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Explaining the Persistence of State-ownership in China

Discussion Papers


June 2006


In the recent decade China witnessed an upsurge of privatization of small and medium state-owned enterprises (SOEs). In contrast to the consequent sharp reduction in the number of firms, however, the estimated share of broadly-defined SOEs that includes limited liabilities companies controlled by the State has shown virtually no sign of decline. We explain the backgrounds of this seemingly paradoxical persistence of state-ownership by looking into two distinctive types of large SOEs: traditional SOEs that remain dominant in oligopolistic industries and manager-controlled SOEs surviving in competitive industries. The two types exemplify several factors constraining further progress of SOE reform such as, financing the costs of restructuring, redefining the role of the State as the single dominant shareholder, and balancing the interests of the State and managers as entrepreneurs. Sorting these issues out will take time, which means that instabilities associated with state corporate ownership will remain in place in the foreseeable future in China.

Keywords: state-owned enterprise, corporate governance, China’s economic reform
JEL classification: L29, L32, P26

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