Public Release: 

Privatisation, Chinese-style

Can China's state-owned enterprises compete in international markets?

Economic & Social Research Council

'Corporatisation', the latest phase of reform of China's state-owned enterprises (SOEs), aims to reduce government interference in the running of these companies and turn them into Western-style corporations, complete with boards of directors and shareholder control over operations. But will such reform prove effective in enabling these companies to compete in international markets?

New ESRC-funded research led by Dr Jackie Sheehan of Nottingham University reveals that anxiety over mounting labour unrest is holding back some of the largest SOEs from completing the ambitious programme of layoffs they began in the late 1990s in an effort to cut costs and boost productivity. And while government interference has been reduced, several significant state controls remain in place.

The team of researchers has studied 10 major SOEs in the Chinese steel industry, which as part of the 'corporatisation' process have been seeking to cut up to half the workforce employed in steel production. Their research shows that:

  • The December 2003 deadline for completing the programme of layoffs, already extended from December 2000 because of unrest and the effects of the 1997 Asian financial crisis, is unlikely to be met.
  • Rather than being forced out of the parent company altogether, workers removed from iron and steel production have been moved sideways into new sub-companies, often in the service sector, or into internal labour pools for retraining and reassignment.
  • Top managers in the parent companies confirm that fear of unrest - such as the 30,000-strong protests in China's northeastern Liaoning Province this spring - is one factor holding them back from enforcing compulsory redundancies.
  • But managers' aversion to compulsory redundancies can also be traced to a lingering sense of social responsibility towards the workers affected. Many SOE managers, particularly the older ones, simply do not believe it is right to sack loyal workers for the sake of the company's bottom line.
  • Although most of the SOEs have successfully sold off company housing to their workers, it has proved much more difficult to transfer other social welfare undertakings, such as schools and hospitals, to local government control. This leaves the firms trying to compete in the market while still acting as mini-welfare states for workers and their families.

The SOEs that Dr Sheehan et al have studied report that while government interference in management has been reduced over the past six years, it has not gone completely. Top management appointments still need government approval. And permission is also needed for SOEs who want to convert their debts to banks and suppliers into shares in the company, and for stock market listings to raise desperately needed capital.

One of the aims of this phase of SOE reform was the achievement of a level playing field for all companies, ending the 'sweetheart deals' that gave certain large corporations a competitive edge in the 1980s and early 1990s. But this has not been achieved: some of the SOEs that the team visited are so certain that they would be turned down for stock market listings and debt-to-equity swaps that they have not even asked for state permission.

Companies under local government control often do better than those under national industrial bureaux. Because local government has a vested interest in their success, they are less likely to be forced to take over other loss-making firms and make cost-of-living payments to their workers, as well as being better placed to win local contracts. This does not mean that the reforms have made no difference to these SOEs. Many managers report a real culture change in their companies, with a greatly increased role for customer relations and marketing departments. Before economic reform began in China in 1979, marketing departments were almost unknown in the state sector, but now they are 'the head of the dragon' that the rest of the company follows.

Some managers also expect government interference in their work to reduce further once the state's shareholdings in their companies are diluted through stock market offerings in China and overseas. Once the state is no longer a company's sole shareholder, they argue, real shareholder control will be able to develop.

But for further progress on welfare and labour market reforms, they look to September's 16th Congress of the ruling Chinese Communist Party to provide policy solutions to social problems that companies are unable to tackle on their own.


For further information, contact Dr Jackie Sheehan on 44-115-951-5954 (daytime) or 44-115-841-1060 (evenings); fax 44-115-951-5948; or email:

Or Lesley Lilley at ESRC, on 44-179-341-3119 or email:

1. The research report 'Enterprise Reform in Post-Deng China: A Longitudinal Study' by Dr Jackie Sheehan, Professor John Hassard, Professor Jonathan Morris and Mr Yuxin Xiao was funded by the Economic and Social Research Council (ESRC).
Dr Sheehan is in the History Department at Nottingham University, University Park, Nottingham NG7 2RD.
Professor Hassard is at UMIST and the Judge Institute, Cambridge; Professor Morris is at Cardiff Business School; and Mr Xiao is at Sunderland Business School.
2. The ESRC is the UK's largest funding agency for research and postgraduate training relating to social and economic issues. It has a track record of providing high-quality, relevant research to business, the public sector and Government. The ESRC invests more than £53 million every year in social science research. At any time, its range of funding schemes may be supporting 2,000 researchers within academic institutions and research policy institutes. It also funds postgraduate training within the social sciences, thereby nurturing the researchers of tomorrow. The ESRC website address is
3. REGARD is the ESRC's database of research. It provides a key source of information on ESRC social science research awards and all associated publications and products. The website can be found at

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