WTO, credible commitments, and China’s reform of state-owned enterprises

Abstract

This study focusses on the relationship between China’s accession to the World Trade Organisation (WTO) and its reform of state-owned enterprises (SOEs) and suggests that the major incentive for the Chinese government to join the WTO is to promote economic reforms through overcoming domestic obstacles. After other options such as decentralisation, legalisation, and privatisation failed to enhance viability of SOEs, the Chinese government began to rely on international institutions to enhance its credibility and harden the budget constraints on SOEs. The WTO is one of the most important international organisations and has binding force for its member states. China’s participation in the WTO will effectively harden budget constraints on its SOEs and improve the efficiency of these enterprises through introducing competition into the domestic market. Historical data support our argument and indicate that China has effectively enhanced the credibility of government commitments and promoted the reform of its SOEs since its accession to the WTO.