China's corporatization drive: An evaluation and policy implications

This paper evaluates China's corporatization drive based on an assessment of the state sector's current problems. It shows that the worsening agency problem and excessive welfare burdens, as well as increasing competition, have contributed to the increasing losses experienced by Chinese state-owned enterprises (SOEs). While socialization of welfare burdens may improve SOEs' financial health, the mass corporatization drive by itself without institutional underpinnings, is unlikely to solve the more fundamental agency problem. The paper then argues that the key to a successful restructuring of the state sector lies in the fundamental transformation of state ownership and the creation of effective governance mechanisms, which, in turn, requires the development of the country's market-oriented institutions, in particular, financial markets and the rule of law. (JEL P20, P31)