Partial Privatization, Capital Allocation Distortion and the Large SOE Reforms in China-Theory and Evidence

42 Pages Posted: 31 Mar 2019 Last revised: 20 Nov 2019

See all articles by Jim Huangnan Shen

Jim Huangnan Shen

University of London, School of Oriental and African Studies (SOAS), Economics; Center for International Development, Harvard Kennedy School, Harvard University

Fang Liu

Fudan University - China Center for Economic Studies (CCES)

Jun Zhang

Fudan University - China Center for Economic Studies (CCES)

Chien-Chiang Lee

Nanchang University

Date Written: October 31, 2018

Abstract

This paper considers the non-monotonic effect of the partial privatization campaign on the capital allocation distortion of large SOEs in China by using the Chinese firm-level panel data. We construct a theoretical model to show that the rise in the degree of partial privatization has the non-monotonic effect of removing the capital allocation distortion problem which otherwise might prevent SOEs from improving their efficiency. In particular, at the beginning of partial privatization campaign, the rise in certain degree of privatization would remove some degrees of capital allocation distortion. However, when more private shares are transferred to SOE managers, further rise in degree of privatization of SOEs are found to even worsen capital allocation distortion. So there exists the U-shaped pattern between the capital allocation distortion and degree of partial privatization. There are two novel forces that are keys to our story. The first one is the large SOEs’ alignment with the optimal factor intensity of the economy- the so-called factor endowment convergence effect. The other is called the deviation effect of the SOEs’ factor endowment structure. We employ the Chinese manufacturing panel data from 1998 to 2007 to examine our theoretical predictions. We find that the empirical results presented at the end is broadly consistent with the theories proposed in the paper.

Keywords: partial privatization; capital allocation distortion; factor endowment structure convergence effect; factor endowment structure deviation effect; Chinese manufacturing panel data

JEL Classification: D86, L13, P20, P26, P31

Suggested Citation

Shen, Jim Huangnan and Liu, Fang and Zhang, Jun and Lee, Chien-Chiang, Partial Privatization, Capital Allocation Distortion and the Large SOE Reforms in China-Theory and Evidence (October 31, 2018). Available at SSRN: https://ssrn.com/abstract=3275817 or http://dx.doi.org/10.2139/ssrn.3275817

Jim Huangnan Shen (Contact Author)

University of London, School of Oriental and African Studies (SOAS), Economics ( email )

London, WC1E 7HU
United Kingdom

Center for International Development, Harvard Kennedy School, Harvard University ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

Fang Liu

Fudan University - China Center for Economic Studies (CCES) ( email )

Shanghai
China

Jun Zhang

Fudan University - China Center for Economic Studies (CCES) ( email )

China

Chien-Chiang Lee

Nanchang University ( email )

999 Xuefu Avenue
Hong Gu Tan New District
Nanchang, Jiangxi 330031
China
330031 (Fax)

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