Title: Soft Budget Constraint and Productivity of Chinese State Enterprise (Preliminary)
Reference Number: 1050
Publication Date: October 2002
JEL Classifcation: P2, P3

Sarah Tong
HK Institute of Economics and Business Strategy


Using firm level data obtained from a survey of about 800 state owned enterprises (SOEs), we investigate the extent of soft budget problem among China's SOEs and its impact on firm performance. Using both ex ante and ex post soft budget proximate measures, we find that SOEs in China in general face soft budget constraint in the late 1980s. The majority of the firms surveyed pay tax from their after-loan payment profit. In addition, more than one third of the firms depend on government financial when they run into financial hardship to repay loans. Empirical estimation show that that firms facing soft budget constraint are more often perform better than (or as good as) the others in both the level and the change of labor productivity. One reason could be that firms with good performance are more often receive favorable treatment from government. It is often inevitable that government provide financial assistance to SOEs of some sort during economic transition. This is because market institutions are not fully developed and SOEs are still bearing additional social responsibilities. Our finding suggests that government assistance may not necessarily create immediate harmful consequences.


Key words: Reform; socialist enterprises and their transitions

Last modified: 12/20/2002