The Reform of China's State-Owned Businesses and the Implications for Japanese Capital Investment in China

No.045
April 1999
Senior Fellow Yan Zhu

1. Amidst China's economic reforms, the last remaining and most difficult issue is the reform of state-owned businesses. As reforms have been late in coming, state-owned businesses are unable to respond to market competition and have fallen into economic difficulty from which they are unable to extract themselves. Since 1997, China has begun reforms of state-owned businesses in earnest with the goals of restructuring the state-run economy, diversifying ownership structures, and establishing a modernized business system.
2. The reform of state-owned businesses demands investment by foreign companies. China's enactment of various policy measures such as diversifying ownership structures, disengaging from competitive fields, and adjusting its industrial structure has generated new opportunities for investment in China by Japanese and other foreign businesses. Through the acquisition of state-owned businesses, capital participation, and participation in various sectors, the investment structure of Japanese businesses in China will grow more diversified and it will become possible to expand into even more varied fields. At the same time, from the perspective of Japanese investment in China, reform of state-owned businesses will also have the negative effect of intensifying competition.
3. Japanese investment in China began early and has a strong presence; through previous technological cooperation and direct investment, Japanese businesses can build a cooperative relationship with Chinese state-owned businesses and have an edge over other nations in participating in their reform. However, Japanese investment strategy stops short at export installations and suffers from various other problems, such as a wariness of technological transfer and weak support systems. Indeed, in the Chinese market, and especially in the high-tech sector, Japanese businesses got a late start compared to the U.S. and Europe.
4. In order to grasp the opportunities brought about by Chinese state-owned business reform, and in order for Japan to expand investment in China, Japanese businesses must exploit their advantages and overcome their weaknesses. For Japan to truly participate in the reform of China's state-owned businesses, Japanese businesses must shift their investment strategy in accordance with changes in the environment and choose an investment structure that focuses on mergers, acquisitions, and other methods. Furthermore, various other efforts including grasping the importance of political and preferential investment support and responding flexibly to changing situations in China are indispensable.

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