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State-owned enterprises of China

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A state-owned enterprise of the People's Republic of China (Chinese: 国有企业) is a legal entity that undertakes commercial activities on behalf of an owner government.

As of 2017, the People's Republic of China has more SOEs than any other country, and the most SOEs among large national companies.[1]: 137  As of the end of 2019, China's SOEs represented 4.5% of the global economy[2] and the total assets of all China's SOEs, including those operating in the financial sector, reached US$78.08 trillion.[3]

State-owned enterprises accounted for over 60% of China's market capitalization in 2019[4] and estimates suggest that they generated about 23-28% of China's GDP in 2017 and employ between 5% and 16% of the workforce.[5] Ninety-one (91) of these SOEs belong to the 2020 Fortune Global 500 companies.[6] Almost 867,000 enterprises have a degree of state ownership, according to Franklin Allen of Imperial College London.[7]

The role of the Chinese Communist Party (CCP) in SOEs has varied at different periods but has increased during the Xi Jinping administration, with the CCP formally taking a commanding role in all SOEs as of 2020.[8][9]

Role

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The state sector is a major part of China's economy, with SOEs accounting for approximately 25% of the national GDP as of 2020.[10]: 6  China's SOEs are among the largest global firms by revenue, and of the 135 Chinese companies on the Fortune Global 500 list (2023), 85 are state-owned.[10]: 6–7  SOEs are important to domestic equity markets, accounting for about 40% of total market capitalization and 50% of company revenues on the Shanghai Stock Exchange and Shenzhen Stock Exchange.[10]: 6 

When China's SOEs were first created, they served as instruments for carrying out national goals and providing social stability via the iron rice bowl.[11] Through the danwei system, SOEs provided workers with housing, amenities, and social welfare benefits, functioning as communities where employees worked, lived, and socialized.[12]: 196 

SOEs continue to support stability through providing employment and maintaining low prices for key economic inputs.[10]: 8  SOEs spend much of their investment on infrastructure development in China's less developed interior provinces, and therefore also perform a redistributive role.[10]

SOEs support China's industrial policy by channeling resources into sectors that the state regards as key, like artificial intelligence, nuclear power, and aerospace.[10]: 8 

SOEs have monopolies in the industries of telecommunications, military equipment, railroads, tobacco, petroleum, and electric power.[13]: 62 

SOEs have a primary role in China's energy sector.[14] Its five large state-owned power generation companies are: Datang, Guodian, Huadian, Huaneng, and China Power Investment Corporation.[15] Its state-owned grid companies are State Grid Corporation of China (SGCC) and China Southern Power Grid Corporation.[16]

Most Chinese universities are SOEs.[17]

China's SOEs are at the forefront of global seaport construction, and most new ports built by them are part of the Belt and Road Initiative.[18] State-owned banks are important sources of funding for port construction.[19]

SOEs that compete in the market are largely owned by provincial or sub-provincial governments.[20] A significant cluster of these SOEs are joint ventures with foreign companies in the automotive industry.[20]

In addition to their own operations, SOEs invest in private enterprises.[21] From the perspective of these private enterprises, this form of partial state ownership is helpful in obtaining financing from banks, particularly as prompts banks to require less collateral.[22] Sometimes in investing in private enterprises, SOEs acquire enough shares to nationalize them.[23] Over the period 2018–2020, 109 publicly traded enterprises with more than $100 billion in collective total assets were nationalized in this way.[23]

SOEs help stabilize public finance, including through allowing the government to use assets as collateral to issue debt or to sell shares to balance budgets.[24] According to academic Wendy Leutert, China's SOEs, "...contribute to central and local governments revenues through dividends and taxes, support urban employment, keep key input prices low, channel capital towards targeted industries and technologies, support sub-national redistribution to poorer interior and western provinces, and aid the state's response to natural disasters, financial crises and social instability."[25]

Financial performance of SOEs was not a major concern until China's reform era.[26] With the exception of a small number of national monopolies, SOEs compete in the market as privately enterprises do.[27] State ownership does not prevent SOEs from seeking to make profits; rather they are incentivized to make profits to increase the value of the state's assets.[28]: 7  Although China's SOEs seek to make profits, but they do not necessarily seek to maximize them.[10]: 7  Academic Wendy Leutert describes them as frequently behaving as "'asset maximizers' rather than 'profit maximizers'."[10]: 7 

History of SOEs

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Nationalist era

When China's Nationalist government controlled northeast China from 1946 to 1948 after the end of the Second Sino-Japanese War, it restructured formerly Japanese enterprises into SOEs.[12]: 6–7  It also confiscated the enterprises of puppet states, such as the Wang Jingwei regime.[12]: 71  Most of these enterprises were re-organized into the National Resources Commission, China Textile Construction Company, and China Merchants Steam Navigation Company.[12]: 71 

