The Reversal of Privatization in China : A Political Economy Perspective

We document the reversal of privatization in China—local governments re-possessing ownership stakes in a quarter of previously privatized firms from 1998–2007. Privatized firms are ‘renationalized' to ease the burden of unemployment in local labor markets. Firms located in provinces with a Chinese Communist Party secretary unaffiliated with any of the three political factions are more likely to be renationalized. The promotion of politicians without strong factional ties is more sensitive to measures of social stability such as local unemployment, compared with GDP growth. With instruments that include the provincial leader's political factional affiliation, we find that renationalization leads to higher leverage, lower profitability and labor productivity