Have China's Enterprise Reforms Led to Improved Efficiency and Profitability for Privatized Soes?
57 Pages Posted: 5 Feb 2003
Date Written: September 2002
About twenty years ago, China set about reforming its moribund economy by introducing certain elements of free market capitalist economics. One reform was the partial privatization of many State Owned Enterprizes (SOEs) and listing the shares in them on the stock exchanges of Shanghai and Shenzhen. The partial private ownership of these companies was supposed to act as a spur to improve profitability, efficiency, investment, and growth. In contrast to the operating and financial improvements recorded in privatizations in other countries, our study shows that performance deteriorated after the privatization. Profitability and efficiency decline in the five years after privatization. Sales grow, capital investment improves, and debt levels fall after privatization. We argue that the privatizations have been unsuccessful (in terms of profitability and efficiency) because the state continues to hold substantial shareholdings in companies and because the state often controls the make-up of the board of directors. Despite their declared intentions, state shareholders are not fully committed to profitability and efficiency because they have various social and political objectives that hinder economic performance.
Keywords: privatizations, SOEs
JEL Classification: G3, P2
Suggested Citation: Suggested Citation