Asian Business

Asian Business

1) Why are state-owned enterprises still so dominant in China’s business system?

Despite all the changes that have swept China in the last 20 years, heavy industry still remains thoroughly dominant by the state sector. No other ownership form has penetrated large scale, capital intensive sectors in any significant sense. State-owned enterprises are still providing the basic inputs upon which all other sectors depend, and for that reason alone, can still be considered the backbone of Chinese manufacturing. They are its steel makers, machine builders, auto and truck manufacturers and petroleum producers just to name a few. State-owned enterprises are the firms that even today still provide basic industrial inputs for the economy, employment, and social welfare for the vast majority of China’s urban workers, as well as the bulk of fiscal revenues for most governmental levels. Despite the waves of reform measures directed towards them, China’s SOEs have proven stubbornly resistant to market forces and frustratingly devoid of market-oriented behavior.

It is not until 1990s when the Chinese central government decided to list some large state firms and sell off small state enterprises. Given the growth of the non-state sectors together with the reform measures to downsize and restructure state-owned enterprises, the state sector has been shrinking and thus it does not command the same importance in the economy as it did pre-reform. Nevertheless, state-owned enterprises still contribute a significant share to the economy’s output. This is particularly true for the sectors that the state views as having strategic value such as, raw materials, petrochemical, telecommunication, and banking. In 2002, there were 30,000 wholly state-owned firms that produced 16 percent of gross industrial output and employed 15 million (14 percent) of the country’s industrial workforce

Reform of state-owned enterprises is also hindered by the fact that Communist...