China has not yet separated government from state-owned enterprises (SOEs); and SOE reforms to date have produced new problems that threaten their objectives. An emerging corporate governance vacuum, tax evasion, decapitalization through wage increases, and the private taking of assets and socialization of liabilities impair performance and threaten the validity of the system. More than marginal adjustments to current policies are necessary. This report looks at the modernization of SOEs, economic legal framework, SOE property rights, organizational structure reforms, corporate governance, and financial accounting systems and controls. It argues to extensively diversify ownership, allowing for passive state minority shares; simplify organizational structures and integrate cross-regional and cross-sectoral shareholding; further develop property right/asset exchanges; eliminate policy-induced barriers to entry and exit in inherently competitive sectors; intensify incentives to meet debt service obligations; create a market for managerial talent; and require independent audits of financial accounts and make them publicly available.