China and the Long March to Global Trade: The Accession of China to the World Trade Organization

By Sylvia Ostry; Alan S. Alexandroff et al. | Go to book overview

5

A litmus test for China's accession to the WTO

Reform of its state-owned enterprises

Harry G. Broadman

Introduction

The progress the Chinese leadership makes in reforming the nation's state-owned enterprises is a prism through which to view China's readiness to assume the obligations of membership in the World Trade Organization. Most other countries in transition from socialism to a market system have turned to systemic, widespread privatization of large SOEs. In China, the state maintains ownership of key businesses, and government agencies carry out shareholder functions typically performed by private owners in market economies. Indeed a new “state asset management” regime, rather than ownership change, is the core feature of China's “socialist market economy.” While market-oriented SOE incentives have been implemented since China began economic reform in 1978, today, Chinese SOEs still account for almost one-third of national production, over one-half of total assets, two-thirds of urban employment and almost three-quarters of investment. Preparing the way for subjecting China's generally inefficient SOEs to WTO's rule-based trade system poses a major challenge to the Chinese authorities.

This chapter sheds light on this challenge by analyzing the incentives and constraints on China's SOE reform program. I begin with a description of the “SOE problem” currently confronting the Chinese leadership. This is followed by a brief outline of the country's industrial structure. I then turn to an assessment of how China's authorities are seeking to implement the modern corporate form as the centerpiece of their state asset management reform initiative for SOEs. Four aspects of the reform program are highlighted and evaluated against the backdrop of international experience in public enterprise restructuring: clarification of SOE property rights; holding companies and other new organizational structures; corporate governance; and financial accounting and auditing. The chapter concludes with policy recommendations for Chinese officials to accelerate the modernization of the country's SOEs so as to improve their efficiency under the rigors of the international marketplace.


China's “SOE problem”

President Jiang Zemin's widely reported speech during the Fifteenth National Congress of the Communist Party in the fall of 1997 contained a more formal

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