Profitability and productivity of Chinese industrial firms - Measurement and ownership implications

This paper assesses the reform of state-owned enterprises (SOEs) by examining the effect of ownership on the profitability and productivity of Chinese industrial firms. Several methodological issues concerning profit measurements of enterprises under different ownership structures are identified and discussed. Test results based on a panel data set provide evidence that capital structures, taxes, and welfare burdens have a significant effect on the financial performance of Chinese enterprises. After adjusting for these effects, SOEs still show poor financial performance, which, we show, is attributable to the effect of "soft loans." Although SOEs grew faster in productive efficiency during 1996-1998, their growth rate in profitability lagged behind that of firms with other ownership structures. (C) 2002 Elsevier Science Inc. All rights reserved.