We Are the (National) Champions: Understanding the Mechanisms of State Capitalism in China

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INTRODUCTION  I.   UNDERSTANDING CHINESE INDUSTRIAL ORGANIZATION      A. Introduction      B. Chinese Industrial Organization as a Networked Hierarchy         1. A simple analytical construct         2. A stylized model      C. Origins of Chinese Corporate Groupism  II.  NATIONAL BUSINESS GROUPS      A. Components         1. Core (parent) company         2. Listed company         3. Finance company         4. Research institutes      B. Membership and Internal Governance      C. Networks         1. Intergroup networks         2. Central-local intergroup networks         3. Business group-party-state networks      D. Examples         1. China National Nonferrous Metals Industry Group         2. China Datang Group  III. THE PARTY-STATE AS CONTROLLING SHAREHOLDER      A. SASAC as Controller         1. Control rights in management         2. Control rights in state enterprise assets         3. Cash flow rights      B. Consequences  IV.  IMPLICATIONS AND QUESTIONS      A. Implications for Comparative Corporate Governance Scholarship         1. Law and finance         2. Convergence      B. Questions for the Future         1. Legal reform?         2. Temasek-ization of SASAC?         3. Great reversal?         4. Dis-integration of the national-champion groups?      C. Implications for the U.S. Legal System  CONCLUSION 

INTRODUCTION

China's emergence as a global economic power poses enormous explanatory challenges for scholars of comparative corporate governance. While China appears to present a new variety of capitalism, frequently labeled state capitalism, the features and implications of this system are still poorly understood. (1) Particularly since China's economic system may be in its early stages of development, understanding the mechanisms by which state capitalism currently operates and how they may change as Chinese enterprises globalize is a pressing task for researchers.

One highly distinctive characteristic of state capitalism in China is the central role of about 100 large, state-owned enterprises (SOEs) (guoyou qiye) controlled by organs of the national government in critical industries such as steel, telecom, and transportation. Although only a handful of these firms, such as Sinopec and China Mobile, have become widely known in the West, the state sector dominates major industries in China and is increasingly active in global markets. As the Economist recently noted, "[A]s the economy grows at double-digit rates year after year, vast state-owned enterprises are climbing the world's league tables in every industry from oil to banking." (2) China now has the world's second-largest number of companies (seventy-three) on the Fortune Global 500 list of the world's largest corporations, (3) and the number of Chinese companies on the list has increased at an average annual rate of approximately twenty-five percent since 2005. (4) These globally significant SOEs are China's national champions.

More than half of the Chinese companies in the 2012 Fortune Global 500 are SOEs supervised by an organ of the central government. (5) Excluding major banks (6) and insurance companies, controlling stakes in the largest and most important of the firms are owned, ostensibly on behalf of the Chinese people, by a central holding company known as the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC), which has been described as "the world's largest controlling shareholder." (7) Though the elite firms that serve as the outward face of Chinese SOEs (again, think of Sinopec or China Mobile) are listed on stock exchanges in Shanghai, Hong Kong, or other world financial capitals, they are nested within vertically integrated groups. Each company's majority shareholder is the core (parent) company of the group--which is itself 100% owned by SASAC. The core company coordinates the group's activities and transmits business policy to group members, who are contractually bound to promote the policies of the state. …