SOE Reform and Privatization in China---A note on several theoretical and empirical issues

State owned enterprise (SOE) reform is one of the biggest issues for every transition economy. Even the Chinese economy, which is widely known as a successful case for "gradualist" economic transition, has been faced with poor management and low efficiency of many SOEs. As in the case for well-known arguments on transition strategies, i.e. gradualism vs. shock therapy, there has been a heated debate centering on the effectiveness of privatization of state enterprises. Conventional wisdom is that if an economy is to be marketized, its property rights should be privately owned. In light of China's economic success in transition, however, recent developments generally tend to support the gradualist approach to SOE property reform. It is often said that ownership of property rights does not matter. In this paper we examine several issues surrounding privatization, particularly of state enterprises, which have long dominated socialist economies. Our conclusions are as follows. First, ownership still matters for improving SOE efficiency as well as achieving its good corporate governance. Other things being equal, there is no theoretical reason that holds that state property rights outperform private ownership in managerial efficiency. Second, privatization is neither a panacea nor quick remedy. But it is generally useful for small and medium-size firm's restructuring in transition economies. Third, in China in contrast to European former socialist countries, de facto privatization as well as macro privatization, i.e. rising share of private sectors in the macroeconomy, is proceeding, though formal and micro privatization, i.e. change in ownership at the firm level, are relatively underdeveloped. Finally, further development of private property rights will facilitate development of markets. We insist that there exist a close relationship among market development, privatization and institutionalization.