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4 Thriving on a Tilted Playing Field China's Nonstate Enterprises in the Reform Era

China's non-state sector, which refers to all production units not owned or not directly controlled by the state, has been the engine of the country's rapid economic growth for the past two decades. After documenting this phenomenon, the paper seeks to address three related questions. First, are non-state enterprises facing a level playing field? The answer is no. We show that non-state enterprises have been discriminated against and handicapped in competition with state enterprises. Second, given that the playing field is not level, why and how has China's non-state sector achieved its rapid growth? We show that there are sets of transitional institutions that have helped non-state enterprises to overcome constraints. Third, can transitional institutions continue to propel the growth of China's non-state sector? We do not believe so, since such transitional institutions fall short of what is needed. in today's economic conditions, and also create distortions by themselves. By implication, we conclude that China's governments need to implement further reforms to level the playing field in order to sustain the vitality of the non-state sector.