• Financial liberalisation

Financial liberalisation

In this paper, a simplified mathematical model based on the behavioral pattern of firms in the PRC is used to discuss the impact of privatisation on private sector development in the People's Republic of China (PRC). It charts the history of the process of privatisation in the PRC, making the point that the development of private enterprises in the PRC has its own specific background.

The paper notes that there are two general approaches to privatisation. The first is to privatise existing government agencies, and the second is to maintain existing agencies intact and allow private enterprises to enter into new areas. The PRC government adopted the second, which is more gradual and smoother than the first. However, in recent years the PRC has begun to accelerate the privatisation of State Owned Enterprises (SOEs) and to sell SOE assets.

The paper then goes on to:

• analyse the objectives of enterprises, and create a model for simplifying the issues
• draw some propositions on the determination of output, investment and employment in the course of privatisation
• discuss the determination of a firm’s residual profit and its implications for the banking sector
• discuss how the number and size of private enterprises in the PRC is determined
• summarise the findings and implications of the models

The paper concludes that:

• all firms in the PRC seem to pursue the objectives of maximisation of profit, sales revenue and market share
• enterprises with multiple objectives have larger demand for investment and labour, and tend to produce more output than do those with the single objective of profit maximisation
• SOEs may redistribute state-owned assets through negative profits and relatively high salaries that cannot be justified from the real contribution of labour to output
• the factors behind the increase in the number of enterprises are privatisation, labour and capital costs, entrance costs and the tax rate
• the PRC did not privatise SOEs immediately, and as a result, many of them faced losses. Once the government became unable to absorb the losses incurred by SOEs, the acceleration of privatisation became inevitable.

  The implications of these findings are:

  • SOEs and the banking sector should all actively and continuously carry out market-oriented reforms
  • private enterprises need to promote market awareness, and thereby transform themselves into pure profit-maximisation entities
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