively-owned enterprises and 9.9 percent in joint ventures (The
World Bank, 1997 d, p.28). Actually, Chinas remarkable growth in the
reform period has been mainly due to rapid expansion of its private and
collective sectors (Huang and Duncan, p.66).
Industrial state-owned enterprises have contributed less and less to
economic growth since 1978. Between 1984 and 1994, for example, the
growth of industrial output in state-owned enterprises was one-half that
of nonstate enterprises and in 1994 alone it was closer to one-fifth.
Similarly, in the last decade, employment growth in nonstate enterprises
has been three times faster than in state-owned enterprises (The World
Bank, 1996 a, p.15). The slower growth of state-owned enterprises has
indicated that their output and employment have declined sharply. The
share of state-owned enterprises in output and employment has been
declining because of rapid growth in collectively-owned enterprises and
township and village enterprises. Three transitions have been carried out
since economic reform began in 1978:
The first wave was state-owned industrialization after reforms
were initiated in 1978. The second wave was industrial growth of
collectively owned and township and village enterprises. In the
past few years, the third wave of industrialization has been rapid
growth of privately and individually owned enterprises,
supplemented by joint ventures and foreign-funded enterprises.
(The World Bank, 1996 a, p.15-17).

Diversify Ownership and Transfer from State to Non-State Sector
Under these circumstances, it is very important to implement
programs to improve internal governance and diversify ownership.
Chinas experience in diversifying SOE ownership suggests that
ownership diversification is an effective way of improving governance
(The World Bank, 1997 a, p.61). The key to successful enterprises reform
is to change the system of ownership including changes in the way in
which existing ownership rights are exercised (Fan and Nolan, p.37). In
the beginning of 1980s, many enterprises gained their own autonomy in
production decisions and wages, adoption of the management
responsibility system (The World Bank, 1997 d, p.ll), and recruitment of
new management (See Table-4). During the 1980s, state-owned
enterprise managers continued to experience a steady increase in
autonomy, authority, and incentives.
Chinas government has selected 1,000 large state-owned
enterprises for the purposes of the focus on reform and the backbone of
Chinas industry: At the Fourth Session of the Eighth National Peoples
Congress in March 1996 the government announced its intention to
concentrate on the reform and development of 1,000 large state-owned
enterprises and enterprise groups that will form the core of Chinas

Table-4. Increased Autonomy for State Enterprises During the 1980s (%)
Base retention rate
Marginal retention rate
Autonomy in production decisions
Wage discretion
Management responsibility system
New management appointed after 1980
Base retention rate
Marginal retention rate
Autonomy in production decisions
Wage discretion
Management responsibility system
New management appointed after 1980
1980 1981 1982 1983 1984
7 19 22 30 34
11 12 11 14 17
7 8 10 14 25
1 1 1 2 5
0 0 0 1 2
9 9 15 25 40
1985 1986 1987 1988 1989
37 39 38 39 39
17 19 23 26 27
35 40 53 64 67
9 12 20 32 35
4 8 42 83 88
40 61 75 85 94
Source : World Bank. China 2020 : Development Challenges in the New
Century. 1997, p.ll.

modern enterprise system (The World Bank, 1996 a, p.18). The priority
1,000 enterprises program is expected to focus on a first wave of
attention and support in granting management autonomy, incorporation,
transfer of social responsibilities, and, where necessary, debt
restructuring (The World Bank, 1996 b, p.42).
About 90,000 of Chinas enterprises are classified by the
government as small enterprises and are managed under provincial
government: The government will loosen controls on the operations of
Chinas roughly 90,000 small industrial state enterprises. Reform in
these enterprises will be pursued through restructuring, mergers, leasing,
performance contracts, and sale to nonstate enterprises (The World Bank,
1996 a, p.18). The government is experimenting with programs that
include mergers, sales, leasing arrangements formation of cooperatives,
management contracts, and joint ventures now.
Many local governments have implemented and encouraged reform
of small state-owned enterprises. Small state enterprises can adopt
contract management, lease management and in some cases can be
transformed into shareholding corporations, or sold to collectives or
individuals with the sales proceeds reinvested into industries urgently in
need of development (The World Bank, 1996 b, p.9). This has given more

freedom, managerial autonomy, and flexibility to local governments to
carry out various approaches to improving efficient reforms. In some
countries, most state-owned enterprises have already been transferred
from state to non-state sector. In Zhucheng, located in Shandong
Province, reform of small state-owned enterprises has been successful:
SOEs and collectives enterprises in the city had performed poorly.
Sixty eight percent of the 150 enterprises were in the red, with a
total loss of RMB 147 million... The Zhucheng city government
restructured 213 of its 274 industrial and commercial enterprises
into shareholding cooperatives and shareholding corporations.
Assets were sold directly to the staff and managers of the firm. The
other 61 enterprises were sold through auctions, merged with other
enterprises, leased to others, or transformed into foreign joint
ventures... The experiment was remarkably successful in
increasing economic efficiency. In 1994, the labor productivity of
enterprises rose by 73 percent, the highest in 15 years. Profits
grew by 159 percent and government tax revenues rose by 50
percent. Workers income increased. Most enterprises distributed
dividends of more than 30 percent (The World Bank, 1996 b, p.8).
In Zhengding of Hebei Province, reform of small state-owned enterprises
has effectively restructured them through establishing a new company as
a subsidiary:
State-owned enterprises with a negative net worth presented a
more difficult problem. Lack of working capital prevented these
enterprises from adjusting their production to market demand.
The Government allowed these firms to set up a new company as a
subsidiary of the original firm. The parent firm contributed
buildings, equipment and employees to the new company as a
shareholder, and employees of the parent firm contributed cash as
equity capital of the new company. They used these resources to
develop new profitable products. With the new products, the

