A state-owned enterprise of the People's Republic of China (Chinese: 国有企业) is a legal entity that undertakes commercial activities on behalf of an owner government.
, the People's Republic of China has more state-owned enterprises (SOEs) than any other country, and the most SOEs among large national companies. As of the end of 2019, China's SOEs represented 4.5% of the global economy and the total assets of all China's SOEs, including those operating in the financial sector, reached US$78.08trillion.
State-owned enterprises accounted for over 60% of China's market capitalization in 2019 and estimates suggest that they generated about 23-28% of China's GDP in 2017 and employ between 5% and 16% of the workforce. Ninety-one (91) of these SOEs belong to the 2020 Fortune Global 500 companies. Almost 867,000 enterprises have a degree of state ownership, according to Franklin Allen of Imperial College London.
The role of the Chinese Communist Party (CCP) in SOEs has varied at different periods but has increased during the general secretaryship of Xi Jinping, with the CCP formally taking a commanding role in all SOEs as of 2020.
Role The state sector is a major part of China's economy, with SOEs accounting for approximately 25% of the national GDP as of 2020. China's SOEs are among the largest global firms by revenue, and of the 135 Chinese companies on the Fortune Global 500 list (2023), 85 are state-owned. SOEs are important to domestic equity markets, accounting for about 40% of total market capitalization and 50% of company revenues on the Shanghai Stock Exchange and Shenzhen Stock Exchange.
When China's SOEs were first created, they served as instruments for carrying out national goals and providing social stability via the iron rice bowl. Through the danwei system, SOEs provided workers with housing, amenities, and social welfare benefits, functioning as communities where employees worked, lived, and socialized. Through this system, which existed until the late 1990s, urban SOE workers had higher levels of social welfare benefits as compared to other workers. Workers in collectively owned enterprises (owned at local levels of government, such as county or village) did not have as a high a level of social welfare benefits.
SOEs continue to support stability through providing employment and maintaining low prices for key economic inputs. SOEs spend much of their investment on infrastructure development in China's less developed interior provinces, and therefore also perform a redistributive role.
SOEs support China's industrial policy by channeling resources into sectors that the state regards as key, like artificial intelligence, nuclear power, aerospace, and electric vehicles. The work of SOEs helps China to move up the industrial value chain. Foreign business of SOEs also helps to address excess industrial capacity in China.
SOEs have monopolies in the industries of telecommunications, military equipment, railroads, tobacco, petroleum, and electric power. SOEs have a primary role in China's energy sector. Its five large state-owned power generation companies are: Datang, Guodian, Huadian, Huaneng, and China Power Investment Corporation. Its state-owned grid companies are State Grid Corporation of China (SGCC) and China Southern Power Grid Corporation.
Most Chinese universities are SOEs.
SOEs are important to major government initiatives including the targeted poverty alleviation campaign, Made in China 2025, and the Belt and Road Initiative. China's SOEs are at the forefront of global seaport construction, and most new ports built by them are part of the BRI. State-owned banks are important sources of funding for port construction. Large overseas projects by SOEs can also be politically important to China's international relations.
SOEs that compete in the market are largely owned by provincial or sub-provincial governments. A significant cluster of these SOEs are joint ventures with foreign companies in the automotive industry.
In addition to their own operations, SOEs invest in private enterprises. From the perspective of these private enterprises, this form of partial state ownership is helpful in obtaining financing from banks, particularly as prompts banks to require less collateral. Sometimes in investing in private enterprises, SOEs acquire enough shares to nationalize them. Over the period 2018–2020, 109 publicly traded enterprises with more than $100 billion in collective total assets were nationalized in this way.
China's SOEs have historically provided most of its outbound foreign direct investment. Outbound FDI from SOEs have benefitted from policy support including export buyers' credits and concessional loans from policy banks.
