Understanding China's 'Last Place Elimination System' for State-Owned Enterprises

China’s state-owned enterprises are undergoing significant reforms as the government aims to make them more efficient and competitive in the market economy. One key aspect of these reforms is the introduction of a “last place elimination system” that will see the lowest performing employees reassigned or laid off by 2025.

While the concept of managing out underperformers is not uncommon, the unique characteristics and history of China’s state sector mean implementing such a system is fraught with challenges. A look at online discussions among Chinese netizens who work at SOEs provides insight into the complex web of relationships, power structures and competing incentives that will shape how the policy plays out on the ground.

Many express concern that without robust, impartial performance evaluation systems in place, managers will simply target those with the weakest “guanxi” or connections. “If you have no background or relationships, and are just focused on doing a good job, you’ll be first on the list,” said one employee at a state-owned bank. Others worried that well-connected but mediocre employees, like the mistresses of senior leaders, will be protected.

There were also doubts about whether SOEs, especially those focused on public goods rather than profits, even have the right incentives and metrics in place to accurately assess performance. “We serve the people, not the bottom line,” argued one employee at a state utility. “Pushing us to be profit-driven could lead to bad outcomes for society.”

Long-serving employees reminisced about the time before economic reforms, when workers were referred to as “masters of the enterprise” and enjoyed a stronger sense of ownership and job security. “Now we’re just seen as cattle to be culled,” lamented one veteran oil worker. “How things have changed.”

Despite the obstacles, most agreed that SOE reforms are necessary and overdue. Bloated payrolls, wasted resources and lack of motivation have become endemic issues. Many said the key is to have robust, scientifically-designed evaluation systems, allow employee input in the process, and ensure senior leaders are held accountable as well. “A good start would be 360 degree reviews for managers,” suggested an engineer at a state construction firm. “Then we might see some real changes in behavior.”

As China’s SOEs embark on this difficult transition, balancing efficiency with social stability and long-cherished notions of the role of the state sector will require wisdom and finesse. “We can’t just take a cleaver to it,” said the utility worker. “Our SOEs are the bedrock of socialist prosperity. We need to get the reforms right.”