Source: World Bank 2030 Report p. 111.
ROE is return on equity
Most is direct quotation
SOE percentage of industrial output 27 per cent – projected to fall to 10 per cent in 2030
Percentage of total number of enterprises 4.5 per cent
Percentage of total industrial assets 42.4 per cent
Percentage of employment 19.4 per cent
Percentage of exports 15 per cent
Non-state sector 70 per cent of GDP
Significant enterprise sector reforms have underpinned China’s successful past growth performance. In particular, bold reforms under the 9th Five Year Plan (5YP) 1995–2000 led to a greatly expanded role of the private and other non-state sector. Indeed, the state sector’s share in the total number of industrial enterprises (with annual sales over 5mn RMB) fell from 39.2 percent in 1998 to 4.5 percent in 2010. During this same period, SOEs’ share in total industrial assets fell from 68.8 percent to 42.4 percent, while their share in employment was slashed from 60.5 percent to 19.4 percent (Figure 4). Their share in China’s exports fell from 57 percent in 1997 to 15 percent in 2010. As a result, the non-state sector has become not only the main generator of output (an estimated 70 percent of GDP) and employment, and strongest growth engine, but also the most active sector for innovation.
According to Jia (2009), 65 percent of China’s patents and 75 percent of technological innovations came from the non-state sector. The 9th 5YP’s guiding principle of “grasping the big, letting go of the small” left China with a distinctive industrial structure. Most small and medium-sized firms became privately owned. Facing much domestic and external competition in an increasingly integrated domestic market, they became very dynamic and productive and now dominate many sectors.
In parallel, the “commanding heights” of the economy (most notably the 120 or so large central enterprises in sectors like electricity, petroleum, aviation, banking and telecoms) were kept largely state-owned.
Even here, much progress was made. Many SOEs were corporatized, radically restructured (including labor shedding), and expected to operate at a profit. In some sectors, intra-SOE competition was promoted and the scope for private participation was expanded. Later, the 2003 establishment of the State-owned Assets Supervision and Administration Commission (SASAC) to exercise authority over large centrally run firms laid a foundation for future improvements in governance and investment planning.
As a result, the profitability of China’s SOEs increased. Their reported average return on equity (ROE) jumped from only 2.2 percent in 1996 to 15.7 percent in 2007, before sliding back somewhat to 10.9 percent in 2009 (Figure 5).
However, the average profitability of SOEs remains well below that of non-state (including private) firms.
Role of SOEs in the Chinese Economy
Chinese industry appears significantly less concentrated than Japan and Korea in earlier periods. However, competition remains curtailed in one key dimension—between state-owned and non-state parts of certain sectors—especially in “strategic” industries and utilities. Large SOEs dominate certain activities not because they are competitive enough to keep the dominance, but because the market competition is restricted and they are granted oligopolistic status by the authorities. The weak and unfair competition resulting from such “administrative monopoly” has been deemed “the current problem facing private enterprise in China” (Naughton, 2011) and “the major source of monopolies in China’s economy”
The strong direct ties between the government and incumbent SOEs, especially large SOEs, limit the entry and access to resources of private firms, hampering the efficient use and allocation of resources and stifling entrepreneurship and innovation.
The most problematic form of government intervention in competition and administrative monopoly in China is official lists which grant SOEs an exclusive or privileged role in certain sectors. Two lists stand out. First, in 2006, China identified 7 “strategic” sectors in which the state would keep “absolute control”—defense, electric generation and distribution, petroleum and petrochemicals, telecoms, coal, civil aviation and waterway transport. In such sectors, while a handful of state firms might compete with one another, they are protected from new entry. Second, in designated “basic or pillar” industries—including machinery, automobiles, information technology, construction, steel, base metals, and chemicals—the state would retain “somewhat strong influence”. In such sectors, private participants could face a range of entry barriers or other constraints. Also, the clear signaling of the expected leading role of state enterprises could lead private firms to conclude that they would not be allowed to grow “too big”, acting as a powerful disincentive to expansion if not entry.
Gao Xu (2010) State-Owned Enterprises in China: How Big are They? http://blogs.worldbank.org/eastasiapacific/state-owned-enterprises-in-china-how-big-are-they
Figures for 2008
Percentage of industry and service sector assets 30 per cent
Percentage of industrial sector assets 50 per cent
Percentage of total enterprises 3.1 per cent
All have declined significantly over past decade or so.
The Second National Economic Census conducted in 2008 reveals that of all the 208 trillion RMB total assets of the secondary and tertiary sectors (industrial and service sectors), 63 trillion – or 30 percent of total – was held by SOEs. (SOEs here correspond to state sole funded corporations and enterprises with the state as the biggest shareholder.) Meanwhile, in terms of enterprise number, there were 154,000 SOEs at the end of 2008, only accounting for 3.1 percent of the total enterprise number. Hence, the big picture is clear: SOEs control a substantial part of total enterprise assets in China despite the fact that their total number is marginal. As a corollary of this observation it follows that the average size of SOEs is much bigger than that of non-SOEs. This is indeed the case. In terms of average assets, SOEs are equal to 13.4 times of non-SOEs.
It is worthwhile to note that the decline in the share of SOEs is much bigger than that in the share of SOE assets. Since 1999, the share of SOEs has declined from 37 percent to less than 5 percent in terms of numbers, and from 68 percent to 44 percent in terms of assets. This is to a large extent a result of the SOE reform – specifically the “grasping the big, letting go of the small” strategy – carried out in the past decade. Since the reform started in late 1990s, most small SOEs have been privatized or filed bankruptcy to lessen the burden of the government, while larger ones have been subsidized (directly or implicitly) and/or merged to hopefully create stronger firms controlling the commanding high of the national economy. This reform strategy is a big success in terms of creating large SOEs. As what is shown in figure 2 by the dark blue line, the average asset size of industrial SOEs increased from 134 million RMB in 1999 to 923 million in 2008, expanding by 589 percent in 9 years. Meanwhile, the average assets of non-SOEs only moderately increased from 36 million to 60 million, up by a dwarfed 67 percent.