Steeled for the meltdown

This is the most sensible and the scariest book on China's economic reforms that you will come across this year. It is sensible in that the author has conducted in-depth, firm-level investigation of several of China's largest state-owned enterprises over two decades of reform. He has developed a "worm's-eye view" of the real, rather than intended or wishfully imagined, effects of successive reform models on these complex economic actors. His theoretical contributions to debate on the role of the state, ownership and regulation in transitional economies are also to be commended for their commonsense empirical grounding and clarity of exposition.

The scary part is Steinfeld's convincing argument that Chinese SOE reform is a vital issue not just within China, but also regionally and even globally. If the sector collapses, as it could, it will take China's technically insolvent banks, and much of the rest of the Chinese economy, with it - it is as simple and as devastating as that.

This book is required reading for anyone working on Chinese reforms or on reform in transitional economies generally. Even if they do not agree with Steinfeld's conclusions, they will have to address the arguments developed. I found it an enormously impressive and valuable piece of work - and I say that as one whose research is, according to Steinfeld, missing the point with respect to SOE reform in China. The key problem, to him, is not that of forms of ownership or clarification of property rights, but the absence of regulatory institutions to enforce genuine budget constraints and market exit for unsuccessful firms. My conversations with a similar set of informants to Steinfeld's (SOE managers, academics and policymakers concerned with the Chinese steel industry) lead me to agree with his conclusion that there is little that even the boldest reformer can achieve within the SOE when so many problems pertain to the external regulatory environment. There is little point arguing the merits of public or private ownership in an economy where, as Steinfeld demonstrates, ownership itself fails to function for SOEs.

Steinfeld's case studies are the "living museum" of Anshan Iron and Steel, Mao Zedong's favourite steelworks; Ma'anshan Iron and Steel, the "red chip" of the Chinese steel industry, held up as an example of successful "corporatising" reform, but portrayed here as embodying many of the worst aspects of both the state-owned firm and the western-style public corporation; and the Shougang Corporation, which, it is argued, only in the early 1990s came to be seen as the political protégé of then-paramount leader Deng Xiaoping, with disastrous results for what had been quite a successful, albeit transitional, reform model. The case studies are the most complete, detailed and nuanced examinations of these firms in English to date, besides being lucidly and entertainingly written, and worth the cover price in themselves.

Steinfeld has worthwhile suggestions on the sequencing of the next phase of reforms, but he knows better than most that there are no easy solutions. Instead, he has set out a clear and comprehensive definition of the problem facing state-owned heavy industry. That is the best he could have done to repay his informants within China who have the unenviable task of averting the impending meltdown.

Jackie Sheehan is lecturer in international history, Keele University.