Reform of State-owned enterprises in China

19 December 2007
Prior to China’s economic reforms of the late 1970s, the central government in Beijing exerted strict controls over the economy, all enterprises were publicly owned and managed, and all staff deployed according to the political and economic interests of the state. Enterprises were required to submit profits to the central government, and workers’ salaries were determined by the state. In 1978, following the turmoil caused by successive waves of political campaigns and social unrest from the 1950s onwards, the Communist Party’s new leadership under Deng Xiaoping, sought to rebuild the shattered economy by making economic reform and opening (gaige kaifeng) their top priority. In 1980, four coastal cities (Shenzhen, Zhuhai, Shantou in Guangdong and Xiamen in Fujian) were designated as Special Economic Zones in order to attract foreign investment, and in 1984, this so-called “open-door policy” was extended to 14 coastal cities. At the same time, efforts were made to reform poorly managed, inefficient and wasteful state-owned enterprises (SOEs). The process of SOE reform has taken over two decades, and although it is now largely complete, the effects of reform are still being felt all over China. The reform process can be divided into three stages, progressing from mild changes to fundamental overhaul.

Table of Contents

  1. Stages of reform
  2. Re-employment of SOE workers
  3. Compensation

1. Stages of reform

The first stage: management reform, 1978-1984
The initial attempt to increase economic incentives for SOEs was to give management greater autonomy. In October 1978, the Sichuan provincial government, spearheaded by future Party Secretary Zhao Ziyang, launched a pilot project to expand enterprise autonomy in six selected enterprises. Instead of submitting all profits to Beijing, these enterprises were allowed to keep a proportion of their profits, and when they produced more than the state-set quota, they were free to use that profit to re-invest in production and technical innovation, provide workers and staff with individual bonuses and collective welfare, or to use the profit to maintain a reserve fund. Following the success of the pilot programme, in July 1979, the State Council released a series of documents, such as the Provisions on Enlarging the Decision-Making Ability for the Operation and Management of State-Run Industrial Enterprises, to encourage local governments to implement similar projects designed to increase economic incentives for SOEs. By the end of 1979, about 4,200 enterprises nationwide were selected for this new programme. In 1980, the experiment expanded to include 6,600 large- and medium-sized SOEs, which accounted for 60 percent of the national budgeted industrial output and 70 percent of national industrial profits.1

The second stage: The Dual Track System, 1984-1992
The next stage of reform was marked by the promulgation of the Provisional Regulations on Expanding the Autonomy of Enterprises in May 1984. Under the new provisions, if they exceeded their production quotas, enterprises were allowed to sell their products outside the state plan at as much as 20 percent above the state price. This was referred to the Dual Track (Plan and Market) System.  In terms of personnel management, enterprises were allowed to appoint technical and mid-level staff and to hire or fire middle-level administrative staff, to offer rewards and bonuses, and to establish direct links with suppliers. At the same time, profit tax was introduced to replace profit remittance. However, enterprises still didn’t have the freedom to recruit or terminate staff simply based on business considerations.

In the next few years, further market-orientated reforms were initiated with the promulgation of the Regulations Concerning Deepening Enterprises Reform and Increasing Vitality of Enterprises, issued in 1986, and Provisional Regulations Concerning the Contract Operational Responsibility System in State-owned Industrial Enterprises, issued in 1988.  In this stage, traditional administrative relations between the state and enterprises were replaced by contractual relations, such as the Contract Responsibility System, the Share System, the Capital Assets Management Responsibility System, and the Leasing System.

Third stage: ownership reform, post-1992
Between 1988 and 1992, SOE reform slowed due to concerns about the social and economic impact of reform, such as high unemployment, increases in the cost of living, and political unrest.  However, the economic performance of the majority of SOEs remained at a very low level. For example, in Zhucheng city, Shandong province, 103 of the 150 SOEs were running at a loss at the end of 1992, with total losses amounting to 147 million yuan – equivalent to the municipal government’s entire revenue for 18 months.2 It was not until Deng Xiaoping’s now famous Southern Tour in early 1992 that the reform process got back on track. Deng called for an intensification of reform and urged officials to think less about ideological correctness and more about economic development. In Deng’s own words: “It doesn’t matter if a cat is black or white, as long as it catches mice, it is a good cat.”

In July 1992, the government issued Regulations on Transforming the Operational Mechanism of State-owned Industrial Enterprises.  These regulations allowed inefficient, under-performing enterprises to completely overhaul their structure. The government also allowed some SOEs to be leased or sold to the public or the employees.