companies became profitable and were able to borrow additional
loans from banks. The parent firm then was able to use its
dividend income to pay for its debt arrears. About one-third of the
state-owned enterprises in Zhengding were restructured in the way
(The World Bank, 1996 b, p.8).
Reform of small state-owned enterprises has been carried into effect by
local governments gradually.
The Governments Efforts
The government announced 10,000-1,000-100-10 program in 1994
for clearer property rights within a sound economic legal framework;
organizational reform; strengthened corporate governance; and
implementation of financial accounting procedures in line with
international standards (The World Bank, 1997 a, p.2). The
governments program and the enactment of the Company Law in 1994
provided an encouraging beginning:
The 10,000-1,000-100-10 enterprise reform experiment calls for:
10,000 large and medium state enterprises adopting new
accounting standards by July 1995; 1,000 large state enterprises
adopting the new state assets management regulations by July
1997; 100 large and medium-size state enterprises being
corporatized as limited liability or limited liability shareholding
companies under the Company Law; and 10 (now 18) municipalities
undergoing comprehensive urban enterprise reform, including
state-owned enterprises restructuring, technology upgrading,
mergers and consolidations, bankruptcy, and divestiture of social
services (The World Bank, 1996 a, p.22).

In order to promote mergers, the central government dictated that the
companies could pay the loans by installment over five years and accrued
interest prior to mergers could be canceled. The government has also
committed substantially more funds to finance write-offs of enterprises
bad debts. To facilitate bankruptcies, the responsibilities of enterprises
toward laid-off workers have been clarified (The World Bank, 1996 a,
Laid-off workers who become self-employed and no longer retain
employee status may receive a one-off settlement equal to three
times the average pay received in the previous six months. If the
worker cannot find a job or the one-off settlement cannot be paid,
then unemployment benefits are to be paid for a fixed period. If
this period expires, and the worker is still unable to find a job, then
responsibility for unemployment benefits is transferred to the local
department of civil relief (The World Bank, 1996 a, p.22).
Although the 10,000-1,000-100-10 program provides essential governance,
implementation of the program is slow. Write-offs of enterprises bad
debts began in 1996 with an allocation of RMB 20 billion in order to
restructure enterprises. In 1997, RMB 30 billion were assigned for the
restructuring. Since these funds are generally allocated to promote in the
merger of two or more small state-owned firms, their use is tied to
restructure enterprises.

The Rise of Non-State Sector
Ownership reforms have allowed free entry for joint ventures,
township and village and wholly foreign-owned enterprises that have
achieved superior productivity performance to the state enterprise sector
(Perkins, p.440). The restructuring of large and medium industrial SOEs
through mergers and acquisitions, domestic and foreign joint ventures,
and other forms of integration and consolidation is in full swing (The
World Bank, 1997 a, p.8). Mergers are an effective way to achieve the
right combination of reform and development and to meet the demands of
economic restructuring (Gao, p.80). The mergers of state-owned
enterprises have been carried out through the development of the contract
system. According to Gaos survey, a total of 3424 enterprises had been
merged into 2856 enterprises by the end of 1988 (p.79).
Mergers of State-Owned Enterprises
The mergers of state-owned enterprises have been implemented by
purchase and transfer. Eight cities in all have established enabling
measures to encourage the transfer of markets and premises, and to make
the merger of enterprises common practice (Gao, p.79). To encourage the
development of mergers, the government promulgated Interim

Regulations on the Merger of Enterprises. Merger between enterprises
effectively creates the conditions that encourage the flow of asset reserves
and maximize productive potential, and thereby contributes greatly
toward economic reorganization (Gao, p.80). After implementing mergers,
unwanted and unnecessary products have been reduced and popular and
high-quality products have been increased drastically. According to
Nanjings survey of twenty-five merged enterprises, eighteen unsaleable
products were eliminated, while eleven new, saleable products were
developed (Gao, p.80).
Foreign Joint Ventures
Sino-foreign joint ventures are additionally important because they
often foster the transfer of international advances in technology (The
World Bank, 1997 a, p.8). The government expected that foreign invested
enterprises would experience high productivity growth by adopting more
advanced technologies and western management and marketing
techniques. Through foreign joint ventures, technological transfer can be
carried out with lessened risk. By transferring technology or know-how
under such arrangements the joint venturer reduces the risk that the host
might independently learn of the technology or know-how, or buy instead

a substitute technology from a competitor (Tisdell, p.56). In these foreign
joint ventures, the board of directors and the general managers are
appointed by the state bureaucracy (Zengxian, p.1257). However, this
restructuring of state-owned enterprises cannot alone provide sufficient
management autonomy because the old management apparatus still
remains and controls them.
Township and Village Enterprises
The biggest achievement of enterprise reforms in China is the
genesis and explosive growth of industrial TVEs (Woo, Hai, Jin, and Fan,
p.434) (See Table-5). The regional distribution of TVEs varied (See
Table-6). In 1993 TVEs accounted on average for about 30 per cent of
rural employment, ranging from a low 10 per cent in Guizhou to 71 per
cent in Beijing. Most TVEs were located in the eastern coastal region.
Their average share of employment in the rural area was 45 percent
(Chai, p.170).
A rapid transition brought the regional imbalance of township and
village enterprises. In the eastern coastal region, the shift of the
workforce from the low productivity agricultural sector to the high
productivity industrial sector was rapidly carried out. This transition in

Table-5. Development of Township and Village Enterprises.
Number Employment Output
(10,000) (million) (billion yuan)
1978 152.4 28.3 49.3
1979 148.0 29.1 54.8
1980 142.5 30.0 65.7
1981 133.8 29.7 74.5
1982 136.2 31.1 85.3
1983 134.6 32.3 101.7
1984 186.4 39.8 146.6
1985 185.0 43.3 205.0
1986 172.8 45.5 251.7
1987 158.3 47.2 323.8
1988 159.1 48.9 436.3
1989 153.6 47.2 485.6
1990 145.4 45.9 542.9
1991 144.2 47.7 772.0
1992 152.0 51.5 1,210.0
1993 168.5 57.7 2,036.0
Annual average growth rates (%)
1978-1983 -2.4 2.6 15.6
1983-1984 38.5 23.2 44.2
1984-1991 -3.6 2.6 26.8
1991-1993 8.1 10.0 62.4
Source : Chai, Joseph C.H.. China : Transition to a Market Economy.
1997, p.169.

