Enterprise Reforms in China: The Way Forward

The strategic importance of the state owned enterprises (SOE) sector to the Chinese economy cannot be underestimated and the success of SOE reform is a significant factor in China's future economic prosperity. The dilemma facing state authorities is to develop free market corporations while at the same time coping with potentially high unemployment and a range of equity and social justice issues. This paper discusses the present move to divest state holdings of listed state controlled firms and offers analysis as to the way forward within the current environment in China. Within this context, the literature is reviewed regarding various ownership types in China to determine if they contributed to the performance of listed firms. State ownership is generally negatively correlated to performance. Conversely, Legal Person ownership positively influences performance. Other forms of private ownership are generally positively correlated to performance, with institutional ownership showing significant promise. Consequently, the divesture of state ownership is recommended and could be accomplished over four tranches. The State could divest its ownership by auction to strategic investors, both domestic and foreign, and in the next tranche an auction to the broad populace through units in mutual funds. The final proposed tranche being a distribution to nationwide pension funds to support retirement schemes, which should be made on a national scale. Finally, listed firms should also issue shares as rights issues to offer present shareholders protection from dilution.