Over the past decade, the shareholding cooperative system (hereafter SHCS) (gufen hezuo zhi) has been put forward by national and local Chinese governments and entrepreneurs as a solution to ownership and management problems of rural industries. Its development in different regions has been very uneven, but by 1995, 12 per cent of all enterprises run by townships or villages (xiangcun qiye) had adopted this system. In the absence of adequate national regulations, many local forms have emerged. The introduction of the SHCS has been monitored in three experimental districts, giving rise to extensive political commentary and economic literature. Reflecting official promotional policies, almost all commentators have been very positive about its results, which makes one wonder why the SHCS is still the exception instead of the rule. Advocates claim that it is a mechanism that provides independence of management, financial responsibility, attraction of investment capital, incentives for employees, and profit distribution.1 However, the evidence presented is biased and unconvincing. Moreover, its legal status is quite vague, a fact which is underlined by its omission from China's largest compendium of policies and regulations for management of

township and village enterprises (hereafter TVEs) (xiangzhen qiye).2 In this chapter, 3 the political and economic factors responsible

for the development of the SHCS, its intended and perceived consequences for ownership and management of rural collective enterprises, and its effect on property rights will be considered. The analysis will be based on economic literature and a survey of thirty-six converted industrial enterprises in two districts in Shandong and HebeL 4 First, some relevant aspects of ownership and management in China's TVEs in general will be outlined. Next, a history of the objectives for introducing the system and its local implementation and modification of regulations will be presented. We will show that its many forms and uneven spread - many inland areas have been very hesitant to adopt the SHCS - were due to several factors: differences in original ownership structures, choices by local authorities which reflected different economic circumstances or dominant political currents. Managerial preferences and evolution of ownership and management practices in rural areas also played a role. The name SHCS suggests, and Chinese scholars have claimed, that it is a combination of a shareholding company and a cooperative. It will be argued that the SHCS is a misnomer; at least in converted collective enterprises it is a hybrid form which lacks most of the attributes of both. Its viability is rather uncertain.