China's Last Steps across the River: Enterprise and Banking Reforms (review)

Yiping Huang is the author or editor of several books on Chinese economic reform (e.g., Huang 1998a and 1998b; Garnaut and Huang 2001) as well as around two dozen articles in refereed journals and edited books. Formerly a senior lecturer at the Australian National University, he now works in Hong Kong for Citibank and Salomon Smith Barney analyzing China's financial markets and macroeconomy. In this book, Huang considers the history of both the industrial state-owned enterprises (SOEs) and the state-owned commercial banks (SOCBs) that lend to them. He combines several chapters of econometric analysis with a review of the history of reform and policy recommendations.

As a number of scholars have pointed out already (e.g., Naughton 1995 and Jefferson and Rawski 1999), Chinese economic reform has been an evolutionary rather than an intentional process. The Chinese phrase for this approach is wuzhe shitou guo he, commonly translated as "crossing the river by feeling the stones." As the book's title demonstrates, Huang argues in this book that the last remaining hindrances to China's emergence as a market economy are the government's policies toward its SOEs and SOCBs.

At the beginning of China's reform period, almost 80 percent of the gross value of Chinese industrial output was produced by SOEs, and these firms dominated the urban economy. SOEs employed almost 80 percent of workers in the cities, and consumed most of national savings in their capital investments. Although they were big, these enterprises were also clearly inefficient, and efforts to reform them began with Zhao Ziyang's experiments in Sichuan Province—even before the Third Plenum of the Eleventh Central Committee in December 1978, the date most China scholars use for the beginning of economic reform.

Since then, SOE reform has been foremost in the policies of economic reform, and yet the problem of these enterprises continues to be intractable. Deng Xiaoping said that state-owned enterprises were to be the cornerstone of China's "socialist market economy," yet by the year 2000 SOEs and state-held enterprises together produced only a third of industrial output, according to official statistics, and their total profits were less than three percent of their total assets (National Bureau of Statistics of China 2001).

Since the initial study by Chen et al. (1988), economists have studied the effects of economic reform on the efficiency of Chinese state-owned enterprises in more than a hundred articles and several dozen books. The results of these many studies are often contradictory. Whether SOEs became more productive or less productive after economic reforms, for example, seems to depend on how you measure productivity and what assumptions you make in deflating material inputs and the capital stock. The one thing these studies agree on, according to Huang, is that the profits of SOEs declined significantly with reform, especially after 1989. Once the cash cow of the central government, by the mid-1990s most SOEs were losing money and absorbing large government subsidies as well as staggering amounts of loans that would never be repaid. Once these costs are calculated, Huang argues, the state-owned sector is a net-loss maker for the economy.

The book is organized into eight chapters (164 pages) and five appendixes (thirty-two pages), followed by references (twenty-six pages) and an index (fourteen pages). In the first chapter, Huang puts China's economic reform in historical context, and he explains both the unique nature and the successful outcomes of China's reform, comparing it to the Eastern European experience. He then provides an overview of China's relatively less successful enterprise and banking reforms, and provides a brief introduction to why these reforms are so important. Joining the WTO will require greater liberalization in both the enterprise and banking sectors, even as the bad-debt problem and employment pressures grow ever more demanding.

In chapter 2 Huang provides an...