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China in the Global Economy

Edited by P. J. Lloyd and Xiao-guang Zhang

China in the Global Economy focuses on the theme of twin transitions occurring in the Chinese economy: the transition from a centrally planned economic system to a market oriented one, and from an agrarian to a modern industrialised society. China’s exporters face unprecedented competition in the world market and the flow of foreign direct investment has fallen restraining the growth of the domestic economy. These new challenges have fuelled debate on the perspective of the Chinese economy and its role in the global economy.
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Chapter 7: State-owned enterprise reform, ownership structure and managerial incentives

Zhilan Chen and Shaogong Lin


Zhilan Chen and Shaogong Lin INTRODUCTION The Chinese Communist Party’s 15th Congress in September 1997 decided to convert state-owned enterprises (SOEs) into shareholding companies. Establishing an effective governance system was regarded as one of the most important objectives of the reform of SOEs. Ownership arrangements and the management of state assets have thus become critically important issues for China’s SOE reform. In order to accelerate the diversification of SOEs’ ownership, one approach has been to introduce external forces through selling shares in national and international stock exchanges; another approach has been to introduce new investors through selling property. The privatization process was further speeded up after the Congress, as many individual investors, mutual funds and other private companies became the shareholders in shareholding companies. SOEs of different firm size may have different ways to convert to shareholding companies. For small SOEs, a common way is the partial or complete sale of enterprises to managers and employees. Hence, some or even the majority of the shares are owned by employees as individuals, and some shares are earmarked as a trust fund for employee pensions and are owned by employees as a whole. For large SOEs, a governance structure involving several large institutional shareholders as core investors is emerging. Most of these institutional shareholders are state financial intermediaries such as state holding companies and asset management companies, and their role is very important. The holding company model may be large enterprise groups with the associated cross-holdings among enterprises. All of these...

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