The Behavior of the Chinese State Enterprises under the Dual Influence of the Government and the Market

Abstract

The paper examines the behavior of the Chinese state owned enterprises after the reform. The focus is on the key issue of government-enterprise interaction. Based on theoretical analyses and empirical tests, I argue that despite facing strong profit incentives, many of the Chinese state-owned enerprises are still greatly influenced by the government and dependent on the government. They behave like rent-seekers when negotiating contracts with the government. At the same time, the government takes the opportunity to impose its objective onto the enterprise. After signing the contract, firms maximize market profit in making short-term production decisions. However, when it comes to final profit, they are virtually not accountable for financial losses. The implication is that the Chinese enterprise reform provides incentives for firms to pursue short-term efficiency, while long-term dynamic efficiency may not as high.