Large-scale urban unemployment had not been an issue in China before the radical economic reform initiated in the mid-1990s.2 Official unemployment figures had never exceeded 5.5 per cent over the last half century. Before the 1990s, China successfully achieved high economic growth while avoiding direct factor market reform and radical state-sector reform. However, accumulated excess workers within state enterprises were said to be more than 30 per cent of the total labour force. Due to large-scale hidden unemployment, soft budget constraints and other property rights related problems the Chinese state sector has been performing badly. By 1995-6, around 50 per cent of enterprises were making losses. In order to vitalise the Chinese economy, the policy of radical reform in the state enterprises was introduced, first on trial in 1993 and finally launched in 1997 (East Asia Analytical Unit 1997; Appleton et al. 2001).