The China Quarterly

Research Report

Explaining the Financial Performance of China's Industrial Enterprises: Beyond the Competition-Ownership Controversy a

Yuk-shing  Cheng  and Dic  Lo 


Scholarly explanations of the worsening financial performance of Chinese industry over the reform era, particularly the loss-making phenomenon, have coalesced around two rival stories: the “inefficient institutions causing poor financial performance” story and the “increased competition inducing profitability decline” story. This article critically reviews the arguments and empirical substantiation of the two stories, and gives an alternative explanation that takes demand conditions and industrial configurations into the analysis. On this basis, it is argued that the worsening financial performance is a macro as well as micro problem that points to the fundamental contradictions in contemporary Chinese political economy. Some policy implications from this analysis are raised in the concluding section.


a The draft of this article was completed during Yuk-shing Cheng's research visit to the School of Oriental and African Studies, University of London. The paper has been subsequently presented at conferences in Cambridge and Beijing. The authors wish particularly to thank Thomas M.H. Chan for his comments on an earlier version.