After the war, the Nationalist government focused on industrial reconstruction in Manchuria.[12]: 95  As a result, it many SOEs in inland China were privatized, transferred to local governments, or shut down.[12]: 95 

Early PRC

Following the CCP victory in the Chinese Civil War, one of the party's early steps was to nationalize enterprises that the defeated Nationalists had controlled.[29]

At the founding of the People's Republic of China, 27.8% of the country's industrial output came from SOEs.[12]: 7  Over the 1950s, the government gradually restructured the industry under state ownership.[12]: 7  By 1956, SOEs produced more than 80% of China's industrial output.[12]: 7 

In the early years of the PRC, the Manchuria region had the highest concentration of SOEs.[12]: 101  These were prominent in the PRC heavy industry-focused method of "socialist industrialization" (a term adopted from the Soviets).[12]: 101 

The policy trend from the early to mid-1950s was to centralize control over SOEs.[12]: 169  SOEs were generally within the authority of central government industrial ministries during the First Five-Year Plan period of 1953–1957.[12]: 238  Proponents of centralizing authority over SOEs included Gao Gang.[12]: 169 

During the Great Leap Forward, control of SOEs was largely decentralized, with control being transferred to local governments instead of the central government.[12]: 231  This process of decentralization also significantly increased the power of local Party organizations.[12]: 238 

During the Third Front campaign to develop heavy industry in China's interior regions, almost 400 state-owned enterprises were re-located from coastal cities to secret sites in the Chinese interior where they would be more protected in event of foreign invasion.[30]

During the Cultural Revolution, significant amounts of authority over national SOEs was transferred to local CCP cadres and People's Liberation Army officials.[12]: 25  Among the major SOEs transferred to local control during this period were Daqing Oil Field, Changchun Auto Manufacturing, and Anshan Iron and Steel.[12]: 255 

Reform and Opening Up

Beginning the late 1970s, SOEs became allowed to pay bonuses to workers.[13]: 10 

Under Deng Xiaoping's leadership, the trend towards localizing authority over SOEs was reversed, and SOE management was again centralized.[12]: 260  The government sought to make SOEs more independent from local Party authorities by strengthening the power of SOE directors relative to the Party committees within enterprises.[12]: 275  This approach, called "the director responsibility system under the party-committee leadership" was similar to the Soviet one-chief system of the early and middle 1950s.[12]: 275 

In 1984, the State Council issued a directive to expand the autonomy of SOEs.[31] SOEs were also allowed to sell surplus goods on the market once they had met their quotas.[31] Through the reform of "substituting taxes with profits" (li gai shui) the government sought to give SOEs incentives to pursue profits, sought to reduce SOE dependence on the government, and sought to increase market competition.[13]: 10 

From the 1980s until the middle 1990s, the China implemented its Contract Responsibility System.[12]: 273  Through this approach, SOEs had to submit an amount of their profit to the state per their contracts with the state, but could keep remaining profits.[12]: 273  This was intended to increase the managerial autonomy of SOEs without privatizing their ownership.[12]: 273 

Increased diplomatic openness in the 1980s and 1990s helped SOEs to negotiate better trade terms.[12]: 271 

With the goal of boosting innovation and efficiency, more than half of China's largest SOEs had established technical development centers by 1993.[14] The same year, the CCP issued its "Decision on Issues Related to the Establishment of a Socialist Market Economy System."[32] In the wave of reform thereafter, one goal was to separate SOE management from government and to empower a select group of SOEs with special property rights and autonomy.[32]

Consistent with CCP general secretary Jiang Zemin and Premier Zhu Rongji's strategy of grasping the large, letting go of the small, major SOE reform occurred in 1997,[32] which represented a change from the previously incremental reform efforts.[33] The state was encouraged to preserve large SOEs and to allow weaker ones to be "let go" through closing or consolidating.[34] There was significant privatization of the smaller SOEs.[12]: 280–281  Other major policies that were part of the 1997 reforms included management and employee buyouts and the inclusion of foreign strategic partners.[33] Between 1997 and 1998, the number of industrial SOEs decreased by over 41%.[12]: 280 

The general trend since 2000 has been for SOEs to increase in importance consistent with a broader resurgence of state activity in the market.[35] SOE mergers have been routine since 2000.[36] Beginning in 2003 with Hu Jintao's administration, the Chinese government increasingly funded SOE consolidation, supplying massive subsidies and favoring SOEs from a regulatory standpoint.[37] These efforts helped SOEs to crowd out foreign and domestic private sector competitors.[37]

