Industrial Policy, Chinese-Style: FDI, Regulation, And Dreams of National Champions in the Auto Sector‪.‬

Long after the start of the reform period, and well after the proven success of the private sector, the fate of the state-owned sector in China continued to disturb the sleep of many policymakers in the Chinese central government. During much of the 1990s, the problem was nightmares caused primarily by the government's dependence on an ever-weakening state sector. Unlike in rural areas, where the nonstate sector transformed the labor force during the 1980s, in the politically sensitive urban areas the state sector continued to employ a relatively stable share of the workforce until 1995. At the beginning of the reform period, state-owned enterprises (SOEs) employed 78 percent of urban workers; in 1995, despite a dramatic decrease in output, they continued to employ 65 percent. In urban areas the state sector accounted for half of the new jobs created between 1978 and 1995. (1) Similarly, the SOEs, despite their declining share of output, continued to contribute 71 percent of the Chinese government's revenue. (2) This dependence on state-owned firms would not have been a problem if these firms were healthy, of course, but unfortunately this was far from being the case. In 1996, the number of loss-making enterprises began to exceed the number making a profit, and the ratio of liabilities to assets for the sector as a whole was at an all-time high of 85 percent. (3)