From state-owned enterprises to shareholding companies : an evaluation of China's corporatization drive

In this paper, we attempt to evaluate China’s shareholding reform initiated at the Chinese Communist Party’s 15th Congress based on an assessment of its state sector’s current status and problems. We will show that two major causes have contributed to the increasing losses experienced by the state-owned enterprises: one is the agency problem, which is a result of inadequate incentive and governance structure; the other is the social burden that the state sector has had to shoulder. Without institutional underpinnings, a mass corporatization drive by itself is unlikely to solve the two problems. We then argue that the key to a successful restructuring of the state sector lies in the development of the country’s market-oriented institutions, in particular, financial markets, a social security system, and legal institutions. Because institutions take time to mature, mass corporatization will be unable to achieve its goal; rather, it has the potential to destabilize the economy and cause social unrest