RESTRUCTURING THE STATE-OWNED ENTERPRISE SECTOR IN CHINA: EFFORTS, EFFECTS AND REMAINING CHALLENGES

Abstract

This paper provides an analytical account of the restructuring of China's state-owned enterprise (SOE) sector during the period of 1994–2002 with the intention to obtain an understanding of how China's SOE sector has been restructured, how effective it has been, and what challenges remain. In particular, it documents the design and implementation of three key programs, namely, the Capital Structure Optimization Program, the establishment and operation of assets management corporations, and ownership transformation of small and large SOEs. This is put in perspective by a historical backdrop on how the SOE sector has been financed and what this has meant to SOE sector restructuring in terms of necessity and constraints. In assessing the effectiveness of restructuring with sector and province level data, this paper found strong evidence indicating that passive restructuring characterized by labor downsizing has taken place extensively, and labor productivity has been improved significantly. However, the data lend no support to any significant impact of restructuring on overall efficiency of the SOE sector when sector-wide factors are controlled for, suggesting that innovative operational restructuring may have been either very limited or unsuccessful. Major challenges remain for the Chinese government to cope with. In particular, financial resources are urgently needed to fund labor settlement and recognize and write off the loss associated with non-performing loans; qualified new owners have to be put in place to launch and lead operational restructuring; and institutions such as bankruptcy regime need to be developed urgently.