Why is China’s Soes Reform Always Disappointing?-a New Political Economic Explanation

Abstract: After three decades’ reform, SOEs remain as powerful but inefficient. The continual failure to adopt necessary reform leads to great disappointment amongst China watchers and requests an explanation. This paper offers a new political economic explanation to the logic of SOEs reform. It argues that the existing SOE literature is built on a conception which equates the Chinese Communist Party (the CCP) with the Chinese state. This commonly accepted conception leads to a belief that the potential economic gains to the Chinese state would be sufficient to induce the CCP to adopt necessary reform. However, this conception is deeply flawed and seriously misleading. The relation between the CCP and the Chinese state is far more complicated than it is commonly assumed and conflicts of interests arise in the case of SOEs reform. SOEs, in particular those in upstream industries are crucial to the CCP’s political survival. Economic gains to the Chinese state come at political costs to the CCP which therefore prevents the latter from adopting actions that benefit the former.