Chapter 3 surveys enterprise reforms in China since the late 1970s to highlight evolving constraints and space for leadership in SOEs. It examines five periods: emergence and decline of “dual track” economic reform (1978–91), establishment of a socialist market economy (1992–94), retrenchment of state ownership in the “commanding heights” (1995–2001), internationalization and consolidation of the state sector (2002–12), and combination of limited economic liberalization with increased political control (2013 to present). Since the late 1970s, SOE leaders have transitioned from managing production to determining how to restructure their firms, managing state-owned capital, and expanding in both domestic and international markets. Although the overall trend has been toward expanded space for leadership, the current Xi Jinping administration has tightened political and commercial control.

Chapter 4 examines legal configurations of political power dynamics during the Legal Modernization Era (ca. 1992–2010) – a golden age for legal reformers in China. The chapter reviews the development of significant national-level economic laws and regulations that gradually replaced many of the fragmented and probationary rules used earlier. The analysis of legal and policy documents suggests that the use of law in this period was consciously directed in two main directions: the use of law to structure and support the creation of markets (i.e., the economic function) and the use of law to reconfigure governance capacities and boost more centralized market regularity within the Party-state system (i.e., the political function). These two functions of law also set the foundation for what is known today as China’s state capitalism and its dominance in the domestic and international markets.

This chapter shows that state-owned enterprises (SOEs) still play a major role within the Chinese corporate ecosystem, but even after a long period of reforms, they are still plagued by skewed government incentives leading to irrational investment decisions, huge waste of resources, and widespread defiance of central government regulations. The chapter includes case studies of the coal and power sectors to demonstrate the unholy "tripartite" relationship among SOEs, local government officials, and corrupt central regulators, all engaging in rent-seeking activities in their own vested interests. Current reform programs fail to address these key defects.