Large private companies in China are growing faster than state-owned companies

A new study shows that government regulation cannot stop the progress of the Chinese private sector. The largest private companies are developing faster than their state-owned competitors

This article is available to in partnership with China.Table Professional Briefing – China.Table first published it on July 21, 2022.

Chinese private companies had to accept many regulatory restrictions in 2021. Tech giants such as Alipay and Didi have been put in their place. Most of the new rules made sense because the goal was to prevent monopolies and cartels. In the real estate sector, they should ensure that companies do not become over-indebted and that they create affordable housing. However, the implementation methods were strict. And without any serious debate from civil society, companies faced the new rules of the game almost overnight. The IPO had to be canceled and appeals were initially ruled out. Many observers saw these measures as part of a new trend towards more state power in the economy, with the Xi Jinping era being identified with greater state domination.

However, the impression that the private sector in China is suppressed more than ever is misleading. In fact, a study by the Peterson Institute for International Economics (PIIE) shows the opposite: China’s largest private companies are growing faster than state-owned companies.

In absolute terms, as well as in terms of revenues or, in the case of publicly traded companies, market value, private companies have increased significantly since Xi Jinping took office in 2011 – although the state sector remains dominant.

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Private sector development is progressing

The Peterson Institute analyzed the revenues of Chinese Fortune Global 500 companies and the largest companies in terms of market capitalization. The turnover of private Chinese companies in 2011 amounted to 104 billion dollars, respectively. This is less than four percent of the turnover of all companies from the People’s Republic of Poland – state-owned companies have the largest share. Ten years later, private sector turnover grew to 19 percent of total turnover.

When it comes to the market value of the largest listed companies, the share of the private sector in the 100 largest Chinese listed companies was only 8% at the end of 2010, but in 2020 it exceeded 50%. In 2021, the value dropped only slightly to 48%. due to government regulations. So the argument that the private sector should be prevented from expanding is hard to defend, given the numbers.

Also, the relative proportion of state-controlled companies through majority or minority ownership has declined significantly over the past decade. What is often referred to as a state-owned enterprise in China is not necessarily wholly or even largely owned by the Chinese state, as the authors of the Peterson study emphasize.

Many state-owned enterprises are joint ventures between state and private owners. They are somewhere between the state and the private, and it is very difficult to decide whether they are state or private. In the automotive industry, for example, large manufacturers have long had joint ventures in which they only owned 49 percent, but these companies operated largely on a free-market basis. Another special case: SOEs list the subsidiaries that set the tone for everyday life.

State-owned enterprises should become “stronger, better, bigger”.

China’s economy has grown spectacularly since the beginning of reforms and opening up in the late 1970s, with the lion’s share of expansion coming from private sector dynamics. While Fortune ranked only 15 Chinese companies in 2005, there were 130 in 2021.

The advancement of the private sector in major Chinese companies does not appear to be the result of long-term planning or top-down decisions, but rather of bottom-up dynamics. The largest Chinese companies have hardly been privatized, and the state has made no efforts to give the private sector a comparative advantage. On the contrary, President Xi Jinping declared in 2016 that state-owned enterprises must become “stronger, better and bigger” while promoting the private sector.

Xi’s Demand: Chinese state-owned enterprises must prove themselves in the private sector environment and survive in international business: One such example is the state-owned port operator China Merchants Ports. It handles 30 percent. ports in China and 68 ports in 27 countries. This includes the largest port in Brazil and the largest port in Africa, currently under construction in Tanzania. However, China Merchant Ports also has stakes in the US ports of Houston and Miami or in the ports of France of Le Havre and Marseille.

In general, private companies are more dynamic and profitable than those from the public sector. However, the exceptions among state-owned enterprises should not be underestimated. The big trend is what Chinese scholar Nicholas R. Lardy has described as “the crowding out of state-owned enterprises by private firms,” ​​and he aptly summarized it in his book Markets Over Mao more than ten years ago.

Party goals in private companies

What is remarkable about China, however, is that private companies have introduced the creation of CP cells. Here, too, the consequences are ambivalent. The party secretary can use his contacts to help a private company cope better by lobbying the state. But he can also patronize leadership and put obstacles to it. The numbers suggest that this is the exception rather than the rule. The annoying thing is that party officials even have a legal opportunity to operate in private companies.

The engine of the great privatization trend is simple. China wants to become a global economic power, and this is only possible with internationally competitive companies. This is especially true of the internet and e-commerce, electronics, electric cars, batteries, steel, consumer goods and services, pharmaceutical companies and life sciences. Some of China’s largest construction companies are also privately owned, although the real estate sector has recently hit financial difficulties with Evergrande and other players. On the other hand, financial services, telecommunications, energy and transport are still dominated by state-owned enterprises.

However, the growth of large firms in state-dominated sectors has been relatively slower. As measured by market value, some large telecommunications and energy companies have actually depreciated in absolute terms. They were overtaken by private companies.

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