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China’s Decentralized Privatization and Change of Control Rights

A distinctive feature of China’s privatization is that both its design and its implementation are highly decentralized and are administered by the local governments. Based on a survey of three thousand firms in over one hundred Chinese cities, this paper studies how city governments choose among various privatization methods, how these different methods transfer control rights from the government to private owners, and how various privatization methods lead to different restructuring and performance. Our data indicates that while privatization in China has made substantial progress in reallocating control rights from the government to private owners, there are significant variations in the degree of remaining government influence in corporate decisions across different privatization methods. More importantly, city governments’ decisions on how to privatize are critically determined by the political and fiscal constraints. In cities where there are less political oppositions to labor shedding and where the government has stronger fiscal capacity, it tends to choose direct sales to insiders (MBOs) as the privatization method, which transfers control rights to private owners most completely. As a result, MBO firms restructure most effectively and achieve the greatest performance improvement.

495wp.pdf (1014.68 KB)
Jie Gan
Yan Guo
Chenggang Xu
Publication Date
December, 2013