China's reform of industrial state-owned enterprises (SOEs) seeks to maintain ownership of the key enterprises and improve their performance by establishing market-oriented incentives. Although most countries in transition have turned to systemic privatization of SOEs, in China the state carries out "shareholder" functions performed by private owners in market economic systems. This report argues for extensively diversifying ownership; integrating cross-regional and cross-sectoral shareholding and simplifying organizational structures; further developing property rights and asset exchanges; eliminating policy-induced barriers to entry and exit in inherently competitive sectors; intensifying incentives to meet debt-service obligations; creating a market for managerial talent; and requiring independent audits of financial accounts. Tables display the performance and characteristic of Chinese SOEs; figures show various organizational structures of state asset management systems; and boxes include the diversification of Chinese SOE ownership, utilization of state-owned land assets for enterprise reform, and alternative organizational modes for state asset management.