change in the firm's administrative supervisory agency, no change in the channel through which the firm remits its profits and taxes, and no change in the firm's ownership. This policy is a compromise of the central government's intention to break administrative barriers to industrial reorganization and the existing interests of the regions and industrial bureaus. This compromise has enabled the reform to proceed without encounterilg much opposition from the local governments. Without such a policy, forming enterprise groups across regions or industrial bureaus would have been impossible in many cases. The three-no-change policy made this transaction possible. To see this, suppose firm x in region X wants to merge firm y in region Y while y still generates profits. Y is likely to reject the merger proposal since it means a loss of profit from y. Under the three-no-change policy, however, x can sign a management contract with Y, promising to submit certain amount of profits to Y in exchange for acquiring the management rights and the residual profits (but not the ownership) of y.

Since firns' ownership is not transferable under the three-no-change policy, enterprise groups with tightly-linked members through cross-shareholding are rare. Members of most groups are loosely-linked and the relations between members are often based on management contats, procurement-supply contracts and technical assistance. Financially very few groups are consolidated, and management and production plans of most member firms are independent. The impossibility of ownership transfer greatly restricts the degree to which the groups can reallocate internal resources and achieve the goal of greater specialization and economies of scale.

While the current enterprise group policy was aimed at promoting resource reallocation among firms, many measures adopted to achieve such a goal may be harmful to market competition for a number of reasons. First, currently most mergers and acquisitions are administratively initiated, rather than market-based ownership transfers. A typical form of such mergers is an industrial bureau instructs two firms both owned' by the bureau to merge. These admimstrative mergers are often opposed by fte firms involved.'<sup>7</sup> During the recent government organizational reform, many industrial bureaus that are to be abolished rename themselves as mentexprise groups" and force their subordinate firns to join the groups. The motivation of these transformations was obviously to retain the powers that used to be in the hands of the industial bureaus. Many of the newly established groups (transformed from old industrial bureaus) recentralized the management powers from the member firms, eliminated the member firms' legal person status, and imposed various arbitrary charges on them. It is recognized by the central govemment that such practices are monopolistic in nature and are detrimental to the development of the market." Second, many Iarge and successful enterprise groups enjoy various special policies '7In Xiangtan City (Hunan Province), a firm which was forced to join an enterprise group declared to 'withdraw" from the group. See Economic Daily, May 8, 1993.

' See "A State Council Leader Says 'Changing Name' Companies Is Not A Reform, But A Retreat from Reform,' Guangming Daily, March 2, 1993.

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