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China’s Private Sector Rising.

By Dan Harris on Posted in China Business

I know this is relatively old news, but until I saw it so well summarized at Thomas P.M. Barnett’s Globalization Blog, I did not have the idea for this post. In Barnett’s post, “Charts of the day: The decline of state capitalism….in China! Barnett highlights a recent Economist article on how China’s rising entrepreneurship and “economic dynamism is owed in large part to its private sector. As the following two charts show, “China isn’t succeeding through state capitalism, but despite its lingering presence.”

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Though I admittedly do not have a large enough base on which to make statements with any scientific accuracy, my impression is that China’s private companies do tend to be better run than its State Owned Entities (SOEs) and they also tend more often to abide by their contracts.

Do you agree? Is this what you have seen?

  • Twofish

    I have problems with the graph because it’s not clear under Chinese law what is a “state owned enterprise”. Most companies have mixtures of private and public ownership, and it’s really not clear what is a “state owned enterprise.” The only companies in China that are unambigiously state owned enterprises are the salt and tobacco monopolies.
    Is Haier an SOE? Lenovo? PetroChina? China Construction Bank? TVE’s?
    Define “ownership” (seriously, it’s a lot harder than it sounds!!!)
    The second
    Dan: Though I admittedly do not have a large enough base on which to make statements with any scientific accuracy, my impression is that China’s private companies do tend to be better run than its State Owned Entities (SOEs) and they also tend more often to abide by their contracts.
    This can be misleading because one thing that I’ve seen is that because people often classify whether something is a SOE or not based on how well it is run. For example, people tend not to classify Haier as a SOE because it is well run.
    The other thing is that my impression with contracts is the opposite, in that SOE’s tend to abide by their contracts more than “private” companies. SOE’s are big corporations with lots of lawyers and deep pockets, so they don’t have much of an incentive to renege, whereas private companies are often smaller SME’s with less legal expertise and shallow pockets.
    ———
    As far as some of the statements…..
    * Now one estimate—and it can only be a stab—puts the share of GDP produced by enterprises that are not majority-owned by the state at 70%.
    Define “majority-owned by the state” Let’s take Lenovo. Lenovo is 45% owned by Legend Holding Group, but with preferred shares that increases to 55%. The major investor of Legend Holding Group is the Chinese Academy of Science which is an agency of the State Council.
    Now you tell me, is Lenovo majority owned by the state or not? Also the ownership structure of Lenovo is *typical* of Chinese corporations.
    The other thing is that any metric of state ownership that uses *numbers* is misleading. When you talk about the number of private enterprises a lot of them are noodle carts. There are relatively few “listed companies whose management is effectively subject to control by central SASAC”. I think about 150, but you are comparing a noodle cart with PetroChina.
    Zheng Yumin, the Communist Party secretary for the commerce department of Zhejiang province, told a conference last year that more than 90% of China’s 43m companies were private.

  • http://www.beverlyhillscriminaldefenselawyers.com Joseph Marchelewski

    I kind of wonder what China’s government thinks about this. On the one hand, they must be thrilled that so much money is coming in. On the other, how are they justifying the success of capitolism to themselves?

  • Raymond

    I have seen the same things in terms of how SOEs treat my company compared with how private companies treat my company. I attribute the difference to private companies wanting to make money and SOEs having many mandates.

  • http://laowaiblog.com Laowaiblog

    Obviously private companies have a stronger incentive to succeed, because they know that if they fail there will be no one to save them. This it true for many countries, not just for China, but it is particularly true in China because private companies are relatively a new phenomenon in the Chinese business scenery, so they have a stronger need to prove they are successful. Their success thus far symbolizes the true transition that China has made in its economic policy.
    http://laowaiblog.com

  • Tim

    @twofish – a number of good points. I have heard both sides of this story, including Mcgregor’s assertions in the Party that the govt still intends to have the state sector dominate the economy even if through convoluted channels of control.
    Although I tend to agree with Mcgregor’s analysis, as you’ve pointed out, it is not simple to illustrate true private/State ownership here.

  • Duncan

    I rarely say this, but I agree wholeheartedly with Twofish on this. Most of the data on what is SOE and what is not comes from official sources, which basically define the private sector as anything not 100% state-owned. Though people like the OECD do a slightly better job at differentiating out the two, they’re still having to run in the dark as share ownership is, to say the least, not entirely transparent for most “private” firms.
    In addition, beyond what Twofish said one has to question the usefulness of equity ownership as an indicator – even if one could find it. In many companies there is a state-linked “sponsor” – an entity or official, perhaps even operating in a technically private capacity (think those coal mines that prove so tough to close) – who provides cover and business guanxi. Though their holding may be small, their influence may be disproportionately large.

  • Twofish

    Machelewski: I kind of wonder what China’s government thinks about this. On the one hand, they must be thrilled that so much money is coming in. On the other, how are they justifying the success of capitolism to themselves?
    It’s really simple, they redefine the term “capitalism” and “socialism.” Whatever China’s economic system is, it’s socialism. It’s socialism because the government says its “socialism with Chinese characteristics”, and no one really wants to argue the point. If it’s not socialism, then you can’t do it in China, but most capitalists care more about money than definitions so no one minds defining what they do as “socialism.”
    Also if you think about it, the Chinese economy doesn’t fit into the standard definitions of public/private or socialism/capitalism. Look at Haier or Lenovo. If you want to, you can argue that they are triumphs of capitalism. If you want to you can argue that they are triumphs of socialism.
    Laowaiblog: Obviously private companies have a stronger incentive to succeed, because they know that if they fail there will be no one to save them.
    Not obviously true. When a large private company “fails”, usually there is a massive bankruptcy and restructuriing, but the purpose of bankruptcy is to make sure that a company with assets is saved when it economically falls apart.
    There’s something called the soft budget constraint problem in which if you have a firm with unlimited budget, they can count on government payments. With Chinese companies, this isn’t the case with companies that are owned by anyone other than the central government. If a company owned by a city goes bad, they are in the same situation as a “private” company.
    Also, even when a company does get a bailout, the managers are usually fired. If you look at how the Communist Party selects officials in the big SOE’s. The second most important characteristic (after political loyalty) is the ability to make the company profitable.
    You can get a feel for how Chinese companies work by reading their annual reports. For the really big companies, the CEO is usually the Party Secretary, and Chinese CEO’s talk about profits like US CEO’s, and if the company doesn’t make a profit and has to get money from the government, the CEO is going to lose their job.

  • Malthus

    Even if it has to distinguish between what is a private and what is a government company in China inaccurately I still think the numbers are meaningful.

  • Jerome Cole

    The official Chinese and OECD versions of non-state enterprises leave out huge numbers of companies that are controlled by the state. China Post is a prime example. The entire premise of this post is deeply flawed.