1The Hazard of Chinese Enterprises under Restructuring

There is a paradox in China’s 20 years economic experience. On one side of the paradox, is the rapid economic growth with the average annual GDP growth rate reaching about 9 % from 1978 to 1998. On the other side of the paradox is the deteriorating enterprise performance. This leads us to wonder where does the rapid GDP growth come from and whether the reform has really improved the enterprise performance, which is more central to the sustainable economic growth. Through our previous study on enterprise’s technical efficiency from 1987 to 1996, we found that enterprise’s technical efficiency showed a tendency to diverge rather than a tendency to converge as we expected as the result of the transition from the former centrally planned economy to market economy. The improvement of technical efficiency is more important to the economic growth in the long run. We suspect that one of the reasons underlying the divergence of technical efficiency is that there are strong exit barriers in China’s manufacturing industry, which prevent inefficient and value destroying firms, especially inefficient state owned firms, from exiting the industry. And this can only sustain as long as growth remains strong. The objectives of this paper are to analys