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Accounting for 80 of the gross industrial output they

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Unformatted text preview: 0% of the gross industrial output, they received production quotas, guaranteed outlets for products and were allocated the necessary resources from the budget. They were also social welfare providers to workers and communities. In the early 1980s, SOEs were first given some autonomy in production, distribution and investment decisions. They were still receivers of state subsidies on input materials under the two-tier price system. Since late 1980s, however, overall SOEs performance has deteriorated due to the following factors. First, starting from 1984, the price reform gradually abolished the two-tier price system and thereby increased the production costs of SOEs. Second, the debt-equity ratio of the SOEs rose dramatically from 23% in 1980 to 440% in 1998, following the "Loan for Grant" reform. The rapid accumulation of debt resulted in a heavy interest payment burden on SOEs. Third, poor corporate governance in Chinese SOEs, resulting from weak incentives for managers to maximize value and protectionist practices of government agencies, led to SOEs' overcapacity and low efficiency. Fourth, the growth of collective and private firms in addition to joint ventures with foreign investors utterly altered the of SOEs' dominant status in China's economy. By 1996, SOEs accounted for only 28% of gross industrial output. Collectively owned, individually owned and other types of enterprises accounted for 39%, 16% and 17% respectively 6 . The increased competition from the market further impaired the financial strength of debt-ridden SOEs. From 1996, the SOEs as a 5John P. Bonin, Dealing with the Bad Loans of the Chinese Banks, p. 9, 01/2001, Department of Economics, Wesleyan University 6 Gregory C. Chow, China's Economy: Reform and Perspectives, p. 3, 02/1999, University of Pennsylvania whole became a loss-making sector. The IMF estimated that 37% of industrial SOEs were suffering losses at the end of 19977. The amount of operating loss reached RMB 130-140 billion during the same year 8. The deteriorating performance of SOEs had a direct impact on the fiscal income of the central government. The share of fiscal revenue to GDP declined substantially from 1980 to 2000 (Table 1), thus dragging down fiscal expenditures of the government and increasing the significance of bank lending in the economy. In 1979 government budgetary expenditures of RMB 127 billion were almost seven times of the increase in loans 9 . Only thirteen years later in 1992, the increase in loans of RMB 498 billion surpassed for the first time annual government expenditures of RMB 439 billion 10. By 1996 the RMB 1.1 trillion increase in loan outstanding was more than a third larger than total government fiscal expenditures of RMB 791 billion". Table 1: Fiscal Revenue vs. GDP from 1980 to 2000 (%) Year 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Fiscal 25.7 22.4 15.9 14.6 Rev/GDP Source: Statistical Yearbook China 2001 13.1 12.5 11.2 10.7 10.9 11.6 12.6...
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