During the 1980s Shunde was renowned for its development of township and village enterprises. In the 1990s the pitfalls of public ownership became apparent. The most serious problem was that township and village enterprises, like their state-owned enterprise counterparts in the city, had accumulated huge debts, which the local government was obligated to repay. To solve the problem, several local governments opted to privatize the enterprises.

Shunde was among several pioneer cities that started privatizing as early as 1992. By 1999 only a handful of its public firms, mostly in the energy and utility sector, remained in government hands. Privatization eventually spread across the country: by the end of 1998, more than 80 percent of the public firms at or under the county level had been privatized

Because the best incentive for local governments to carry out privatization was to stop assuming the liability of more nonperforming loans, privatization could have been easily seen by the public only as a way for the government to get rid of its financial obligations. Without genuine governance reform, people would have had the idea that the government would compensate its loss of the privileges associated with enterprise ownership by putting a more aggressive "grabbing hand" into the firms. Thus governance reform is necessary to initiate privatization, and investment is required after privatization. Shunde’s local government has done both.

The central goal of Shunde’s governance reform was to transform the role of the government from a player to an arbitrator in the economy. This transformation involves not only changes observable to the public, but more important, intangible changes, such as anti-corruption supervision inside the government, the improved morale and integrity of public servants, enhanced government regulation and administration, and ultimately, a greater commitment by the government to the rule of law.

The government signaled its intentions through radical structural changes. First, it cut the size of its administrative staff by nearly 40 percent, from 1,400 to less than 900. This much smaller government size has been maintained since the reform was initiated in 1993. As a result, the Shunde government did not need to do anything when a nationwide government reform program aiming at downsizing 15 percent of governments at all levels was launched in 1998. Second, policymakers reduced the number of government departments from 49 to 29. As a result, many functional departments simply vanished. For example, there were 14 bureaus in charge of agriculture before the reform, now there are only 4. Several agencies in charge of industry were merged into one, whose role was transformed from managing to providing administrative support and services. To increase the transparency, the Shunde government publishes a monthly bulletin containing information on government regulations and activities.

A comparison of Shunde and other cities in China reveals much about the relation between governance reform and privatization. Most firms in Shunde were privatized by management or employee buy-out; in contrast, in many cities privatization meant nothing more than changing the firm’s name. In southern Jiangsu province, internal disputes within privatized firms were reportedly common because of the forced nature of the privatization process; in some localities many firms were simply dissolved and degenerated into family workshops. The lack of political and government assurance was cited as a key factor leading to these dismal results.

Shunde’s governance reform has not only resulted in thorough and genuine privatization, it has also begun to bring favorable reactions from the private sector. This is shown by a 1999 survey on 338 private entrepreneurs in six Chinese cities, including Shunde. To the question "how many major law, regulation, or policy changes occurred in the last three years that affected your business?" the average answer in Shunde was 0.36, while the average for all six cities was 2.54. These results suggest that the policy environment is much more predictable in Shunde than in other cities.

In addition, more people in Shunde trust the courts: 40.6 percent of firms in Shunde—but just 30.7 percent of firms in the larger sample—were willing to seek justice in court. In terms of administrative irregularities, Shunde stood tall: no arbitrary fee collection was reported in Shunde, whereas it was one of the most complained about issues in several other cities.

As for government services, Shunde had the lowest number of power cuts and the smallest average losses reported by firms. The wait for telephone installation was also much shorter in Shunde than elsewhere (6.3 days versus 22.5 days in Beijing). In addition, none of the firms in Shunde complained about the quality of phone services, while the percentage of firms filing complaints in Chengdu, Mianyang, and Deyang were 22 percent, 31 percent, and 23 percent, respectively. In terms of water supply and drainage, Shunde ranked high or medium.

What factors have contributed to the success of Shunde’s governance reform? The size of the economy and the time horizon of the politicians are two key factors. In the economic arena, the city’s electronics industry has maintained a technological edge within China. In the political arena, the mayor of the city is deeply committed to the local economy, having turned down several promotion opportunities.

Transition from a command economy to a private property-based economy involves not merely the establishment of private property rights but also the transformation of the governance of the state, where the guardians of private property rights reside. Adoption of private property rights is relatively easy compared with the transformation of state governance, which involves political, social, and cultural obstacles. The problem is how to first convince politicians that they should downsize and streamline the government and then how to convince the public of their genuine intention to do so. It is therefore vital to establish a "political free market" that encourages political parties to maintain a program regardless of who is in office, or open political debates, which create confidence among the citizenry that there is a consensus on key issues. External constraints (such as the legislative body) enforcing verified government choices are helpful to ensure state governance reform and high economic performance.