11 Clearly, the move to private ownership of firms has been slower in industry and services than in agriculture, although the process speeded up considerably in the mid-1990s. One important explanation for the delay in privatizing SOEs is the worries among the authorities about increased frictional and structural unemployment, and the related risk of heightened social tension. Lingering socialist ideology has probably also had an important effect: a desire to maintain state control over a number of large production units – “strategic firms” or “commanding heights” of the national economy. According to Chow (2006d, p. 268), the implicit party slogan in this field in the late 1990s was: “Retain the control of the large and let loose the small”. A more pragmatic reason for the reluctance to privatize large SOEs could be industrial policy ambitions: to create a number of large oligopolistic players on world markets in the future – along the lines, for instance, of French industrial policy (a point made by Nolan, 2004). Moreover, private agents may have been reluctant to buy SOEs with large overstaffing or weak financial position. Some state banks may also have resisted the privatization of firms to avoid realizing losses on their loan stock.<sup>7</sup> However, in spite of various obstacles to the privatization of SOEs, it seems that the bulk of aggregate production (GDP) in China today takes place in privately controlled firms.<sup>8</sup> While the shift to private ownership of _firms_ has been smaller (and slower) in industry and services than in agriculture, the shift to private ownership of _assets_ has been larger. In particular, while the dominant physical asset in agriculture – land – is publicly owned, the physical assets used by private firms outside agriculture are often privately owned, although rental arrangements exist here as well. (A reason why the shift is larger in the ownership of firms than of assets in the non-agriculture sector is just that some real assets are rented.) Private accumulation of assets has taken place not only via high private saving but also as a result of “asset stripping”, when public wealth has been turned over to

> 7 A cross-regional regression study by Guo and Yao (2005) finds that not only large overstaffing but also huge debt to banks, in fact, have reduced the probability that a firm will be privatized.

> 8 By privately controlled firms I mean all production units in China except wholly or majority-owned SEOs and those “collective firms” that are still owned mainly by local governments. OECD (2005a, Table 2.1) estimates that about 60 percent of aggregate production in China in 2004 was accounted for by the private sector; Tseng and Zebregs (2002) have presented similar figures. We would expect that the recent revision of the national accounts (presented in late 2005) has increased the statistically recorded private share, since the revision has raised the recorded size of the tertiary sector by about 9 percent of GDP. Indeed, in a speech to the yearly congress of Chinese Economists Association on July 3, 2006, the Deputy Finance Minister of China, Jiwei Lou, stated that private firms today account for 70 percent of aggregate output.

Since about half the population still works in agriculture, the private share of the Chinese economy is even larger in terms of employment.