Changing the tiger's stripes: Reform of Chinese state-owned enterprises in the penumbra of the state

Much of China’s economic growth has been driven by the emergence of a vibrant private sector, today accounting for approximately 60% of GDP
and 80% of employment. To get more finance news in China, you can visit shine news official website.
Conventional wisdom holds that privatisation of state-owned enterprises (SOEs) reduces their dependence on the state and yields
positive economic benefits including enhanced firm performance,
productivity, and innovation. The pro-privatisation argument is that the
state either cannot monitor managers properly or chooses not to pursue
efficiency because state interests take precedence over financial
results (Boardman and Vining 1989, Vickers and Yarrow 1991, Shleifer and
Vishny 1994). Empirical work, however, has produced mixed results on
privatisation. For example, DeWenter and Malatesta (2001) found that,
among the 500 largest firms globally in 1975, 1985, and 1995, private
enterprises had significantly lower costs and higher profits than SOEs.
Yet, when they examined a sub-sample of privatised firms, they found
inconsistent results – performance increased post-privatisation, while
leverage and employment increased mainly pre-privatisation. Market
returns from privatisation also differed across countries, positive in
Hungary, Poland, and the UK but insignificant elsewhere.

Our research on privatisation in China (Harrison et al. 2019) is unique in several respects. We analyse an extremely large sample of
industrial firms, more than 3.5 million firm-years from 1998 to 2013,
drawing on the Annual Industrial Survey conducted by the China National
Bureau of Statistics.1 We compare privatised firms with firms that
remained state-owned and firms that had never been state-owned. Most
importantly, we compare both the performance and dependence on the state
of privatised firms with firms having no prior state ownership.
Overall, our results indicate selective performance gains from
privatisation – privatised firms have greater productivity and are more
likely to file patents than firms remaining state-owned even though
their return on assets barely improves. The performance effects
notwithstanding, privatised firms remain dependent on the state.
Subsidies, concessionary interest rates, and loans granted to privatised
firms remain at nearly the same levels as those to SOEs. Privatisation
changes the behaviour of firms but not firms’ dependence on the state.

Privatisation occurs when the state ceases to hold majority ownership and/or is no longer the controlling shareholder of a firm. A
firm is considered state-owned if either 50% or more of its capital
shares are owned by the state or the controlling shareholder is the
state (in China, the controlling shareholder need not be the majority
shareholder). When either of these conditions holds in year t, but
neither holds in year t+1, a firm becomes privately owned.

In our analysis, we also separated firms with non-zero legal-person ownership from firms without legal-person owners to control for the
possibility that legal-person ownership remains a disguised form of
state control. We found no significant differences between firms with
and without legal-person ownership. Our regression results, which are
discussed in our paper, are based on models with multiple controls
including trends for the pre- and post-2008 periods, and fixed effects
for year, industry, and firm (industry and firm fixed effects are
entered separately).