Economic reforms and state sector bankruptcy in China

The decline in fiscal revenues, the extent of bad loans in the state banks and the losses in the state-owned enterprises all reflect financial difficulties in different parts of the state sector. Viewing the state sector in total by consolidating the balance sheets of the government, state banks and state-owned enterprises reveals that while in 1978 state sector net worth was almost equivalent to state sector assets, by 1997 state liabilities to households threatened to exceed state sector assets. As state sector net worth turns negative, the Chinese state is bankrupt. The deterioration in state sector net worth came about through numerous channels, four of which are explored in more detail. If inflating away the nominal household claims on state sector assets is, as past experience suggests, not an option, then households de facto hold claims to the aggregate physical assets of the state. The deterioration in state net worth thus reflects a quasi-privatization where the state retains the right to determine the use of the physical assets, and pays for this right with excessive returns to household claims