Academic journal article Brookings Papers on Economic Activity

Grasp the Large, Let Go of the Small: The Transformation of the State Sector in China

Academic journal article Brookings Papers on Economic Activity

Grasp the Large, Let Go of the Small: The Transformation of the State Sector in China

Article excerpt

ABSTRACT In the late 1990s, China's industrial sector was dominated by state-owned firms. We document how this changed after 1998. More than 80 percent of the state-owned firms in 1998 were shut down or privatized by 2007. Among firms we classify as state-controlled in 2007, many were restructured and registered as private firms with a controlling share held by a state-owned conglomerate or were new firms established after 1998. In 2007, almost half of the state-controlled firms were registered as private firms, and about 40 percent were new firms established after 1998. The privatization and convergence in labor productivity decelerated after 2007, but the establishment of new state-owned firms continued at roughly the same rate. When we interpret these facts through the lens of an equilibrium model of heterogeneous firms, we find that the transformation of firms that remained under state control and the creation of new state-controlled firms together account for 21 percent of China's growth from 1998 to 2007 and 18 percent of its growth from 2007 to 2012. However, the exit and privatization of state-owned firms had a negligible effect on aggregate growth.

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A central feature of the industrial revolution in China over the last two decades is the decline of the state-owned sector. Figure 1 illustrates that the share of state-owned firms in industrial output declined from 50 percent in 1998 to 30 percent by 2005, and has continued to fall since then, albeit at a slower rate. This fact naturally suggests that China's growth was driven by the growth of the private sector and the reallocation of resources away from state-owned firms. According to a popular view, the growth of the private sector was only possible when, starting in the late 1990s, state-owned firms were shut down or privatized. The shutdown of loss-making state-owned firms released resources that were more profitably employed by private firms. Privatizing state-owned firms may have raised their productivity by more closely aligning control and cash-flow rights. The industrial revolution in China is thus nothing more than the triumph of "Markets over Mao," to quote the title of a recent book by Nicholas Lardy (2014).

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Another view is that China's growth was driven by "state capitalism." Advocates of the role of state capitalism point out that although many state-owned firms were closed or privatized, the remaining state-owned firms are among the largest firms in China today. For example, 67 of the 69 Chinese companies in Fortune's 2014 list of the 500 largest companies in the world are state-owned. One can also point to the experience of specific state-owned companies. Consider, for example, the experience of the Baoshan Steel Company. Baoshan, a large steel manufacturer in Shanghai, became a publicly traded company in 2000. (1) The controlling share (75 percent) is held by a holding company (the BaoSteel Group) wholly owned by the Chinese central government. (2) Baoshan has done very well since the late 1990s. Total sales increased from USD 3.7 billion in 2000 to USD 23.1 billion by 2007. Profits increased by even more, from USD 527 million in 2000 to USD 2.2 billion by 2007. Baoshan is currently the largest steel producer in China and one of the largest steel producers in the world. (3) The experience of Baoshan is an example of how state-owned firms have changed. Such firms, which are among the largest companies in China today, have typically been partially privatized but always with a controlling share held by a large state-owned conglomerate. The term used in China for this ownership change is that large state-owned firms were "corporatized," not privatized. Furthermore, there is a widespread perception that such firms have been enormously successful, perhaps even too successful. For example, a new popular phrase in China is guo jin min tui, which translates roughly as "the state advances, the private sector retreats. …

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