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 :)


Olivia said...

This is a very interesting issue I had never thought about before. One thing that jumps out to me immediately is the irony of the US screaming "unfair competition" when the US government has no qualms about subsidising more than a few important sectors (https://www.thebalance.com/government-subsidies-definition-farm-oil-export-etc-3305788). And they aren't the only ones (https://ec.europa.eu/agriculture/cap-in-your-country_en). Many of these subsidies do seem to relate to fossil fuels and agriculture though, so it would be pertinent to have a sector-specific conversation regarding competition distortion.

Nonetheless a bit of googling shows that the WTO didn't side with the US in their use of punitive tariffs against China and India's for their SOEs...(https://www.ft.com/content/6ae06806-0bbe-11e4-8693-00144feabdc0).

Pieter said...

An interesting post! I think your argument that SOEs are more competitive than often is assumed is good, but this does not also convince me that US (or other western/competitive) firms do not have a valid claim when they argue that SOEs are unfairly advantaged through state support. Competition is about creating an equal playing field, and even if the advantage of the SOEs is less than often proclaimed, they can still maintain an advantage relative to other firms. Thus, to make your argument stronger, I think it is necessary to somehow show that the SOEs do not have a relative advantage over these firms that are filing the complaints. One way of approaching this would be to, as mentioned by Olivia, look at the extent to which firms in the US are being subsidised by the state, and determine whether this is comparable.

Again, a good post, and I hope that this helps you a little bit too!

Kristina said...

I think it’s interesting that your goal is to refute claims, and I buy the 3rd argument, but I am not so sure about the other two, and I think they will need to be expanded in order to be more convincing. It is probably hard to disprove that there is widespread advantages from government support (as opposed to proving there is), so perhaps painting a clearer of picture of the criticism and then finding counterexamples will be useful (although I realize this data isn’t transparent). Maybe compare the performances of companies for this? In the second, you argue that they are more efficient than they seem, but I’m not sure if or how that really addresses the main concern of the Time article (also stated in your intro), which is that they have an unfair advantage in the global economy. Otherwise, the formatting is very clear and I like that you presented a background already. Focusing more on what exactly you’re trying to disprove will make it more effective I think.

Unknown said...

It is a very interesting post, especially it is a very compelling way to approach the question of the Chinese SOEs. Furthermore, it is very useful to introduce the topic with a background section. However, I have doubts on the idea that SOEs are a method to further the nation-building. Furthermore, your first argument may in effect be a positive externality regarding the possibility to obtain loans. In other words, a commercial bank may be more inclined to loan to an enterprise which discloses their operational, financial information and ownership structure. In this context, the SOEs would 'play fair' regarding the competition.
Moreover, it seems that the gradual decrease of importance of the SOEs seems more like a way to move up the value chain, which has been undertaken through the State. Then, the SOEs would decrease in importance, opening up the gates of their market of competence. In other words, the SOEs would undertake the important costs of moving up the chain, then the SOEs would gradually liberalize the market, which would increase competition and further economic growth (https://www.weforum.org/agenda/2018/01/chinese-companies-winning-local-consumers/).

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