Why are Chinese State-Owned Enterprises so Powerful?

Updated: Feb 16


Deng Xiaoping Billboard in Shenzen © Brücke-Osteuropa / Public Domain / Wikimedia Commons

The growth of the Chinese economy has often been defined as a "miraculous" phenomenon, which exploded suddenly and unexpectedly. However, these "miraculous" changes have only been possible thanks to the numerous reforms that have been implemented in China since the end of the seventies. These reforms all had as their objective the economic growth of the country and an opening of Chinese enterprises at the global level which, since the foundation of the People's Republic of China in 1949, disappeared from the international trade and investment panorama. Since the end of the seventies, when China decided to open up politically and economically, the country's economic growth achieved an unprecedented historical result. In particular, what partly revived the country were state enterprises, together with private enterprises. However, it was precisely state-owned enterprises (SOEs) that the central government concentrated on by implementing a series of reforms to improve their profits.


In 1978, Deng Xiaoping and his supporters took control of the Central Committee of the Chinese Communist Party. This put an end to what Deng himself described as 'two years of undecided economic strategy and policy' after Mao Zedong's death. 1978 was a decisive year for the development of this nation; it ended a period of closure and contrasts that culminated in the Cultural Revolution, and Chinese state-owned enterprises experienced the purchase of new technology from abroad, which represented a significant innovation. The period of reforms to which Chinese companies were subjected was undoubtedly a long and slow process, but it brought fast and continuous economic growth. The reforms began both in the rural areas of the country, with the system of family responsibility and the creation of municipal and Township and Village Enterprises (TVE), and gradually in the financial sector and state-owned enterprises (SOE). First of all, in the early eighties a program of improvement of the companies was put into motion, with the increase of productivity and profitability of the state companies as its primary objective. Thus, in 1984, the rights of companies were extended to production planning, payment, and hiring of workers and personnel - all factors previously managed by the state. Initially it was implemented in 100 SOEs in Sichuan Province, then applied to more than 6,000 SOEs in 1980, reaching 42,000 SOEs in 1981 and almost the entire industry by 1983. Thus, the new-born ‘international’ enterprises improved their productivity by facing the competition that was created in the market (Garnaut, Song & Fai, 2018).


Nevertheless, not all that glitters is gold. In fact, the SOEs' profit rate fell from 18% in 1985 to less than 6% in the early 1990s (Rawski, 1994), with an increasing number of loss-making companies. The market competitiveness was way too high for what Chinese markets could bear at that time. The second phase of reforms began in 1992, mainly under the leadership of Deng Xiaoping. It started the gǎizhì (改制) period (which literally translates to “restructuring”), during which the companies adopted the politic of the zhuā dà fàng xiǎo (抓大放小), ‘grasping the big, letting go of the small’. Its purpose was therefore to eliminate or sell small companies by grouping the most powerful ones into large industrial conglomerates under the control of the central or local government. The economic rationale behind this policy was to let larger state-owned companies develop in order to compete globally.


Private corporations, however, still held important levels of power in the Chinese economy. SOEs needed to be further renewed in order to compete not only in the international market, but also against the Chinese non-state-run enterprises. Therefore, as reform never stopped, SOEs gained more and more power. Key factors included the division of objectives according to industrial groups: for strategic companies, such as those in the areas of defense, power generation and distribution, oil, coal, and telecommunication, the aim was to maintain 100 percent state control, focusing on increasing activities in these sectors. When it came to the machinery, automobile, chemical, and construction industries, on the other hand, the aim was to maintain limited state ownership, with an increase in state influence if necessary. Finally, for companies involved in other types of production such as trade and building materials, it was sufficient to maintain the necessary influence to ensure the functioning of key companies. These improvements led to nearly 100 state-owned companies becoming part of the Fortune Global 500 within only ten years.


Still, not all state control enterprises worked as the CCP had expected. During the 2008 crisis, a large number of SOEs lost their profits and power (Kroeber, 2016). Substantial changes did not become apparent until 2015. The new strategy was to constantly promote mixed ownership of state-owned enterprises and make sure that both state and non-state capital were committed to the functioning of the state-owned enterprises (State Council, 2015). This was, for example, the case of China Unicom, the second most important Chinese telecommunications operator: in August 2017, the company announced that it would sell nearly $12 billion in shares (worth 35% of its listed unit in Shanghai) to a group of private and state investors. These investors included technology giants Alibaba and Baidu, as well as a major state-owned insurance company, the China Life Insurance Company. China Unicom saw the state's stake in the company fall from 63% to 37% as a result of the transaction. This resulted in increased liberty of investment for the company as the state share decreased (Naughton, 2016).


Despite this, some recent policies offer mixed signals: Beijing has once again ordered companies to adopt additional business objectives, but at the same time has strengthened control over their operations (The China Dashboard Winter, 2020).


In conclusion, after briefly studying the large improvements made for SOEs during the last 50 years it can be concluded that the presence of the state within SOE capital and governance was important for their growth but only up to a certain point, as too invasive and rigid a presence entails limits that became apparent in the 2008 financial crisis.



Ilaria Zolia was born in Florence (Italy) in March, 1997. She obtained her bachelor's degree in Foreign Languages and Literatures (Chinese and English studies) from the University of Bologna in September 2020. During her studies, she spent time abroad, first in Spain and then in the UK, where she attended the University of Birmingham. She has a strong passion for China and South-East Asia, where she has spent almost three months travelling. She is currently attending a Global Marketing, Communication, and Made in Italy master's degree. You can find her on Instagram and on LinkedIn.



The opinions expressed here are those of the writer and do not represent the views of European Guanxi.


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References


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https://www.china-briefing.com/news/chinas-soe-reform-process/


Chinadashboard.asiasociety.org. 2020. Winter 2020 — The China Dashboard Winter 2020 — Asia Society Policy Institute And Rhodium Group. (2020). Available at: https://chinadashboard.asiasociety.org/winter-2020/page/overview


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Garnaut, R., Song, L., & Fai, C. (2018). China's 40 Years of Reform and Development 1978-2018. Acton: ANU Press.


Kroeber, A. (2016). China's Economy: What Everyone Needs to Know. Oxford: Oxford University Press.


Naughton, B. (2016). The Chinese Economy, Transitions and Growth. London, Cambridge: MIT Press.


Rawski, T. G. (1994). Chinese industrial reform: Accomplishments, prospects, and implications. The American Economic Review, 84(2): 271–5.


State Council (2015), Guideline on Developing Mixed Ownership in SOEs, Document No. 54, 24 September, Beijing: General Office of the State Council. Available at: http://english.www.gov.cn


State Council (2017), Instructions on Further Promoting Modern Corporate Governance in SOEs, Document N. 36, Beijing: General Office of the State Council. Available at: http://english.www.gov.cn