As with other reforms, change of ownership was first carried out at the local level before it was adopted and promoted by the central government. The first SOE change of ownership occurred in 1986, when three people put up 34,000 yuan as collateral to lease the Wuhan Motor Engine Factory. In the same year, private shareholding was introduced in three Guangzhou based SOEs where the employees bought 30 percent of their firms’ shares. In May 1988, the State Council issued regulations on the leasing of small SOEs, which officially established the legal grounds for this practice. In 1990 and in 1991 respectively, the Shenzhen Stock Exchange and the Shanghai Stock Exchange opened, enabling a limited number of SOEs to issue shares to the public.

In 1995, ownership reform was significantly accelerated when the central government decided to retain the ownership of between 500 to 1000 large-scale SOEs and to allow smaller SOEs to be leased or sold (zhuada fangxiao).  In 1997, the 500 largest state firms held 37 percent of the state’s industrial assets, contributed 46 percent of all tax revenue from the state sector, and generated 63 percent of the state sector’s profits. By 1998, a national survey showed that one quarter of China’s 87,000 industrial SOEs had restructured and another quarter planned to restructure in some way.  Among the restructured firms, 60-70 percent had been partially or fully privatized. By the end of 2001, 86 percent of all SOEs had been restructured and about 70 percent had been partially or fully privatized.3 The number of SOEs fell from 64,737 in 1998 to 27,477 in 2005. At the same time, industrial output increased (Statistics: Number of SOEs and industry output 1998-2005).
As the public sector shrunk, the private sector expanded. The number of private enterprises increased from 440,000 in 1996 to 1.32 million in 2001, 16.9 percent of all enterprises to 43.7 percent.4 The public sector’s share of all industrial output dropped from73.4% to only 11.1% between 1983 and 2003 (Statistics: Percentage of SOEs in all industry output 1983-2003).5

SOE reform improved economic performance, but it also created serious social problems. From 1998 to 2004, six in ten SOE workers were laid off.6 The proportion of SOEs employees in all employment also dropped from 16 percent in 1994 to eight percent in 2005 (Statistics: Percentage of SOE workers in all employment).  Based on Ministry of Labour and Social Security (MOLSS) figures, 21 million workers were laid-off from SOEs between1994 and 2005 (Statistics: Yearly increase of laid-off workers), and when laid off workers from collective enterprises were included in the calculations, the total number increased to 30 million laid-off between 1998 and 2004.7

Although the most intensive phase of SOE reform has passed, reforms designed to improve economic performance continue. In 2006, the State Council’s Development and Reform Commission estimated that in the next three years, a further 3.6 million SOE employees would be laid off and another 3 million employees would be redeployed amidst the restructuring of subsidiary businesses.8

2. Re-employment of SOE workers

In attempt to mitigate the potentially serious social and economic problems caused by mass lay-offs, local governments adopted a number of methods to encourage re-employment. When SOEs were sold, buyers were required to sign a contract arranging for the redeployment of employees. Government funds, such as the state asset exit fund and the SOE bankruptcy provisional fund, were established to finance compensation and re-deploy workers. The funding usually came from the transfer of ownership rights, sale or lease of state assets. The government would also offer discounts, and in some extreme cases the free transfer of ownership rights, in return for the new owner’s commitment to redeploy more workers.  In some cases, the government would pay extra subsides to cover the redeployment of employees. In addition, tax holidays were offered to former SOE employees starting their own business who hired laid-off workers. Yet, despite all these preferential policies, new owners often complained that the discounts were insufficient, while workers complained that state assets were being sold too cheaply and suspected widespread corruption.9 Re-employment centres were established to assist laid-off workers to find jobs and to distribute monthly subsidies.  Yet, despite these efforts, the re-employment of laid-off workers through official channels never reached one hundred percent, and by 2003 it had decreased to just 30 percent (Statistics: Yearly decrease of laid off workers through reemployment 1998-2005).

3. Compensation

According to China’s Labour Law, employers should “give a certain amount of economic compensation to employees made redundant, according to the relevant provisions of the State” (Article 28). But there was no national standard to decide the exact amount of compensation that workers were entitled to, and very often, how much the laid-off workers received depended on the bargaining power of the workers and on the resources available to enterprises and local governments.  For example, the 2,400 laid-off workers of the Inner Mongolia No. 2 Machine Factory received only 6,000 to 12,000 yuan in compensation; whilst laid-off oil workers at China Petrochemical received on average around 100 000 yuan each.10
According to a survey by Garnaut, et al (2006) of 11 cities across China, most workers received a redundancy package equivalent to three years’ salary. However because workers usually had to contribute to their own pension and insurance schemes, after these contributions were deducted, they only received a small proportion of their designated compensation.  In enterprises with limited resources, poor or corrupt management, it was not unusual for laid-off workers to get no compensation (See CLB news article “Elderly females workers demand their rightful redundancy and pension benefits”). This was especially common in provinces with a high concentration of SOEs, such as Liaoning, Heilongjiang, Sichuan, Chongqing and Hebei, where traditional heavy industries were based. Many workers were cheated or coerced into giving up their jobs for only a meager sum of money, and in these cases, dissatisfaction and resentment spilled over into large-scale protests and unrest (See CLB research reports on the workers’ movement).

