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The Political Bandwagon

The Fifteenth Party Congress signaled CCP leadership’s willingness to take a more flexible approach toward privatization. Gaizhi, or organizational restructuring, immediately became a buzzword for economic policymaking in urban areas, touching off swift changes throughout the country (Yusuf, Nabeshima, and Perkins 2006; see also Lardy 1998 and Steinfeld 1998). In 1996 the total number of industrial SOEs was 113,800; by the end of 1998 it

Table 7.3 Percentage of remaining industrial SOEs relative to previous

year’s, 1996-2002


Provincial average

Prefectural average

City/county average


97.7 (13.1)

98.2 (l7.2)

96.8 (18.2)


67.1 (16.3)

62.7 (28.9)

59.8 (34.4)


80.5 (14.2)

78.1 (26.1)

77.2 (2M


9a4 (9.5)

88.9 (22.4)

84.2 (26.6)


84.6 (12.1)

79.2 (23.2)

78.7 (24.9)


79.3 (8.8)

76.4 (15.2)

77.2 ( 23.i)


90.7 (8.4)

89.2 (11.1)

86.5 (15.8)

Note: Figures in parentheses are coefficients of variation.

Sources: CSY1996-2003; data of the 1995 industrial census and the 1996-2002 NBS industrial surveys.

had dropped to 64,737 (CIESY 2001, 17). The sharpest decline came in 1997, which saw an average 33% drop in the number of industrial SOEs among different provinces, as shown in table 7.3. The rush probably had started earlier in the year, as the basic plan of ownership restructuring had been outlined (and very likely leaked out afterward) during a meeting that the CCP held in January 1997 to make preparations for the upcoming party congress in the fall (Jiang Zemin 2006, 1:613-616).

Indeed the quick responses to the central policy change during 19971998 prompted a series of calls by Premier Zhu Rongji for more measured paces of ownership restructuring and use of more diverse methods (especially merger) other than outright sell-off (Zhu Rongji 2011, 2:448-451, 455-457, 470-471, 501-502). The overall speed of change eased in 1999 but then accelerated again in 2000 and 2001. Contrary to the wish of central leaders, the fast disappearance of large numbers of SOEs seemed to be more of a result of net attrition than incorporation of poorly performing enterprises into the remaining SOEs. As reported in an earlier study (Lin and Zhu 2001), only a small group (less than 10%) of the industrial SOEs restructured during 1997-1998 used merger as the means of change. As the process of ownership restructuring deepened, the initial emphasis on merger between SOEs also faded, as indicated by a total absence of any mention of the term in Premier Zhu Rongji’s speeches on SOE reforms after 1999. Part of the reason may be the lack of enthusiasm among SOE managers due to concerns about the opportunity cost relative to outright privatization and other alternatives, as well as doubts about the effectiveness of merger for tackling the problems of SOEs.11

An even more powerful driving force behind the unexpectedly precipitous decline of SOEs came from local officials, who controlled more than 90% of all SOEs before the ownership restructuring. From 1997 to 2003 (when the SASAC was formed), the total number of nonfinancial SOEs under subnational governments dropped from 26.3 million to 12.7 million, whereas that of centrally controlled nonfinancial SOEs decreased at a much slower pace—from 2.3 million to 1.9 million (FYC 2004, 367). The policy change announced at the party congress created an immediate impetus for many local officials to realign themselves with the new party line by demonstrating activism in ownership restructuring.[1] [2] The sharply reduced political risk for privatization also left open opportunities for local officials to use ownership restructuring to address other agendas for self-interest, which oftentimes could be more effectively facilitated through methods other than the centrally prescribed one (i.e., merger) within the public sector. An important fact in what followed is that, while the rush toward privatization was broad- based among different provinces, there were considerable variations at subprovincial levels, which help reveal what drove the behavior of local officials.

  • [1] In 2004 I took part in a survey of 511 private enterprises jointly conducted with researchers fromthe Chinese Academy of Social Sciences. During the survey I interviewed seventeen private enterpriseowners who were former managers of SOEs. None of them considered merger to be a viable optionof restructuring. One of them (informant, 14/2004) remarked: “Unless there was something that thestronger enterprise really wanted from the weaker one, it’s not worth the trouble to have a merger.It often involved more complications in regard to personnel, placement of [redundant] employees,financing, debts, and relations with the government and business partners. Other methods of reformwere more straightforward and clear-cut" Another former SOE manager (informant, 9/2004)opined: “Government-arranged mergers between SOEs only resulted in bad marriages. Instead of getting to the core of the problems of SOEs, mergers shifted all the problems from the poorly performingenterprises to those that were not losing money yet. In the end it made everyone worse off. The result isthat more SOEs became candidates of privatization. It’s totally self-defeating"
  • [2] For examples of indiscriminate, campaign-style sell-off of public enterprises by local governments,see Zhu Rongji 2011, 2:501-502.
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