other sectors, including manufacturing and agriculture, leading to huge productivity and efficiency gains in all segments of the economy.

Currently most of the service industries in China are still dominated by state monopolies or oligopolies, such as banking, distribution, transportation, telecommunications, media, utilities, logistics, health care, and even tourism. In order to fully unleash the potential of the service sector, the government needs to deregulate the sector, introduce more competition, and gradually open it to foreign investors, and particularly encourage the private sector to participate in the service industries.

# **_III.4 Reforming the State-owned Enterprises_**

China's network of nearly 200,000 state-controlled companies once formed the backbone of the nation's economy, but now hangs like an albatross around Beijing's neck. The SOEs' contribution to China's gross domestic product fell from nearly 100% in the early 1980s to about 30% in 2000 as the more efficient private and semi-private sector outpaced the state sector. However, still employing over 53 million people 47 and accounting for about 60% of government revenues in 2001, SOEs continue to play an important role in the Chinese economy, and their restructuring or transformation can be cited as the most challenging industrial policy problem faced by any government in the world. In order to maintain them, the government propped up the loss-making firms with loans from state-controlled banks and saddled itself with hundreds of billions of dollars of non-performing loans.

In the past five years, the government also adopted the strategy of selling or privatizing smaller state-owned enterprises and laying off workers to improve efficiency and productivity. These policies were marginally successful but contributed to a sharp rise of unemployment. In May 2003, the government launched a new plan by creating the central State Assets Supervision and Administration Commission (SASAC). The new commission’s priorities are to ensure better management and curtail the loss of assets by separating the ownership and management aspects of the state-owned firms. The commission's goal is to eventually reconstruct 30 to 50 state enterprises and build them into internationally competitive firms. Meanwhile, the government allows foreign firms to merge or acquire SOEs, not only small and medium ones, but those ranked as top 500 in China. 48 Although the role of government in SOEs’ management and operation has been reduced under the Modern Enterprise System and Group Company System reforms 49 since 1993, central ministries and local governments still retain influence or authority, especially on major management and personnel decisions. Downsizing SOE management has proved to be very difficult, since the party itself still has ultimate power over SOE managers’ appointments above a certain level, as well as great influence over many managers who

> 47 National Bureau of Statistics of China, _China Statistical Abstract 2003_ , China Statistics Press, 2003, p51. This figure only refers to those employed in the state-owned and state-controlled enterprises.

> 48 China Development Gateway: _http://www.chinagate.com.cn._

> 49 Which were intended to restructure enterprises based on the principle of corporatization, and separate state’s exercise of ownership rights from the enterprise’s exercise of legal person property rights.

22