What is privatization and its history in China

Privatization has gotten popular from 1970s. Privatization is the process of transferring ownership of a business from the public to the private sector.  The definition of the Privatization has two senses: wide and Narrow. In wide sense, privatization also means liberalization. Liberalization means de-control and de-licensing economic activities in the private portion. Economic policies may be liberalized in the area of foreign trade, monetary policies, fiscal policies and industrial development. Generally, under the development policy in countries, certain industries are exclusively reserved for development in the state sector. Any relaxation about such an exclusive reservation could be a part of the privatization process. For example, in Taiwan in the nearly decades the private sector has been allowed to enter into fields like bank, petroleum, alcoholic items etc.

In narrow sense, privatization means advertisement. It means the government sales whole or part of its holdings of the equity shares to private shareholders. Change of ownership from the public to the private sector is known as denationalization.

Privatization may take place in the following ways, leasing a public enterprise to a private sector, contracting out economic activities to private sectors. In U.S. certain public services like garbage collection and waste disposal were leased out to private sectors. In Taiwan also leasing of toll station in the freeways or contracting out public parking space are instances of privatization

History

The history of privatization can be traced back to Ancient Greece. The government contracted out nearly everything to private sector. In more recent times, the British steel industry was privatized in the 1950s. West Germany sold its majority shares to private investors in 1961. In 1980s the privatization gained worldwide momentum. In United Kingdom British railway was privatized by Thatcher.

In eastern and former Soviet Union, the significant privatization of state owned enterprise was taken place in the 1990s. Recently the largest scale of privatization happened in Japan. Japan post involves the Japanese post service; after privatization, it’s also the world’s largest bank.

Types of Privatization

There are four main methods of privatization:

Share issue and asset sale privatization: selling shares on the stock market or selling an entire or partial organization to a private investor, usually by auction 

Voucher privatization: all citizens can inexpensively buy a book of vouchers or for free that represent potential shares in any state-owned company.

Privatization history in china

Privatization æ-¹æ³• in china

China is a socialism country, due to the historical factor and social structure, china have large amount of state owned enterprises. These state owned enterprises provide job opportunities, but the corrupt structure lead the state owned enterprise in loss profit. The state owned enterprise is the most important role under china’s economy. To China government, it’s the majority source of income. The losing profit of state owned enterprise may affect China’s foundation. So the reformation of the state owned enterprise becomes an urgent issue to be solved.

China government believes the efficiency of state owned enterprise can be improved by bringing in outside investor. So the major reformation objective focuses on ownership privatization. Chinese enterprise reformation has four stages of ownership reformation.

“The first is the entry of large numbers of new non-state enterprises. The second is the reform of managerial control rights within established systems of public ownership, such as strengthening managerial incentives through the contract responsibility system.

The third has been the change in asset structures resulting from non-state investment in the state sector. The last stage of ownership change – the outright conversion of enterprises, usually from state or collective ownership to some other formal ownership classification – we argue, can be viewed as the outcome of the three preceding stages of reform.” (Gary H. Jefferson, 2005)

New entry

Before mid-1990s, the most dramatic method of ownership reformation in china was the new-entered private firms. There have three approaches of the reformation,

The first was the proliferation of collectives, principally, township and village enterprises during the 1980s. The number of individually owned enterprise with eight or fewer employees skyrockets into the millions in 1994. It became a second source of domestic firm entry. The third was foreign investment, including great china area: Hong Kong, Macao and Taiwan. Many of these foreign firms had been state owned enterprises that were converted to joint ventures. The restructuring of the firms acted an important form of new entry into china’s enterprise system.

An important consequence of this entry of was the creation of competition in many sectors. This competition inspired a decline in profitability across all ownership types. The resulting erosion of monopoly rents in state industry motivated all around Chinese industry look for technical innovations and new mechanisms of management.

Reform of control rights

In the mid-1980s, the introduction of the enterprise contract responsibility system was proposed to strengthen and identify the system of incentives and rewards for state owned enterprise managements and workers.

Without a formal ownership conversion, the restructuring of state owned enterprise met with limited success.

McMillan and Naughton (1992) found that “managers responded to expanded autonomy, including greater profit retention, by strengthening worker discipline, increasing the proportion of workers’ income paid in the form of bonuses, and raising the fraction of workers on fixed term contracts.”

However, Gary Jefferson and Jian Su (2005) criticize “while most studies document efficiency gains in the state sector, productivity growth in state industry generally lagged behind that outside the state sector.”

One important result of these reformations was “that a managerial class emerged bearing a strong vested interest in privatization.

Changing asset structure

The relation between the ownership structure of the assets and formal ownership classification has become fluid in China.

In 1999, for example, when the population of China’s large and medium-size enterprises was about evenly split between state-owned and non-state owned enterprises, 1,417 of the former reported a minority of state asset ownership, while for the non-SOEs, 1,935 reported that a majority of their assets were state owned. This counterintuitive pattern of asset ownership across the range of ownership classifications calls into question the economic significance of China’s formal classification system.

We show in Section 5, the impact that asset ownership shares exert on enterprise performance, apart from formal ownership classification. By creating de facto conversion and making formal conversion a mere formality, this accumulation of non state assets in the state sector played an important role in the historical progression of ownership reform in China.

Formal conversion

In the mid-1990s, the three processes mentioned above together created pressures for deep restructuring, including the formal conversion of State owned enterprises. Meanwhile, the accumulation of attention to financial stability connected with the Asian financial crisis and the Chinese government’s quest for entry into the World Trade Organization increased pressures for enterprise re-structuring.