Long live China’s state-owned enterprises: deflating the myth of poor financial performance

China’s industrial state-owned enterprises (SOEs) are commonly perceived as performing poorly. This leads authors to conclude that SOE reform so far has been a failure, and to recommend all-out privatization. Industrial SOE profitability indeed declined drastically in the course of the reform period, and industrial SOEs are always less profitable than industrial non-SOEs. However, the gap between SOEs and non-SOEs can be explained by just two factors: SOEs face higher circulation tax rates than non-SOEs, and have a higher capital intensity. In as far as these are the result of government policies and historical factors discriminating against SOEs, privatization of SOEs may improve these enterprises’ profitability levels, but privatization is not a necessary condition. The decline in SOE profitability over time furthermore is well explained by economic transition factors; non-SOE profitability declined following a similar time pattern, and non-SOEs are no better suited to withstand shocks such as the 1989–1990 economic downturn.