HOW HAS THE CONTINUATION OF 'SOFT' BUDGET CONSTRAINTS AFFECTED THE PERFORMANCE OF STATE-OWNED ENTERPRISES AND IS THE ALTERNATIVE OF PRIVATISATION FEASIBLE?

This paper will argue that the continued existence of state-owned enterprises (SOE) soft budget constraints, while adversely affecting SOE performance, reflects wider problems in the regulation of Chinese industry. As such, simple recourse to privatisation will not address the deep structural factors, such as over-politicisation and under-regulation of the private sector, which affect SOE performance. Section I of the paper will discuss the "direct" effects of soft budget constraints on SOE performance in China. Section II will address the "indirect effects" of soft budget constraints through their effects on the competitive environment vis-a-vis private sector firms. Section III will address the issue of privatisation and discuss the broader factors which affect both the extension of soft budget constraints and low SOE performance.