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State Enterprise Reform as a Source of Macroeconomic Instability: The Case of China We are grateful to Akira Kohsaka, the anonymous referee, and the participants in the Fourth Convention of the East Asian Economic Association held in August 1994 in Taipei for insightful suggestions; and Chun Chien Kuo and Andrew Roper for excellent research assistance.

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Using a survey of 300 state‐owned enterprises (SOEs), we argue that the acceleration of inflation in China after 1984 was caused by the decentralization reforms in the state sector. These reforms allowed the SOEs, with the collaboration of local governments and local banks, to realize their innate tendencies to over‐consume and over‐invest. The results of these two phenomena were a fiscal crisis for the state and frequent inflationary surges in the money supply. We also refute an alternative explanation that identified competition from new non‐SOEs as the reason for the collapse in SOE profits, and hence as the reason for the fiscal crisis. We conclude that the present government efforts to clarify the property rights of the SOEs is an important step in eliminating the SOEs as sources of macro‐economic instability.
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Document Type: Original Article

Affiliations: 1: China Reform Foundation 2: University of California, Davis

Publication date: November 1, 1996

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