Table-6. Share of Rural Employment in TVEs and Individual and Private.
TVEs (%) Individual Private
Eastern region 44.7 10.0 1.8
Beijing 71.3 5.7 1.0
Tianjin 55.7 4.9 1.8
Shanghai 62.6 2.7 1.7
Liaoning 50.9 8.1 1.7
Shandong 37.9 16.9 1.5
Jiangsu 34.0 8.3 0.8
Zhejian 31.7 14.0 2.1
Fujian 35.9 12.1 3.0
Guangdong 37.3 11.1 3.2
Hebei 29.6 15.7 1.2
Central region 27.9 11.0 1.0
Heilongjiang 36.4 8.8 0.5
Jikin 30.0 9.3 0.9
Henan 31.6 10.2 1.0
Shanxi 37.4 11.4 2.0
Anhui 25.5 12.2 0.7
Hubei 28.5 10.2 0.7
Hunan 21.9 13.6 1.1
Jiangxi 23.6 13.7 0.9
Sichuan 20.0 9.6 0.8
Shaanxi 24.5 10.8 1.4
Western region 17.1 13.3 1.2
Guangxi 19.4 14.1 1.0
Ningxia 21.0 10.1 1.5
Xizang N/A 25.7 0.4
Xingjiang 19.8 15.9 1.8
Neimenggu 25.3 10.0 1.1
Yunnan 11.0 13.6 0.7
Guizhou 10.1 10.7 1.8
Gansu 19.4 10.9 1.2
Qinghai 10.8 8.8 1.3
Source : Chai, Joseph C.H.. China : Transition to a Market Economy.
1997, p.172.

this region occurred much faster than elsewhere in China. To reduce this
regional imbalance the government has intensified its efforts to promote
TVEs in the less developed regions (Chai, p.171). As a result, TVEs
output in these regions has been remarkably improved in the last few
years. In 1994, the share of gross value of industrial output in TVEs grew
by 42 percent. During the years 1980-92, while the industrial SOEs total
factor productivity (TFP) grew at an annual average of 2 to 3 percent, that
of industrial TVEs grew at a rate of 7 percent (Jefferson and Rawski,
p.56). Similarly, during the same period, while the industrial output of
SOEs grew at an annual average of 7.8 percent, that of TVEs grew at a
rate of 18.4 percent (Jefferson and Rawski, p.48). The high growth of
industrial output in TVEs has caused the decline of the share of gross
value of industrial output in state-owned enterprises.
Individual Enterprises
Although individual enterprises average size is very small, they
constitute the largest component of Chinas private sector in terms of
employment. The Decision of the CPC Central Committee on Issues
Concerning the Establishment of a Socialist Market Economic Structure
formally agreed that the assets of small-scaled SOEs should be allowed to

be sold, leased or auctioned to the private sector and individuals
(Zengxian, p.1256). An Individual enterprise is officially defined as an
individual proprietorship and as a household firm employing not more
than seven workers (Chai, p.174). Employment of individuals is the
largest in Chinas private sector. Although the growth of individuals was
uneven, the number and employment have grown rapidly during 1978-
1993 (See Table-7). The faster growing sector has been individual
enterprises, which in 1980 accounted for only 0.02 percent of gross output
but by 1994 produced about 12 percent of total output (See Table-2).
Private Enterprises
Although private enterprises had suffered from numerous
restrictions in the 1980s, their growth has experienced a sharp
acceleration as a result of strong government support and the easing of
restrictions on them (See Table-8). Private enterprises in China are
private firms with more than seven hired workers (Chai, p.177). After
1988, private enterprises were regularly considered as a legitimate part of
the Chinese economy by the 13th Party Congress. The government
established laws and regulations for private enterprises in 1988 (Chai,

Table-7. Development of Individual Enterprises. 1978-1994(000).
Year Number Employ
1978 300 330
1979 560 676
1980 897 1,554
1981 1,830 2,275
1982 2,636 3,199
1983 5,900 7,465
1984 9,304 13,031
1985 11,714 17,662
1986 12,111 18,459
1987 13,725 21,583
1988 14,527 23,049
1989 12,471 19,414
1990 13,283 20,928
1991 14,168 22,580
1992 15,399 24,677
1993 17,669 29,393
1994 21,470
Source : Chai, Joseph C. H.. China : Transition to a Market Economy.
1997, p.175.

Table-8. Development of Private Enterprises. 1988-1994.
Year Number (000) Employment (000) Output (billion yuan)
1988 41
1989 91 1,640 9.74
1990 98 1,702 12.18
1991 108 1,839 14.66
1992 140 2,320 20.51
1993 239 3,730
1994 420
Source : Chai, Joseph C. H.. China : Transition to a Market Economy.
1997, p.178.
Table-9. Growth Rates of Industrial Gross Real Output, 1991-1993.
Year Total State- owned Collectively- owned Individually- owned Other
1991 7.0 6.0 9.4 4.2 10.7
1992 12.8 3.8 20.9 27.6 14.7
1993 0.5 -6.7 -3.3 15.1 22.0
Source : World Bank, China: Reform of State Owned Enterprises. 1996,

Minami, Professor of Economics at Hitotsubashi University in
Japan, argues that bankruptcy is an effective way to reform money-losing
state-owned enterprises: State-owned enterprises with poor operation
should be forced into bankruptcy as soon as possible (Minami, p.232).
Within the 18 (now 56) experimental cities, there have been 472
industrial SOEs identified for bankruptcy, but procedures have begun for
161 of them, and only 58 firms have been declared bankrupt (The World
Bank, 1997 a, p.8). Although there have been some recent bankruptcies,
government (especially local government) is reluctant to shut down
enterprises that have little hope of financial viability. Bankruptcy
procedures are time-consuming and costly, and the government does not
want to exacerbate urban unemployment (The World Bank, 1997 d, p.29).
In Shanghai, fifteen small and medium state-owned enterprises
with the municipality had been declared bankrupt and 130,000 workers
had been laid off by 1994 (The World Bank, 1996 a, p.18). In Chongqing,
two medium state-owned enterprises were declared bankrupt: a shoe
manufacturer and a knitting mill, and the knitting mill was one of
Chinas largest bankruptcies, involving the layoff of 2,000 workers (The
World Bank, 1996 a, p.18). Bankruptcy is relatively new and still in its

