Have China's enterprise reforms led to improved efficiency and profitability?

About twenty years ago, China set about reforming its moribund economy by introducing certain elements of free market capitalist economics. A major reform was the privatization of many State Owned Enterprises (SOEs) and listing the shares in them on the stock exchanges. To date, however, there have been few studies of the effectiveness of the privatizations and their impact on a firm's profitability and efficiency. To remedy this, our study sets out to investigate the operating performance of privatized firms. We find that there is a decline in profitability and asset utilization in the five years after privatization and this contrasts with the results for privatizations in other countries, which show improvements in financial performance. However, we also find that performance is a function of who controls the firm after its listing. In particular, the decline in performance is much less when private investors control the firm. A policy implication of our study is that the state needs to relinquish ownership control of listed firms so that economic efficiency and financial performance can be improved.