DP11854 China's Decentralized Privatization and Change of Control Rights

Author(s): Jie Gan, Yan Guo, Chenggang Xu
Publication Date: February 2017
Keyword(s): Chinese Economy, Control Rights, Privatization, Restructuring
JEL(s): D22, D23, H19, L29, P31, P39
Programme Areas: Public Economics, Financial Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11854

A distinct feature of China's privatization is that its design and implementation are decentralized and administered by the local governments. Based on a proprietary survey dataset containing 3,000 firms in over 200 cities, this paper studies how city governments choose among various privatization methods, how these methods transfer control rights, and how they influence privatization outcomes. We find that less political opposition to labor downsizing and greater fiscal capacity prompt cities to choose direct sales to insiders (MBOs) as their privatization method. This method transfers the most control rights to private owners, retains the least government supports and is associated with most hardened budget constraints, restructure most effectively, and achieves the greatest performance improvement.