As part of China Western Development program, China's five large state-owned hydropower companies planned, underwrote, and built the majority of dams on the river and its tributaries.[38]

Beginning in 2007, central government SOEs were required to provide to the central government a portion of their capital income, stock dividends, property transfer income, enterprise liquidated income, and other state-owned capital income.[13]: 48 

SOEs were major beneficiaries of China's stimulus program following the Great Recession, which began a period where the private sector withdrew and the state-owned sector expanded.[39]

Xi Jinping era

The pace of SOE mergers has increased under Xi.[36] The goals of China's current SOE mergers include an effort to create larger and more competitive national champions with a bigger global market share by reducing price competition among SOEs abroad and increasing vertical integration.[36]

Overall, China's focus on SOEs during the Xi era have demonstrated a commitment to using SOEs to serve non-market objectives and increasing CCP control of SOEs[40] while taking some limited steps towards market liberalization, such as increasing mixed (state and private) ownership of SOEs.[41] Along with increased mergers, promotion of mixed ownership, and management of state capital have continued; results have been mixed.[41] Transitioning solely state-owned enterprises to a mixed ownership was announced in 2013 at the 18th Central Committee of the Chinese Communist Party and re-affirmed by the 19th Party Congress.[42]

Following an August 2015 directive, SOEs' articles of association are required to specify the leading role of party organizations in their firms.[43]: 80  The 2015 directive also increases the importance of party organizations within SOEs by requiring that the CCP committee secretary and the chair of the board must be the same person.[43]: 80 

According to Xi, "[T]he dominant role of state ownership cannot be changed, and the leading role of the state-economy cannot be changed."[37] In Xi Jinping Thought, the historical importance of state-owned enterprises is highlighted:[37]

[W]ithout the important material foundation that state-owned enterprises have laid for China's development over a long period of time, without the major innovations and key core technologies achieved by state-owned enterprises, and without state-owned enterprises' long-term commitment to a large number of social responsibilities, there would be no economic independence and national security for China, no continuous improvement in people's lives, and no socialist China standing tall in the East of the world.

Xi Jinping Thought also emphasizes the role of SOEs as part of the dominant position of state ownership necessary for common prosperity.[44]

Lai Xiaomin, the former president of state-owned China Huarong Asset Management announced in 2015 that during the operation of China Huarong Asset Management, the embedded CCP committee will play a central role, and party members will play an exemplary role.[45] As Jin et al. wrote in 2022,[46]

The overarching principle of SOE reform is to firmly implement the Party’s leadership and the modern enterprise system. This principle creates a political governance system in China’s SOEs—a Party-dominated governance system characterized by Party leadership, state ownership, Party cadre management, Party participation in corporate decision-making, and intra-Party supervision.

CCP branches within China's SOEs are the governing bodies which make important decisions and inculcate its ideology.[47]

In 2019, a CCP rule required SOE articles of association to require that major decisions must be discussed by the SOE's party committee before they are considered by management or by the board of directors.[43]: 80 

In 2023, multiple state-owned enterprises, including Shanghai Municipal Investment Group, established internal People's Armed Forces Departments run by the People's Liberation Army.[48][49][50] They are expected "to work together with grassroots organizations to collect intelligence and information, dissolve and/or eliminate security concerns at the budding stage," according to the People's Liberation Army Daily.[49]

In 2024, the Chinese government announced SOE management would be assessed based on stock market performance.[51]

State Council (Central Government)

China Investment Corporation

SASAC of the State Council

For a more comprehensive list, see State-owned Assets Supervision and Administration Commission § Central SOEs.

As of 2022, SASAC oversees 97 centrally owned companies.[52] These are the central SOEs which cover industries deemed most significant to the national economy.[28]: 6  Companies directly supervised by SASAC have been reduced and consolidated through mergers according to the state-owned enterprise restructuring plan with the number of SASAC companies down from over 150 in 2008.[53]

Ministry of Finance

Main article: Ministry of Finance of the People's Republic of China § As shareholder

Ministry of Education

Regional Governments

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Governments below the national level operate portfolios of SOEs which operate both domestically and abroad.[52] Examples of regional or local SOEs include:

Anhui Province

Beijing Municipality

Chongqing Municipality

Gansu Province

Guangdong Province

Shenzhen City

Zhuhai City

Guangxi Zhuang Autonomous Region

Guizhou Province

Hebei Province

Heilongjiang Province

Hubei Province

Wuhan City

Liaoning Province

Shanghai Municipality

Shandong Province

Linfen City

Yantai City

As of 2019

Shanxi Province

Tianjin Municipality

Xinjiang Uyghur Autonomous Region

Zhejiang Province

Ningbo City

Hong Kong S.A.R.

See also

References

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