Current Status, Efficiency, and Future Reforms of China's State Sector

Key Insight

China maintains the world's largest state sector relative to GDP, with approximately 150,000 SOEs controlling combined assets of around $16.8 trillion, equivalent to 177% of GDP in 2013. Major Chinese SOEs had assets equivalent to 145% of GDP and revenues of 26% of GDP in 2011, double that of other large emerging economies like Brazil, Russia, and India. In 2014, 82 of the 92 Chinese firms on the Fortune Global 500 list were SOEs, including 35 of the 40 largest, and three of the ten biggest companies globally (Sinopec, CNPC, and State Grid). However, despite this vast control over assets, SOEs contribute disproportionately less to GDP, estimated at about 35%, compared to 60% from domestic private firms, indicating significantly lower asset efficiency.

China's SOEs are generally not monopolies, with only a few officially designated exceptions such as the national railway system, the tobacco monopoly, and the salt monopoly (abolished in 2014). A deliberate feature of the 1990s SOE reforms was the creation of multiple, competing state firms even in strategic sectors like aviation, telecoms, oil, and electricity generation, contributing to high economic growth. This strategy, termed 'growing out of the plan,' emphasizes competition over full privatization, highlighting that competition, not just private property, is the indispensable feature of a market economy. For instance, in 2011, there were 880 SOEs in coal mining, 312 in steel, and 264 in nonferrous metals processing, demonstrating a fragmented, non-monopolistic structure.

However, the competition-based approach has reached its limits. Since 2005, uncompetitive SOEs rarely exit the market, as local governments prop them up with preferential access to bank credit and other resources. Central SOEs are often protected by regulations limiting private entry, and competition among them is undermined by government interventions like the rotation of senior executives, suggesting they are viewed as divisions within a larger state entity. Weak competition law and poor regulatory oversight, with the 2007 Antimonopoly Law mainly used against foreign firms, further insulate SOEs from competitive pressures. This insulation has led to a deterioration in SOEs' financial performance since 2008, with returns on assets and equity falling by approximately one-third, in contrast to improving private firm performance. Future reforms proposed by the Xi Jinping government, such as 'mixed ownership' for local SOEs and the transfer of central SOE shareholding to asset management companies (like Singapore's Temasek model), are considered timid and insufficient. Sustained rapid economic growth requires improved enterprise efficiency through expanding private firm operating space and rationalizing the state sector, including allowing uncompetitive SOEs, especially local ones, to go bankrupt and imposing stronger financial discipline on central SOEs.