Do China’s SOEs need to be reformed?

14 Feb

Over recent decades, it has become clear that China’s State Owned Enterprises (SOEs) are becoming less efficient and not driving the high levels of profit expected. However, privatising such companies is not an option according to the country’s leaders. In a recent article by The New York Times (2014), Chinese economist Wu Jinglan claimed that the high majority of SOEs have high debts and are too dependent of government subsidies for survival. In addition, the article claimed that China’s annual debt is predicted to exceed $13 trillion and overtake the USA, with much of this debt being put down to state owned enterprises, as these make up 80% of China’s top corporations.


As China’s SOEs are not performing as well as they perhaps should, can they be reformed without privatisation, which the government is so against?  The Economist (2013) has suggested that China should look to Singapore for inspiration, in a move from SOE to becoming a government-linked Company (GLCs).  GLCs in Singapore include Singapore Airlines and SingTel, of which the government owns 56% and 52% respectively.  GLCs have the simple aim of long-term increases in value of it’s holdings, whereas Chinese SOEs have much more complex aims including technological advances. Within GLCs, companies are free to hire professional managers at market rates, allowing the state to distance itself from the management of these companies.


But will this approach work in China? Critics assess GLCs by stating that there are very few companies that have managed to establish themselves within the international market. However, Singapore’s GLCs have shown to receive a higher average return on assets and higher market values than similar privatised firms, They are not necessarily the infamous brand names associated with private companies but they are more successful than the majority of Chinese SOEs. Currently, SOEs are not producing the returns they could be capable of, and are simply accumulating debt, so perhaps it is time for the Chinese government to reassess, and government-linked companies look like a viable alternative to SOEs.


Lucy Edwards




Forsythe, M. (2014). A Leading Chinese Economist Warns of a Difficult Year and ‘Dead’ Companies. Available: Last accessed 13/02/2014


The Economist (2013). Reforming China’s state-owned firms From SOE to GLC. Available: Last accessed 13/02/2014


One Response to “Do China’s SOEs need to be reformed?”

  1. cm20g12 March 16, 2014 at 5:24 pm #

    China’s difficulty and reluctance in transforming state-owned enterprises into privatised firms also stems from other reasons such as the country’s emphasis on social stability and the influence of local governments over its banks, which have led to corruption. In more detail: since the SOEs have accumulated debt, to privatise them, this debt would need to be restructured. This restructuring would have to have a Parento improvement effect and so benefit not only the new owner, but the bank and the old owner also. Since some of the banks are corrupted this often does not happen, and instead a large amount of debt is simply written-off. In this way, social instability is further promulgated. Another problem has been with China’s lack of a social security system. Since SOEs supplied workers with a social benefits system, the 30% worker surplus in SOEs (which has caused debt accumulation) cannot be simply fired since there is no financial system to support them while they are out of work. If they were let-go social stability would decrease, and throughout the 1990s SOE reform process, the government has placed great importance on social stability. It has been documented that as the extent of privatisation increases, the number of workers decreases. (Bai, Lu & Tao, 2006).

    However not all SOEs are completely inefficient and Sun & Tong (2003) state that they provide 40% of urban employment and that the number of money-losing SOEs fell from 6599 in 1997 to 3463 in November 2000. Also the state monopolisation from SOEs in key industries such as energy and finance give a strengthened state control of resource income and safeguard goals for GDP growth (Xia, Song, Li & Appleton, 2014). However it must be accepted also that SOEs consume a part of this such GDP in terms of their management.

    With regards to switching to the GLC, Temasek Singaporean model, Tan and Wang (2007) would agree. The shareholders’ return for the Temasek system would result in large wealth revenue for China and not only this, investigations have revealed that the fiscal performance Temasek companies on the stock exchange is equal to that of non-Temasek companies. This is important as from the economic reform onwards, post-1979, in China, SOEs have competed poorly against their privatised neighbouring companies. The Temasek model would also ease China’s regulatory role and boost its profit-seeking commercial role. Finally, the model is appropriate as it does not jeopardise China’s monolithic power hold over its enterprises.

    Xia, Q., Song, L., Li, S., Appleton, S. (2014) The effect of the state sector on wage inequality in urban China: 1988–2007. Journal of Chinese Economic and Business Studies. 12 (01). pp. 29-45. [date accessed: 16/03/14]. Available from:

    Sun, Q., Tong, W. H. S. (2003) China share issue privatization: the extent of its success. Journal of Financial Economics. 70 (02). pp. 183-222. [date accessed: 16/03/14]. Available from:

    Bai, C., Lu, J., Tao, Z. (2006) The Multitask Theory of State Enterprise Reform: Empirical Evidence from China. The American Economic Review. 96 (02). pp. 353-357. [date accessed: 16/03/14]. Available from:

    Tan, L., Wang, J. (2007) Modelling an effective corporate governance system for China’s listed state-owned enterprises: issues and challenges in a transitional economy. Journal of Corporate Law Studies. pp. 143-183. [date accessed: 16/03/14]. Available from:

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