The aim of this paper is to evaluate for China recent directions in reform. The decision to restructure large SOEs into enterprise groups has received a lot of criticisms in particular, in the popular press. The main criticism of the reforms is that the downsizing should be consistent with a market-oriented approach. This paper points to some positive features of the government's decision to create large enterprise groups consistent with the literature on late industrialisation. It is argued that the notion that downsizing represents a viable solution to the problem that the SOE sector faces is based on an overoptimistic view of the market. In particular it does not give sufficient attention to the difficulties inherent in creating a workable mechanism that is faithful to the basic tenants of individualistic property rights. The paper is set out as follows. The next section details the need for reform. It provides information on the declining significance of SOEs and their financial position. This is followed by a discussion of recent reform measures, and an evaluation of the reforms. In the next section some broader problems together with the future prospects for the state-owned sector are discussed. The last section contains concluding comments.