Privatization with ‘Vested Interests’ in China

Abstract

Abstract Vested interests have been blamed for resisting the reform of state-owned enterprises (SOEs) in China. Yet, various interest groups have heterogeneous interests in privatization. Using both firm- and provincial-level data, we find that SOE managers and local bureaucrats—two key players of privatization—have contingent, rather than vested, interests in privatization, depending partly on their political connections with the central government. On the one hand, political connections motivate SOE managers to privatize more state ownership while retaining managerial control. On the other hand, central connections discourage provincial leaders from using privatization to boost their economic performance. These results shed light on the conditions under which China implements its economic reforms. With the increasing embeddedness and declining autonomy for policymakers, the once well-performing developmental state models now face serious challenges as politically powerful interest groups can manipulate economic reforms for their own purposes rather than for structural transformation.