State and non-state enterprises in China’s economic transition

China’s enterprise system reform constitutes a key part of its economic transition from a centrally planned to a market-based economy. The reform process began in 1978 and has continued right through the first decade of the twenty-first century and beyond. The key elements in enterprise system reform consist of the ownership reform of the state-owned enterprises (SOEs) and the development of the non-state enterprises including both foreign-funded firms and indigenous private firms. The ownership reform in the state sector has unleashed strong productive forces through improved incentives that, together with the rising private sector, have formed the micro-foundation for the rapid economic growth in China over the past thirty years. The reform has nurtured rising entrepreneurship which has in turn injected further dynamics into the system powering the strong growth of the Chinese economy. These reforms have led to the changes in the relative importance of the state versus the non-state sector, with an increasing share of the non-state sector in the total economy. To accommodate these fundamental changes taking place in its enterprise system China has been reforming its institutions, such as the financial and banking system, labor market system, local government system and the legal system. The significance of the enterprise system reform in China is that the private sector has now contributed more than 60 percent of China’s GDP, more than 80 percent of the total industrial value added, and more than 97 percent of its total workforce employed.