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Public Disclosure Authorized 2 83 D World Bank Discussion Papers Meeting the Public Disclosure Authorized Challenge of Chinese Enterprise Reform Public Disclosure Authorized Harry G. Broadman Public Disclosure Authorized Recent World Bank Discussion Papers No. 226 Mongolia: Financitig Education during Economic Transition. Kin Bing Wu No. 227 Cities without Land Markets: Lessons of the Failed Socialist Experiment. Alain Bertaud and Bertrand Renaud No. 228 Portfolio Investment in Developing Countries. Edited by Stijn Claessens and Sudarshan Gooptu No. 229 An Assessment of ViulnerableGroups in Mongolia: Strategiesfor Social Policy Planning. Caroline Harper No. 230 Raising the Productivity of WVomenFarnners in Sub-Saharan Africa. Katrine Saito No. 231 Agriailtuiral Extension in Africa. Aruna Bagchee No. 232 TelecommunicationsSector Reform in Asia: Toward a New Pragmatism. Peter L. Smith and Gregory Staple No. 233 Land Reform and Fann Restructrinig in Russia. 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Copyright c 1995 The Intemational Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing April 1995 Discussion Papers present results of country analysisor research that are circulated to encourage discussion and comment within the development community. To present these resultswith the least possible delay, the typescript of this paper has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibilityfor errors. Some sources cited in this paper may be infonnal documents that are not readily available. The findings, interpretations, and conclusions expressedin this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliatedorganizations, or to members of its Board of Executive Directors or the countries they represent. 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The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical tide list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is availablefree of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'lena, 75116 Paris, France. ISSN: 0259-210X Harry G. Broadman is senior economist in the World Bank's China and Mongolia Department, East Asia and Pacific Regional Office. Library of Congress Cataloging-in-Publication Data Broadman, Harry G. Meeting the challenge of Chinese enterprise reform / Harry G. Broadman. p. cm. -(World Bank discussion papers ; 283) Includes bibliographical references. ISBN 0-8213-3223-6 1. China -Economic policy -1976- 2. Business enterprises - Government policy -China. 3. Government business enterprises - China. 1. Title. 11. Series. HC427.92.B76 1995 338.951 -dc2O 95-10466 CIP CONTENTS Foreword ................................................ v Acknowledgments .............................................. vii Abstract ................................................ ix Executive Summary ............................................. xi 1. Introduction ............................................. 1 2. Chinese Industra Structure and Performance ..................... 5 Enterprise OwnershipForms and Size Distribution................. 5 Inter-enterpriseCompetition ............................... 8 Impact of Reforms on SOE Performance ....................... 9 SOE Losses and Subsidies ................................ 11 Industrial Pollution .................................... 17 3. EHstoricalSources of China's Industrial Sector Problems ................ 18 InefficientEnterprise Incentive and GovernanceSystems ............. 18 Distortionsin the Policy and RegulatoryRegime .................. 19 Lack of Factor Markets ................................. 19 4. China's Industrial Reform Achievements to Date ..................... 21 Reforms in the 1978-92Period ............................. 21 Reforms from 1993 to the Present ........................... 24 RemainingProblems to be Addressed and Options for Restructuring..................................... 28 5. Objectivesfor Further Reformof China's Industrial Sector: The Development Agenda .............................. 31 ModernizingEnterprise Incentive and GovernanceSystems and DiversifyingOwnership ................................ 31 Improvementof the Policy and RegulatoryRegime ................ 34 Developmentof Factor Markets ............................ 37 6. Conclusion . ............................................. 40 Tables in Text 2.1 Losses of China's State-OwnedEnterprise ........................ 12 2.2 Regional Distributionof Industrial SOE Losses ..................... 14 2.3 Fiscal Subsidiesto China's SOEs ............................. 15 Boxes in Text 2.1 Transformationof Chinese SOEs into ShareholdingCompanies .... ....... 11 4.1 Three Major Chinese Reform Experimentsin Enterprise Governance ... .... 22 4.2 China's Experimentsin Urban Economic Reform ................... 27 5.1 Agenda for Further Reform of China's Industrial Sector ............... 32 Figures in Text 4.1 The Pace of Chinese Enterprise Reform ......................... 22 I v FoREwoRD Unlike many other countries undergoing transition to a market economy, China has experiencedvery fast growth; indeed, in recent years it has been the fastest in the world. In large part, China's economic performance since the advent of reform in 1978 is rooted in an industrializationstrategy that has mixed competition,decentralization of economic management, and the opening of the economyto internationaltrade and foreign investment. China's approach to enterprise