China's Murky Ownership Laws

I’ve always found the notion of private enterprise in China somewhat confusing. This is not because private enterprises do not exist in China, but because it’s incredibly difficult to determine whether, or to what extent, “private” companies are really State-owned enterprises (SOEs) in disguise. This is especially true for large corporations.

With that in mind, I found a recent Economist article on the subject especially timely (see Capitalism Confined). The article details how Chinese companies fall into 4 general categories: large state-controlled enterprises (SOEs), joint ventures between private (often foreign) companies and SOEs, companies with minority state ownership but state influence, and companies backed by government-owned investment funds. The main take-away is that the Chinese government is still involved at almost every level of economic organization.

According to the Economist:

The first category [state-controlled enterprises] comprises the vast banks and transport, energy and telecoms providers that were, and to some extent still are, government ministries…they account for perhaps 1% of privatised companies… Most of these huge companies have been turned into vaguely conventional-looking businesses. They have been restructured, recapitalised and rebranded. A minority of their equity has been sold to the public and is traded on the stockmarket.

The second category of firms, joint ventures, is also small in number…Often the private partner is a Western company hoping to gain access to a huge and growing economy. In return the Chinese gain [access to] Western know-how. For the Westerners, this involves obvious risks beyond the usual differences of opinion in a joint venture: that they will be pushed aside once the Chinese have acquired their knowledge.

The third group, largely in private hands, contains the most successful privatised companies: …[those] that ended up in the hands of their managers…In only 1% of these firms did the state have a shareholding of more than 20%…[The state] does, however, continue to exert influence, notably through party representatives.

The success of this third group of companies has encouraged the development of the fourth. Officials in cities and provinces have created hundreds of municipally backed funds to invest in promising ventures.

Taken collectively, these iterations of state engagement reflect how China’s government has not only held on to its economic control but found subtle ways to extend it. At the very least, these iterations constitute an important series of large-scale economic experiments with implications for China’s economy and, effectively, the world’s too.

Given China’s increasing role in the global economy, I agree with the author’s inference about the implications of this kind of experimentation with economic organization. I also think it calls for further research into the costs and benefits of structuring economic activity in this way. One point the article details is how, as a consequence of state influence, Chinese companies have struggled to compete abroad. Although they benefit from cheap financing capital and political favor domestically, large Chinese companies struggle to compete with their more organizationally (and technologically) efficient foreign counterparts abroad.

Nevertheless, truly interesting stuff! I encourage you to read the article in its entirety.

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