ABSTRACT
China has many important challenges to face regarding inadequate fiscal resources,
an insolvent banking sector, and an unusually small private sector. The tough choice
is deciding which one to put the most emphasis on? Such a choice is inevitable
due to finite capacity of the state. If SOE reform had been successful, development
of the private sector need not be a top priority. If not, the promotion of the private
sector is the first priority task. The state-owned enterprises (SOEs) in China have
always been criticized for inefficiency, corruption and threatened to be a serious
halt on economic reform. Two major flaws of China’s SOE system arise from the
incentive structure for managers and soft budget. A manager’s future promotion is
not dependent on his/her ability to maximize profit. It is based on their capability
to fulfill the workforce’s needs on compensation, housing, medical and education
for the SOEs in China. The soft-budget phenomenon is also criticized as one of
the major reason for SOEs’ revenue loss from imprudent investments. As China’s
economic reform proceeds, SOEs still play an important role in China’ economy
despite its gradually declining importance.