experimental stages (The World Bank, 1996 b, p.6). Since 1994 the
government has been experimenting with corporatization, mergers, and
bankruptcies in pilot cities in order to deal with the worst performing
state-owned enterprises and to accelerate the reform process.
The Contract Responsibility System
State-owned enterprises were granted more autonomy in decision
making about what to produce, how much to produce, and where to sell it.
The decision making autonomy was introduced through adoption of a wide
range of contract and responsibility system (Huang and Duncan, p.69).
The contract responsibility system has begun since 1982, but by early
1988, this system covered more than 90 percent of all state-owned
enterprises (The World Bank, 1996 b, p.21).
The distribution system in production management was also
modified. In 1987, as a further step for decentralizing the enterprise
management system, the contract responsibility system was adopted by
most of the state-owned enterprises that signed a contract with their
supervisory agency, typically the industrial bureau, promising the
remittance of certain taxes and profits, but retaining most of the decision-
making rights: the number of producer goods directly distributed by the

state dropped from 256 in 1980 to 27 in 1985; and a large proportion of the
newly employed workers was on a contract basis (Galenson, p. 21). In the
early 1990s, almost all enterprises adopted some type of a responsibility
system (Huang and Duncan, p.69). After the contract is drawn up, the
government department concerned no longer interferes directly with the
operation or management of the enterprise. This is the system most
widely practiced in large and medium enterprises (Nolan and Fur eng,
p.155). The contract responsibility system has been playing an important
role in stabilizing and developing the Chinese economy. The system is
intended to enhance economic performance, by practicing efficient
management of the economically beneficial relationship between the state,
the enterprises, and the staff and workers (Gao, p.73).
The significantly poorer productivity growth performance of state-
owned enterprises indicates the importance of continuing reform of
ownership structures and freer entry for non-state firms (Perkins, p.441).
As the result of rapid growth of the non-state sectors, the role of the state
sector in industry at the core of the Chinese economy has been replaced
gradually, and the economy has been driven in large part by market forces

(Zengxian, p.1237) (See Table-9). Industrial non-state enterprises have
efficiently contributed to Chinas economic growth. It is very important to
implement these programs to improve internal governance and diversify
ownership: mergers of state-owned enterprises, sales to collective or
individual firms, and transferring from state to joint ventures, township
and village, and foreign-owned enterprises through the development of
the contract responsibility system. Implementation of these reforms could
be expected to make a significant impact on the productivity of Chinas
industrial sector and greatly contribute to Chinas continued economic

Through reform of state-owned enterprises, diversifying ownership
and transferring from state to non-state sector, the structure of urban
employment has been changing rapidly. In this chapter, I will argue that
Chinas government restructure programs and transformation of
workforce from state to non-state sector will improve labor redundancy
and unemployment in state-owned enterprises, promote new jobs for
workers laid off by bankruptcy, and support them to work in private and
individually owned enterprises.
Labor Redundancy
During the current transformation to a market-based economy, the
unemployment and labor redundancy in state-owned enterprises are
Chinas major problems. In state-owned enterprises under the old system,
staff and workers were employed and allocated to enterprises by the state.
According to the World Banks survey, the redundant workers of state-
owned enterprises exceeded 10 percent of their workforce (The World
Bank, 1996 b). Overall Chinas state enterprises employ an estimated 15

million redundant workers (The World Bank, 1996 a, p.17). According to
the World Banks survey of 142 state-owned enterprises (The World Bank,
1996 b), 60 percent of surveyed firms indicated that their redundant
workers exceeded 10 percent of their workforce and 33 percent firms
indicated that labor redundancy exceeded 20 percent (See Table-10).
Chinas unemployment problem is very complicated:
The Chinese official statistics reported that the number of
registered unemployed was 4.764 million and the unemployment
rate was 2.8% in urban areas in 1994. But many studies and
surveys have revealed that the disguised unemployment rate in the
SOE sector was about 20-30% over the past few years, the number
unemployed in urban areas has reached 5.3 million by now,
disguised unemployment in the SOE sector is approaching 20
million, and the real unemployment rate in urban areas will be
about 12-15% if the disguised unemployment turns into open
unemployment (Zengxian, p.1254).
The Governments Substantial Efforts
In 1986, Chinas government promulgated four different provisional
regulations to promote and standardize hiring and dismissal and to
facilitate labor mobility and work incentives: implementation of the
contract employment system in state enterprises, hiring of workers in
state enterprises, dismissal of workers and staff for work violations in
state enterprises, and unemployment insurance for workers and staff in
state enterprises (Galenson, p.160). The regulations have required the

Table-10. Redundant Workers in 142 State-Owned Enterprises.
First Semester of 1994.
Actual employment relative Enterprises
to optimal employment level
More than 30 17.0
20 to 30 16.2
10 to 20 26.8
5 to 10 24.6
About right 12.0
Too low 3.4
Source : The World Bank.
China: Reform of State-Owned Enterprises. 1996, p.14.

