The purpose of this paper attempts to analyze the causes of the privatization of state-owned enterprises (SOEs) in China by a dynamic game theory. Although local governments control SOEs, banks have power to affect the operation of them because banks make tremendous loans to SOEs owing to soft budget constraints. Local governments face the choice of whether privatization, and banks consider whether debt-equity swap of SOEs. Therefore, the strategic interaction between local governments and banks give rise to equilibrium. Accordingly, the result of privatization of SOEs rests on the profit level of SOEs, the discount rate and the bargaining power of banks. The higher inflation expectations and the more impatient of players, the more possible that local governments privatize SOEs. In contrast, if SOEs are able to obtain high profit, then local governments are more likely to restructure them and banks prefer to the way of debt-equity swap. In addition, the relationship between asset value of SOEs and privatization depends on the bargaining power of banks. As the augment of banks' bargaining power, such as the central macro-control, local governments tend to privatize those SOEs with high value assets.
