Skip to:
  1. Main navigation
  2. Main content
  3. Footer
Working Paper

Firm Dynamics and SOE Transformation During China's Economic Reform

We study China’s state-owned enterprises (SOE) reform with a focus on the corporatization of SOEs. We first empirically document that small SOEs are more likely to exit or become privatized, whereas big SOEs are more likely to be corporatized while remaining under state ownership. We then build a heterogeneous-firm model featuring financial frictions, endogenous entry and exit, and optimal firm-type choices. Our calibrated model suggests that in the long run, the SOE reform increases the aggregate output by facilitating resource reallocation to the private sector. Along the transition, the corporatization option leads to higher aggregate output than the privatization-only policy by giving a higher financing capacity to more productive incumbent SOEs.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.


Suggested Citation

Jia, Chengcheng , and Shijun Gu. 2021. “Firm Dynamics and SOE Transformation During China's Economic Reform.” Federal Reserve Bank of Cleveland, Working Paper No. 21-24. https://doi.org/10.26509/frbc-wp-202124