ABSTRACT
Until recently, China avoided privatizing state-owned enterprises (SOEs) and instead sought to reform them through piecemeal measures, such as by increasing managers’ decision-making autonomy, introducing financial incentives, and bringing in performance contracts between the government and SOEs (Naughton, 1995; Shirley and Xu, 2001). These reform measures were accompanied by improved productivity of SOEs during the 1980s (Groves et al., 1994; Jefferson et al., 1996; Zhuang and Xu, 1996; Li, 1997). However, the performance of Chinese state industry has since steadily deteriorated (Lardy, 1998). Faced with mounting losses in the state sector, in the early 1990s, the Chinese government began to shift the focus of SOE reform to privatization of small SOEs and the corporatization of larger ones (Cao et al., 1999; Lin and Zhu, 2001).
