ABSTRACT

This chapter argues that the problems with China's state sector lie in the state monopoly of the financial sector and the state owned enterprises (SOEs). It also argues that the objective of state sector reform should not be to make SOEs and state owned banks (SOBs) more competitive because they can never become truly competitive as SOEs or SOBs. Chinese enterprises have relied almost exclusively on the state banks for external finance. In the absence of an independent banking system, bank loans have since become the new source of soft budget constraints. It would appear that SOEs are strongly disadvantaged in comparison to other enterprises, such as the township-owned enterprises. The chapter shows that World Trade Organization accession provides a great opportunity and the pressure for China to expedite the ownership reform of the state sector by introducing self-motivated large stakeholders in the SOBs and enterprises.