In addition to one-off compensation payments, laid-off workers were entitled to a monthly subsidy (the basic living subsidy, BLS) for up to three years as a transitional arrangement with their enterprise.  When this period expired, they were transferred to unemployment insurance (UI) for up to another two years. The BLS level was lower than the minimum wage, but higher than the UI level. If a worker failed to get a job after five years, and their family income fell below the minimum standard of living benchmark set by the local government, they were transferred to means-tested income support benefit. By 2004, all laid-off workers who no longer had an employment relationship with their former employers, were transferred directly to UI. 

In an attempt to further clarify severance compensation levels, the Labour Contract Law promulgated in 2007, clearly states: “An employee shall be given economic compensation based on the number of years they have worked for their employer at the rate of one month’s wage for each full year of employment.” (Article 47). The Labour Contract Law provides a legal basis for how severance packages should be calculated, but, given that all too often laws are not effectively enforced in China, how much protection this new legislation will provide workers remains to be seen.


  • Cai, Y.S. (2006). State and Laid-Off Workers in Reform China. The Silence and Collective Action of the Retrenched. London and New York: Routledge.
  • Fernandez, J.A. & Fernandez-Stembridge (2007). China’s State-Owned Enterprise Reform. London and New York: Routledge.
  • Garnaut, R.; Song, L. and Yao, Y. (2006). Impact and significance of state-owned enterprise restructuring. The China Journal, 55: 35-65.
  • Moore, S. & Wen, J. (2006). Reform of state owned enterprises and challenges in China.  Journal of Technology Management in China 1(3): 279-291.
  • Shen, J. (2007). Labour Disputes and their Resolution in China.  Oxford, England: Chandos Publishing.
  • Wu, J.L. (2004). “Market Socialism” and Chinese Economic Reform. A paper submitted to the IES’s Round Table on “Market and Socialism Reconsidered”. Available at
  • Xia, G.W. (2006):市場轉型與下崗工人(Market change and Laid-off workers), published in the official website of the Sociology and Anthropology Research Centre, Beijing University on 10 Mar 2006.

Last updated, 14 Dec 2007


  1. Wu, J.L. (2004). “Market Socialism” and Chinese Economic Reform. A paper submitted to the IES’s Round Table on “Market and Socialism Reconsidered”. Available at (Top)
  2. Garnaut, R.; Song, L. and Yao, Y. (2006). Impact and significance of state-owned enterprise restructuring. The China Journal, 55, p. 37. (Top)
  3. Garnaut, R.; Song, L. and Yao, Y. (2006). Impact and significance of state-owned enterprise restructuring. The China Journal, 55: 35-65. (Top)
  4. National Bureau of Statistics of China (2003). “Analysis of the Census Part 24: the current development of the state-owned and private-owned enterprises”.  Published on the National Bureau of Statistics Official Website. Quoted in CLB Report: Conflicts of Interest and the Ineffectiveness of China's Labour Laws, p.3. (Top)
  5. Shen, J. (2007). Labour Disputes and their Resolution in China.  Oxford, England: Chandos Publishing. (Top)
  6. Liu Liying (March 2005). “今年告別下崗職工” (Bidding farewell to this year’s laid off workers), 中國新聞周刊 (China News Weekly), vol. 220.  Quoted in CLB Report Speaking Out: Labour Movement in China 2005-2006. (Top)
  7. Liu Liying (March 2005). (Top)
  8. China Development and Reform Commission  (2007). “2006年就業面臨的問題及政策建議” [Problems and recommendations on employment issues in 2006].  Retrieved on 4 Dec 2007 at; Zhang, C.C & Tian, K.C. (2006). “第3次就業高峰來臨 算上農村我國失業率高達20%” [The third peak of workforce is coming: the unemployment rate has reached 20% after rural unemployment is included] , published on Nangfang Wang on 19 June 2006. (Top)
  9. Garnaut, R.; Song, L. and Yao, Y. (2006). Impact and significance of state-owned enterprise restructuring in China.  The China Journal 55: 35-65. (Top)
  10. Zhang, S.P. (2002). “企業改革中一個不容忽視的問題” [An problem that cannot be ignored in the SOE reforms].  中國黨政幹部論壇 [Forum of Chinese Party Cadre] 1: 15-17. (Top)
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