Reforming the Chinese state-owned enterprise a law and economics perspective


University of British Columbia

Date Issued


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Master of Laws - LLM




China stands in contrast to the transitional countries of the former Soviet-bloc in its economic reform path that can be characterised as incrementalism instead of 'big bang," and marketisation instead of corporatisation. Despite the extensive reforms in all segments of society, the ownership of state-owned enterprises has been maintained largely under the control of the Chinese authorities as the 'brown jewel" of the socialist regime. Yet such a reform path has led China to phenomenal and sustained economic growth far from the dim picture initially envisaged by some commentators. This has given rise to intense disputes concerning a host of questions with profound theoretical and practical implications. Following the line of theories of the firm in law and economics, this study attempts to analyse the state-owned enterprise reform from two aspects. On the one hand, it examines the Chinese economic reform as institutional changes on the basis of the transaction cost economics and property rights theory. Having established that China's reform is of unambiguous property rights implications, this study continues to demonstrate that enormous transaction costs still exist in the current mixed economy. As the fundamental source of such costs is the incompatibility of state ownership and free market economy, the further reform featured with a privatisation of state-owned enterprises is thus called for. On the other hand, seeing that the agency problem singles out as the most crucial transaction cost, this study further focuses on the issue of ownership and control in the Chinese state-owned enterprises. Mainly based on the contractual theory of firm, it analyses two major initiatives of the enterprise reform - the CMRS, and the corporatisation and securitisation of state-owned enterprises. While the former is dismissed as a transitional solution, the latter is deemed to point a right direction for the privatisation of state enterprise and an optimal relationship between state and enterprises. Nevertheless, the share and corporate governance structure provided in the current Chinese corporate laws must undergo immense changes. This study is at best a preliminary analysis of limited issues. Far more efforts are needed to gauge such a broad and complex topic.

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Law, Peter A. Allard School of