The main purpose of this paper is to analyze the cause of privatization of China's state-owned enterprises (SOEs) in the late 1990s in terms of the change between central and local government relations. We conclude that the two central policies-tax sharing reform and banking reform that change the incentives between central authority and local governments, and this change exerts an important effect upon the cost-benefit structure of local governments. Under the circumstance, the value of SOEs on local governments is decremented. This depreciation is due to the immensely declining financial supply of SOEs to local governments, increasingly expensive upholding cost of local governments to SUEs, and the exorbitant social burdens of inefficient SOEs on local public finance. Therefore, privatization of SOEs becomes a rational strategy among local governments' options.
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