contract of employment for hiring of all workers in state-owned
enterprises since 1988. Through the adoption of the labor contact system,
the employment has been more flexible. Enterprises were given much
more freedom in the hiring of workers through the introduction of a labor
contract system (Pyle, p.90). By 1992, the number of workers employed
on a contract basis reached 25 million, accounting for 16 percent of the
employee population (Rongxia, 1993, p.40). It is predicted that the rate
will reach 50 percent by the year 2000, and 95 percent by 2010 (Leung,
Unemployment insurance was introduced in 1986 in China:
Unemployment benefits are paid for a maximum of 24 months,
provided an individual has worked for five or more years. Benefits
suggested for the first 12 months would equal 60 to 75 percent of
basic wages, followed by 12 months at 50 percent. For those who
have worked for more than one year but less than five, only the
first years standard wage would prevail (The World Bank, 1996 b,
The goals of unemployment insurance were to provide support for
displaced workers and remove an obstacle preventing SOEs from making
surplus workers unemployed (Pyle, p.93). Unemployment insurance
covers benefits of workers in bankrupt firms and in enterprises being
restructured. An unemployment insurance system that provides
protection but also encourages active job search is a superior alternative

to the current system of job guarantees. It is less costly and it encourages
labor mobility (The World Bank, 1996 b, p.41).
The government has made substantial efforts to reduce
unemployment among workers of state-owned enterprises by introducing
reemployment programs, by running 2,600 retraining programs to
upgrade the skills of laid-off workers (The World Bank, 1996 a, p.19), by
helping job-seekers find jobs, and by creating new jobs. The goal of the
reemployment program is the followings:
To rely on policy support and various employment service means to
bring forth the initiative of the government, enterprises and
laborers to provide priority services and aid to those unemployed
for more than six months and redundant enterprise employees with
financial difficulties, in an effort to help them quickly get
reemployed (Ning, 1997, p.10).
The government has sought new methods through reemployment projects,
such as setting up enterprise funds to support small, private enterprises
and self-employment, which have the potential to absorb a large number
of redundant workers (Peoples Republic of China, p.65). Shanghai has
the largest number of industrial workers, and is the city with the largest
number of laid-off workers during the state-owned enterprise reform.
Over the past few years, more than 900,000 unemployed workers have
found new jobs through re-employment service centers (Ning, 1998, p.ll).
After the governments vigorous efforts to create jobs, the unemployment

rate was reduced to only 1.8 percent in 1985. After that, the rate rose
again, reaching 2.3 percent in 1991 (Leung, p.142). This figure is
evidently an underestimate, and the actual figure may be 4 percent or
more (Xu).
Employment of State and Non-State Sector
Employment in state sector has been declining, and non-state
sectors employees have increased sharply. Employment during the first
half of 1995 declined by 1.3 million in state-owned units and by almost 1
million in collectively owned enterprises. Employment in individually and
privately owned firms (including joint ventures and foreign-funded firms)
increased by 4.8 million (The World Bank, 1996 a, p.6). The structure of
urban employment has been changing rapidly (See Table-11). Although
the employment in state-owned enterprises continues to be dominant in
urban China, employment in the private sector has increased in recent
The numerous new jobs created by private and individually owned
enterprises indicate that private and individually owned enterprises have
promoted the transition from the state to the non-state sector and have
improved labor redundancy and unemployment in state-owned

Table-11. Urban Employment bv Ownership. 1989-1995 (Aggregate data),
Year State-owned Collectives Private and
1989 70.8 24.3 4.9
1990 70.9 24.1 5.0
1991 70.2 23.8 6.1
1992 70.0 23.2 6.8
1993 69.8 21.3 8.9
1994 68.7 19.5 11.7
1995 67.1 18.1 14.8
Source : : The World Bank. Sharine Rising: Incomes. 1997, p.28.

enterprises. While state-owned enterprises created just 1.4 million new
jobs in 1994 and 1995, private and individually owned firms created 6.6
minion (The World Bank, 1997 d, p.32). The growing acceptance of
nonstate firms operating without any government participation has
generated a sharp increase in private and individually owned firms (The
World Bank, 1997 d, p.32). Most indicative of change is that several
million workers have been released from state enterprises and most have
been reabsorbed into dynamic non-state enterprises. These treads would
undoubtedly accelerate with a fully supportive national policy framework
(The World Bank, 1996 b).
Political Perspective
During the Maoist period, the Chinese Communist Party proudly
claimed that the problem of unemployment in China was non-existent.
For decades, the government denied the existence of unemployment and
therefore, social security benefits for the unemployed have hardly been
perceived as necessary. Officially, there are only figures on persons
waiting for employment, referring to registered unemployed people in
the cities. The difference between unemployment and waiting for

employment has been regarded as an ideological issue differentiating
capitalist and socialist societies (Wang).
The ability to find employment for laid off workers is an essential
requirement of state-owned enterprises reform. Reforms, such as
unemployment insurance, reemployment programs, and transformation
of workforce from state firms to private and individually owned firms will
be effective in solving redundancy and unemployment of the workforce in
state sector. The shift from state and collective jobs to private and
individual sector jobs has provided tremendous impetus to economic
growth and productivity gains in urban China. Chinas government has
accepted the unemployment data and the scale of redundancies which the
official statistics do not reflect. It is likely that Chinas leadership will
continue to hone its understanding of unemployment data, and tune
policy to avert the implications of joblessness (Facing Up the Facts, p.3).
Therefore, the Chinese Communist Party must relax its centralized labor
policy which ostensibly leads to the erosion of the control of the work in
order to sufficiently implement these programs for unemployment and
labor redundancy.

In order to promote the markets, legal norms and procedures
should be required for direct government control over the economic
decisions in China. Political factors were crucial in determining the
success of the transition from a centrally-planned economy to a market-
based one in Chinas reform since 1978. The Chinese government should
play a significant role in legislatures and formulating policy or
implementing the reforms. However, corruption and profiteering activity
are the main political obstacles to reform of state-owned enterprises. In
this chapter, I will discuss how the governments public policy, various
regulations, and laws for reform of state-owned enterprises and non-state
enterprises have supported business autonomy and diversification of
ownership under the Chinese government. The goal has been the
separation of government administration from the economic functions and
elimination of these economic crimes.
Economic. Policy

The State Planning Commission is the pivotal organization for
Chinas economic planning. The Five-Year economic plans are drafted by
the commission in cooperation with the concerned ministries. For
instance, in drafting the plan for the automotive industry, the State
Planning Commission reportedly worked closely with both Ministry of
Foreign Trade and Economic Cooperation and the Ministry of Machinery,
which is responsible for the automotive industry (Mastel, 1997, p.54). The
State Planning Commission plays a leading role in matters of the reforms
and economic planning in China. In 1979, Chinas government called for
the development of a planned economy supplemented by market
regulations. By 1993, the goal of reform had matured to the creation of a
socialist market economy with Chinese Characteristics (See Figure-1).
Chinas Ninth Five-Year Plan and its Fifteen-Year Perspective Plan focus
not just on future growth but also on the entire direction of development
(The World Bank, 1997 d, p.18) (See Figure-2).
Various Regulations and Laws
The government has enacted various regulations and laws such as
the Bankruptcy Law, the State-Owned Enterprise Law, the Fourteen
Autonomous Management Rights, the Company Law, the Township

