4 May 2018

Do China's State-Owned Enterprises play fair?

Haruka writes:*

Chinese State-Owned Enterprises (SOEs) have a powerful influence in the domestic and global markets. With the advancement of SOEs into the global market, some foreign companies claim that SOEs are unfairly advantaged as they receive significant support from the government. However, is this claim legitimate? Below, my blog consists of a brief history of SOEs, foreign claims, and arguments against such claims.

History of SOEs
SOEs were first established when the People’s Republic of China was built in 1949. The country was devastated by a long period of war and naturally, SOEs became the backbone of the nation-building. After the economic reform in 1978, SOEs underwent transformations. They became increasingly autonomous, efficient, and competitive. In the late 1990s, guided by the principle of “grasping the big, letting go of the small” (抓大放小), the government merged many SOEs in order to cut off inefficient and loss-making SOEs. Currently, SOEs are categorized as competitive, functional, and public. Competitive firms include auto industries and banks, functional firms provide public service including infrastructure, and public firms include companies such as airlines.

Claims about Chinese SOEs from abroad
Alongside Chinese economic boom, SOEs become more profitable and ambitious and some expanded their markets overseas. In reaction to this, some foreign companies claim that SOEs are unfairly advantaged because of their solid financial and regulatory support from the government. In making this case, In making this case, the U.S.-China Economic and Security Review Commission [pdf] reported that SOEs benefit from lower cost of and better access to funds. According to Time, SOEs do not abide by same rules as other private companies. They rapidly expand industries abroad without worrying much about profitability and efficiency compared to other non-subsidized foreign competitors.

Reexamining such Claims
However, such claims need to be reexamined for the following reasons:
  1. It is unclear to what extent SOEs are advantaged with their government’s support. For example, banks which make loans to SOEs are commercialized. So it is unclear if SOEs have privileged access to loans or if they have lower interest rates when making loans. SOEs are also required to disclose their operational, financial information and ownership structures. Thus, SOEs might be less advantaged and more transparent than some foreign companies claim.
  2. SOEs are competitive and efficient, and they should not be seen simply as government-controlled monopolies. Particularly after the 2006 structural reform of SOEs, more competitive SOEs are owned by stocks and there is less supervision on them. For instance, Shanghainese SOEs adopted the reform the earliest and successfully made innovations, enhanced technology embedded in products, improved corporate operations, and attracted private investments.
  3. The number of SOEs are decreasing and private companies are becoming the main driver for economic growth and development. According to the China Statistical Yearbook [pdf], the number of SOEs decreased from 39.2% in 1998 to 5.2% in 2011. During the same period, SOE’s share of industrial output dropped from 49.6% to 26.2% and their share of employment declined from 60.5% to 19.8% (see Figure at right). With declining influence of SOEs, private companies such as Alibaba, Huawei, and Baidu become a vibrant source for economic innovation and provider of employment.
Bottom Line: Over the course of history, SOEs became a powerful force for economic growth. With their expansion overseas, some foreign companies claim that SOEs are unfairly advantaged. However, this claim needs to be reevaluated because SOEs are not just government-controlled monopolies but competitive firms.

* Please help my growth and development economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)