ABSTRACT
After completing socialist economic reforms in 1957, China established numerous state-owned enterprises (SOEs). However, the inefficiency of the SOEs and other economic failures forced China to implement market-oriented economic reforms in 1978. Instead of privatizing SOEs instantaneously, as Russia did in the early 1990s, China has taken various measures to boost the profits of SOEs. Nevertheless, China’s SOEs’ profitability has declined significantly over the years. For example, return on total assets was 16.1 percent in 1978 and down to 3.3 percent in 2001. Specifically, regional SOEs’ financial situations are worse than centrally controlled SOEs. For instance, in 2000, centrally controlled SOEs’ total profits were 223.4 billion yuan, while regional SOEs’ total profits were only 60 billion yuan, although regional SOEs’ investment was higher than centrally controlled SOEs’ investment.1 In addition, SOEs’ profitability is substantially different across various regions. Statistics show that, in 2001, the profit margin on net assets was 6.6 percent in Guangdong and –8.3 percent in Heilongjiang.2