Figure 1. The Evolving Obiectives of Reform
1978-79 A planned economy based on the law of market exchange value
1979-84 A planned economy supplemented by market regulation
1984-87 A planned commodity economy
1987-89 An economy in which the state regulates the market and the market regulates enterprises
1989-91 An economy with organic integration of a planned economy and market regulation
1993-present A socialist market economy with Chinese
Source : The World Bank.
China 2020 : Development Challenges in New Century. 1997, p.9

Figure-2. Chinas Ninth Five-Year Plan and
Fifteen-Year Perspective Plan
Chinas Ninth Five-Year Plan (1996-2000) and Fifteen-Year Perspective
Plan outline the basic principles and priorities that will shape public
policy in China well into the next century. According to the plans, rapid
and balanced growth can contribute only if China completes two
fundamental transitions: from a traditional, planned economy to a
socialist market economy and from extensive growth to intensive growth.
In addition to calling for real GDP growth of 8 percent a year over the
next five years, the plans lay out an ambitious agenda:
Maintaining the momentum of economic reforms.
The government is determined to contain inflationary pressures through
budgetary and monetary restraint, supported by fiscal and financial sector
reforms. It will concentrate on reforming the 1,000 largest state-owned
enterprises and will pursue more intensive growth by promoting science
and technology and developing five pillar industries: machinery,
electronics, petrochemicals, automobiles, and construction.
Developing human resources.
The government has set itself the target of eliminating poverty by 2000,
primarily through economic growth and targeted public expenditures. It
also intends to make primary health care and nine years of compulsory
education available to all and to expand coverage of social security
Protecting the environment.
Recognizing the environmental damage that has accompanied growth, the
government intends to increase environmental regulation and
enforcement, adopt environmental taxes, and increase public education
and awareness.
Source : The World Bank.
China 2020 : Development Challenges in New Century. 1997, p.18

Enterprise Law, Regulations Governing the Supervision and Management
of State-Owned Enterprises Property, Interim Regulations on the Merger
of Enterprise, and the Commercial Bank Law. They also are supporting
business autonomy and distinguishing the rights and obligations of the
government from state-owned enterprises.
The Bankruptcy Law was promulgated in 1986 to encourage
enterprises to run themselves better and reduce losses, introducing the
market mechanism so that inputs and outputs are both linked the
market, encouraging competition between enterprises and so on (Nolan
and Fureng, p.67). However, the Bankruptcy Law was never put into
effect. Although China passed a bankruptcy law in 1988, it quickly
became a dead letter. Through February 1991, only a single report exists
of a state enterprise closed down through court action under the
Bankruptcy Law (Naughton, p.240). That is why the Bankruptcy Law is
difficult to implement without simultaneously instituting safety nets and
training programs for the unemployed. Further delay in implementing
the bankruptcy law for fear of creating more unemployment might also
ensue (Ash and Kueh, p.33). Galenson, vice president for policy planning
and administration at the Economic Strategy Institute, has a more
optimistic perspective:

Fifteen state-operated and forty-one other enterprises declared
bankruptcy. These figures are minuscule when compared with the
total of 20,600 state-operated enterprises (out of 74,800) that were
unprofitable in 1991. However, this small number of bankruptcies
is a great improvement over the previous five years during which
only two state-operated and ninety-eight other enterprises went
bankrupt (p.251).
It is still very difficult to establish and implement a system of bankruptcy
in a socialist economy.
Before the State-Owned Enterprise Law was promulgated in 1988,
the enterprises belonged to the government and were part of government
departments. The State-Owned Enterprise Law was established in order
to distinguish the rights and obligations of the government from those of
the firm: Enterprise Law was designed to make state enterprises into
legal entities responsible for their own profits and losses (Perkins, p.417).
The Fourteen Autonomous Management Rights were promulgated
in 1992 by the enterprise legal people to define the state-owned
enterprises sphere of business autonomy: these regulations require the
enterprise to be responsible for its own profits and losses, specify the
conditions for property rights transactions, and state more clearly the
legal responsibilities of enterprises and government supervisory
departments (The World Bank, 1997 a, p.21) (See Table-12). Table-12

Table-12. Management Autonomy in 128 Surveyed SOEs.
Fourteen autonomous rights Percent indicating full
1. Production autonomy 96
2. Pricing autonomy 73
3. Selling autonomy 97
4. Purchasing autonomy 94
5. Import and export rights 39
6. Investment autonomy 47
7. Use of retained earnings 78
8. Rights to dispose of assets 37
9. Autonomy to establish joint venture or 40
engage in mergers or acquisitions
10. Rights to hire workers 58
11. Rights to manage personnel 55
12. Rights to determine wages and bonuses 65
13. Rights to decide on organizational structure 78
14. Rights to refuse nonregulated 21
government collections
Source : The World Bank. China : Reform of State-Owned Enterprises.
1996, p.22.

