BEIJING, July 13: China has no alternative but to follow the examples set by former communist-run economies and embark on a large-scale privatisation programme spread over five years, according to a World Bank study.

The study said the Chinese government's attempts to reform its loss-making state-owned enterprises (SOEs) had so far been unsuccessful and it had no choice but to reduce the state's involvement to a `passive minority ownership.'

However, the report carefully avoided using the term `privatisation.' In the report, `China's management of enterprise assets: the state as shareholder', the researchers said profits by SOEs declined from six per cent of gross domestic product (GDP) to less than one per cent, and last year at least half the industrial SOEes incurred net losses equal to 1.3 per cent of GDP.

Factory capacity utilisation rates for key industrial products fell below 60 per cent, but SOEs continued to absorb more than three quarters of domestic credit, and their borrowing comprised about 60 per cent of the total non-financial public sector deficit.

``This crowds out investment by non-state firms, which have been the engines of growth,' the report said adding that it undermined the weak banking system, because non-performing loans to SOEs meant the state banks had negative net worth.

The study, however, pointed out that despite the poor returns posted by the SOEs, they still accounted for almost three-quarters of investment, more than half of total assets and two-thirds of urban employment.

The report recognised that some of China's reforms improved productivity and at times had been `genuinely creative,' but said they had only provided temporary relief or had created new problems such as asset-stripping, tax evasion, decapitalisation and wage manipulation.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.