China's Membership in the WTO and Enterprise Reform : The Challenges for Accession and Beyond

Progress in reforming China's state owned enterprises (SOEs) has been a litmus test for assessing the Chinese leadership?s willingness to seek membership in the World Trade Organization (WTO). The more extensive the reform of the SOEs, the more resilient they would become to the rigors of the international marketplace and less strain would be placed on China?s economy. By the same token, China's accession to the WTO will spur SOE reform, since the greater external competitive pressure will induce enterprise restructuring. The November 1999 agreement between Chinese and U.S. authorities on terms for China?s WTO accession signals an important commitment by the Chinese to expose their SOEs to more fundamental market discipline and reform. However, even after China becomes a member of the WTO, the effectiveness of its implementation of WTO commitments will turn on continued reform of the SOE sector. This paper sheds light on these challenges by analyzing the incentives and constraints on China's SOE reform program. Four critical aspects of the reforms are highlighted and evaluated against the backdrop of international experience: clarification of property rights; establishment of large group/holding companies and other new organizational structures; improved corporate governance incentives; and implementation of international financial accounting and auditing practices. The paper concludes with policy recommendations