shows that more than 90 percent of the enterprises were fully autonomous
in production, sales, and purchase, and less than 40 percent of them were
free to import and export, dispose of assets, establish joint ventures or
engage in mergers or acquisitions, and refuse nonregulated government
The Company Law was promulgated in 1994 in order to provide a
new legal structure for state enterprises: limited liability, share capital,
and separation of ownership from management as reflected in a
governance structure comprising shareholders meeting and boards of
directors (The World Bank, 1997 a, p.22). The enactment of the Company
Law in 1993 is the most important legal development for the drive to
establish SOEs as separate legal entities (The World Bank, 1997 a, p.22).
The Township Enterprise Law was promulgated in 1997 for the
purpose of property rights of township enterprises. Regulations
Governing the Supervision and Management of State-Owned Enterprises
Property in 1994 were designed to reconfirm that state-owned enterprises
have to establish assets operations responsibility systems and provide the
legal basis for the emerging network of state-owned bodies designated to
supervise state-owned enterprises property (The World Bank, 1997 a,
p.23). Interim Regulations on the Merger of Enterprise were promulgated

to promote the smooth and healthy development of mergers. The
Commercial Bank Law passed in 1994 conferred greater autonomy on the
specialized banks to make loans of their choosing (The World Bank, 1996
b, p.8).
Political Obstacles
In order to implement various regulations and laws for reform of
state-owned enterprises, China should separate government
administration from economic functions. The reforms during 1978-1984
brought sluggish progress in reforming the enterprises because its new
reforms were very weak and have not been seen as effectively
implemented: Many party secretaries refused to relinquish their power to
the directors; the ministries or departments continued to interfere with
enterprise operations; and the bankruptcy law promulgated in 1986 was
never really put into effect (Galenson, p.21). This indicates that
overconcentration of the Chinese Communist Party brought the difficulty
of economic reforms in China. Therefore, China requires the
decentralization of authority and the distinction between the functions of
the Party and the state (KLuver, p.85) because the goals of political reform
were to eliminate bureaucratism and the overconcentration of power

(Kluver, p.85). The major problem is that the political structure does not
meet the requirements of the reform of the economic structure.
Therefore, without reforming the political structure, it will be impossible
to safeguard the fruits of the economic reform or to guarantee its
continued advance (Goodman, p.13). Deng Ziaoping made this comment
regarding reform:
I think the aim of the reform of the political structure is to motivate
the masses, raise efficiency and overcome bureaucracy. The
substance of reform should primarily be separating the party from
government administration, finding a solution to how the party
should exercise leadership, and how to improve leadership
(Xiaoping, p.16).
Legislation should be speeded up to provide a fair and open
environment for competition. Increasing corruption and other
profiteering activities are an obstacle to Chinas economic reform. Some
form of corruption is usually at the heart of commercial problems caused
by the lack of rule of law in China (Mastel, 1997, p.91). The continued
domination of the Communist Party was seen as an obstacle to economic
reform, therefore the political system had to be reformed at the outset (Li,
p.309). Some government tax workers even told enterprises how to evade
various taxes (Zhang, p.76).
The multiple price system of the past was led to a serious
corruption and other profiteering activities:

Black markets for many goods have rapidly developed. Many
enterprises and even local governments now tend to overreport
their needs for materials which are allocated at lower prices, and
then sell them to other enterprises at much higher prices. In some
cases, the state enterprises even sold much of their allocated
materials at higher prices, and completely ignored the state output
plan, simply for the sake of increasing retained profits. The profits
earned from selling inputs are more than the profits generated from
turning the input into output (Zhang, p.122).
Currently corruption and theft are a serious problem for Chinas
economic activity. At the level of power structure, the position of the
Party has been eroded by the partial redistribution of economic power
resulting from the reforms and increasing corruption among the ranks of
Party officials (White, p.15). The extent of corruption is a serious problem
in China:
The extent of corruption at a national level emerged last week in a
report on the state purchase of grain. Out of a total of $65 billion
set aside to buy grain from farmers since 1992, $25 billion 40%
had disappeared. Investigators found that much of the missing
money had gone into luxury condominiums, futures trading and
purchase of cars and mobile phones the kind of graft that makes
the short-tempered Zhu go ballistic (McCarthy, p.54).
Corruption must be dealt with laws. The government gradually needs to
pull away from the market and assume the role of a referee. Chinas
economic reform will be successful if the government can remove these
political obstacles, corruption, theft, other profiteering activities, from the
Chinese Communist Party and the government.

The Chinese Communist Party is the political nervous system of
the Chinese state system and the Chinese society. The Communist
Partys Central Committee and its Politburo remain at the heart of power
in China (Mastel, 1997, p.44). The Central Committee has 186 full
members and 130 alternate members. The decision-making in the
Central Committee is headed by the Politburo. The core of the Politburo
is seven-member Standing Committee whose chairman is General
Secretary Jiang Zemin. Chinas legislature is the National Peoples
Congress (NPC). Traditionally, the NPC has been merely a rubber-stamp
legislature, approving the decisions of the Politburo and the State Council
(Mastel, 1997, p.47). The major political powers in China are
concentrated on President Jiang Zemin and the Politburo. Chinas
political change needs to focus in greater clarity on the Partys role in
relation to other institutions, most notably the government bureaucracy,
the emerging legal system and state enterprises, and the Partys political
role, while disengaging from the pervasive administrative responsibilities
it had accumulated over thirty years of power (White, p.13).
The role of bureaucracy is still paramount in the selection and
promotion of managers and in the decision-making process with respect to
entry and exit of firms (Galenson, p.36). The bureaucracy has removed

much operational autonomy. Both mandated state policies and
Communist Party interference had eroded the managers position
(Naughton, p.285).
In the past, the market remained constrained by continued
intervention by state bureaucrats who sought to guide its development in
ways that help them fulfill their political obligations (Reynolds and Kim,
p.15). Incompetent and obstructive bureaucrats severely hindered
Chinas economic development. The political leadership in China has
shown great political will and courage in carrying out the economic
reforms, but very important questions remain unresolved: price reform,
ownership and management rights, bureaucratic controls and
interference in the economy, the role of the party and party cadres in the
operation of the economy (Reynolds and Kim, p.123).
Presently, China must establish a minimally reliable method for
enforcing its own laws (Mastel, 1997, p.99). One of the Chinese
governments most important actions has been to strengthen its economic
legislation (Waters, p.30). China took the first step in 1993 when the
National Peoples Congress adopted the recommendation of the Central
Committee of the Chinese Communist Party to appoint Qiao Shi as NPC
chairman. Under his guidance, China has begun to develop appropriate

