The government is now restructuring state firms to make them more efficient. However, worries about the social effects including the closure of schools has made ministers more cautious about the proposed reforms.
The state education commission (SEC) has urged firms to continue to provide primary and secondary schools even if this affected their profits.
"All schools set up with enterprise investment are indispensable parts of the nation's educational resources," said a recent circular from SEC, which warned that schools cannot be closed without permission from county or municipal government. Instead, firms should "try new measures" to run them more economically.
Many of China's 100,000 state firms run schools in a system developed over the past 40 years. The largest industries, such as the railways and steelworks, also have their own colleges and universities.
"Five or 10 years ago when they made money there were few alternatives to spend it in the socialist economy so companies ploughed back their profits into schools and other fringe benefits. Some schools were very well funded indeed, " said Dr Xiao Geng, an economics lecturer at Hong Kong University.
"Now there are more opportunities to reinvest in the business itself and managers have more freedom to decide what to spend on, so some firms are cutting back on schools."
Meanwhile, state firms have been suffering from the opening up of the country to competition. More than 40 per cent of them ended last year in severe debt. The few businesses which have been allowed to go bankrupt are involved in protracted disputes with local authorities over compensation for giving up their schools, with the chronically underfunded local education authorities battling with central government for cash to meet the extra burden. Many local authorities are already behind with payments to their own teachers.
Company schools are generally only open to employees' children. In most towns they are considered inferior to the local secondary schools where competition to get in is severe.
However, in many poor areas, particularly in north-east China, they are virtually the only education option.
Even before the SEC's circular the firms' attempts to hive off schools had slowed down as the employers realised that it was cheaper to operate schools than to pay higher wages. "Fringe benefits enable wages to be kept extremely low," says Dr Xiao.
"Provision of workplace schools has become so much part of the system that even private companies and foreign joint ventures are setting them up for their employees." The threat to schools has also met with resistance from workers.
Meanwhile the government insists that businesses are not making losses because they provide benefits, but because of their inefficient structure.
Little progress has been made in restructuring, however, be-cause of the political minefield surrounding the reforms. Allowing loss-making enterprises to close would add millions to the growing army of unemployed people, and deprive many of clinics, housing and schools.
But many economists believe that this will only be a temporary reprieve as the government's reluctance to act now is merely storing up worse problems for the future.