legislation to improve its investment condition. Initially eighty-nine new
laws were adopted, including laws restructuring unfair competition,
amendments to accounting and contract laws, and laws concerning
certified public accountants (Waters, p.31).
Reform of the State Planning Commission has been gradually
improving during the Eighth National Peoples Congress in 1993. The
State Planning Commission was allowed to move more rapidly to a
socialist market economy. The State Planning Commission continues to
function in overall economic planning. It maintains the responsibility for
recommending economic development goals for the country and for
preparing long and medium-range plans to meet the countrys goals
(Waters, p.33).
Since the reform of the economic system began, the State
Commission for Restructuring the Economic System has done much
work. The State Commission for Restructuring the Economic System is a
comprehensive department under the State Council in order to exercise
leadership in the reform of the economic system. The tasks of the
commission are the followings:
First, to act as staff officer and assistant to the Central Committee
of the Chinese Communist Party and the State Council in
formulating policies on the reform of the economic system. Second,
to prepare and design the overall plan and the implementation

programme for the reform of the economic system. Third, to
coordinate reform activities, and fourth, to give guidance to the
reform in the localities (Gao, p.147).
Reforming enterprises made great progress in some spheres,
partially internal management, but whose dynamism and flexibility were
harmed by continuing government interference. The political system is
still quite authoritative, governability has improved, and central economic
and political control over regions remains substantial (Huang, p.55).
Economic reform took place with hardly any change in the political
system (Galenson, p.27). When economic reform has developed to a
certain point, political reform must be carried out in order to ensure the
achievement of economic reform and facilitate its development (Gao,
p.159). In structural reform, it is necessary to reform the administrative
system so as to separate enterprises from politics.
Because of recent reforms, Chinas government now provides
adequate legal and regulatory principles to separate and allocate the
ownership and management and develop the market-based economy:
Promulgation and implementation of these rules and regulations
have legally established the principal market position for all
enterprises. While standardizing the establishment, alteration and
termination of enterprises, as well as the occupation, use,

disposition and profit of the property of legal entities, they ensure
that enterprises engage in independent management, assume sole
responsibility for their profits and losses, seek self-development and
impose self-restriction, and guarantee their position of equal
competition in market activities, thereby creating a relatively
favorable legal environment for enterprise development (Xin, p.15).
A legal framework is indispensable for the creation of a new market
system. However, from the perspective of institutional reform, the
government-enterprise relationship has not materially changed much,
with effectively little separation between the affairs of business and those
of administration (The World Bank, 1997 a, p.28). Government cadres,
and those of the Party and army institutions, must be prohibited from
taking concurrent or honorary posts in enterprises and companies (Gao,
p.115). Therefore, it is necessary for Chinas continued economy to reduce
the control of the Chinese Communist Party over the enterprises and
eliminate the political obstacles, especially corruption and an abuse of
bureaucracy, in order to effectively implement regulations and laws for
reform of state-owned enterprises.

Chinas economy had been controlled by a centrally-plan before
China implemented the economic reforms in 1978. After the reforms, the
non-state sectors have grown much faster than the state sectors.
However, state-owned enterprises still remain the key drivers in
industrial production, urban employment, and investment. The Chinese
government still wants industrial state-owned enterprises to be the
backbone of the modern Chinese industry; consequently, state-owned
enterprises need to improve their poor performance by establishing
market-based incentives. Therefore, continued reform of state-owned
enterprises is still necessary to maintain economic growth in China.
The most effective reforms are to diversify ownership and transfer from
the state to the non-state sector and to promote internal governance. Non-
state sectors have rapidly increased their productivity growth, especially
the township and village owned enterprises. Through the reforms,
including mergers, sales, leasing, management contract, and foreign joint
ventures, state-owned enterprises have gradually received more
managerial autonomy. In particular, mergers of state-owned

enterprises and the contract responsibility system have enhanced
economic performance and implemented substantial reform of state-
owned enterprises. In addition, the government has supported and
promoted township and village and private sectors in productivity,
business autonomy, and material supply. Township- and village-owned
enterprises can also help eliminate the regional imbalance.
Unemployment and labor redundancy in state-owned enterprises
are Chinas other serious problems. Through adopting a labor contract
system, unemployment insurance, and reemployment programs, labor
redundancy has been improved. For the governments substantial efforts
to be put into full effect, however, the Chinese Communist Party must
recognize that unemployment problems are serious and complicated in
China. Urban employment in state-owned enterprises has declined, and
in the private sector has been increasing rapidly. Numerous creation of
new jobs by private and individually owned firms is an effective way to
improve the problem of unemployment and labor redundancy. The
implementation of the governments effective programs and new job
assignments in non-state sector will improve the complex problems of the
workforce in China. A well-developed labor market will help the

unemployed to find new jobs and contribute to a better allocation of labor
A legal framework is indispensable for China in order to create a
new market system. Among various regulations and laws, the State-
Owned Enterprises Law, the Company Law, the Commercial Bank Law,
and Interim Regulations on the Merger of Enterprise are necessary to
distinguish the rights and obligations of the government from the firm,
and to promote more business autonomy.
The key to success in reforming state-owned enterprises is true
separation of business management and government control over the
enterprises. In pursuing Chinas market reform, the Chinese Communist
Party should continue to reduce state intervention, corruption,
profiteering activity, and the persistence of bureaucratic controls and
restrictions on Chinas enterprises. Enterprise reforms cannot be
completely successful unless they are accompanied by a modernization of
the social and political structure of Chinas economy.
After the reform in 1993, the National Peoples Congress, the State
Planning Commission, and the State Commission for Restructuring the
Economic System have made improvements on developing reform of
Chinas enterprises. China still needs to reduce the control of the Chinese

Communist Party over the enterprises in order to sufficiently implement
reform of state-owned enterprises.
It is evident through analysis of the reform of state-owned
enterprises described in this thesis that the reform of state-owned
enterprises must be continued. This thesis shows evidence that state-
owned enterprises have been less efficient than the private sector in a
competitive market with effective regulation of private firms. Some
reform measures have also not yet been fully implemented. However,
reform of state-owned enterprises is important and will offer more goods
and services of better quality at market prices. Although continued
reforms of state-owned enterprises will be complicated to achieve, it will
be impossible to continue for China enterprises to continue to grow
without reform.

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