SOEs help stabilize public finance, including through allowing the government to use assets as collateral to issue debt or to sell shares to balance budgets. According to academic Wendy Leutert, China's SOEs, "...contribute to central and local governments revenues through dividends and taxes, support urban employment, keep key input prices low, channel capital towards targeted industries and technologies, support sub-national redistribution to poorer interior and western provinces, and aid the state's response to natural disasters, financial crises and social instability."
Financial performance of SOEs was not a major concern until China's reform era. With the exception of a small number of national monopolies, SOEs compete in the market as privately enterprises do. State ownership does not prevent SOEs from seeking to make profits; rather they are incentivized to make profits to increase the value of the state's assets. Although China's SOEs seek to make profits, they do not necessarily seek to maximize them. Academic Wendy Leutert describes them as frequently behaving as "'asset maximizers' rather than 'profit maximizers'."
History of SOEs
Nationalist era Sun Yat-sen contended that China should develop state-owned firms and make the national industries of China into "a great trust owned by the Chinese people."
When China's Nationalist government controlled northeast China from 1946 to 1948 after the end of the Second Sino-Japanese War, it restructured formerly Japanese enterprises into SOEs. It also confiscated the enterprises of puppet states, such as the Wang Jingwei regime. Most of these enterprises were re-organized into the National Resources Commission, China Textile Construction Company, and China Merchants Steam Navigation Company.
After the war, the Nationalist government focused on industrial reconstruction in Manchuria. As a result, it many SOEs in inland China were privatized, transferred to local governments, or shut down.
Early People's Republic of China Following the CCP victory in the Chinese Civil War, one of the party's early steps was to nationalize enterprises that the defeated Nationalists had controlled. At the founding of the People's Republic of China, 27.8% of the country's industrial output came from SOEs. Over the 1950s, the government gradually restructured the industry under state ownership. By 1956, SOEs produced more than 80% of China's industrial output. In the early years of the PRC, the Manchuria region had the highest concentration of SOEs. These were prominent in the PRC heavy industry-focused method of "socialist industrialization" (a term adopted from the Soviets).
The policy trend from the early to mid-1950s was to centralize control over SOEs. SOEs were generally within the authority of central government industrial ministries during the First Five-Year Plan period of 1953–1957. Proponents of centralizing authority over SOEs included Gao Gang.
During the Great Leap Forward, control of SOEs was largely decentralized, with control being transferred to local governments instead of the central government. This process of decentralization also significantly increased the power of local CCP organizations.
During the Third Front campaign to develop heavy industry in China's interior regions, almost 400 state-owned enterprises were re-located from coastal cities to secret sites in the Chinese interior where they would be more protected in event of foreign invasion.
During the Cultural Revolution, significant amounts of authority over national SOEs was transferred to local CCP cadres and People's Liberation Army officials. Among the major SOEs transferred to local control during this period were Daqing Oil Field, Changchun Auto Manufacturing, and Anshan Iron and Steel.
Reform and opening up The period from 1978 to 1991 was characterized by "deal track" economic reform of SOEs. The relationship between the state and SOEs shifted from central command to strategic bargaining. SOE leaders were significant in experimentation with reform policies and could negotiate with their administrative superiors on various matters, including production targets and budgets.
Beginning the late 1970s, SOEs became allowed to pay bonuses to workers.
As a response to the return of Sent-down youth, SOEs in the late 1970s and 1980s often started collectively-owned enterprises to create employment opportunities for the family of SOE workers. This approach to providing jobs was particularly common in northeast China.
Under Deng Xiaoping's leadership, the trend towards localizing authority over SOEs was reversed, and SOE management was again centralized. The government sought to make SOEs more independent from local CCP authorities by strengthening the power of SOE directors relative to the party committees within enterprises. This approach, called "the director responsibility system under the party-committee leadership" was similar to the Soviet one-chief system of the early and middle 1950s.
Beginning in the early 1980s, the central government began to develop multi-regional "general companies" which became the predecessors of central SOEs and national champions.
In 1984, the State Council issued a directive to expand the autonomy of SOEs. SOEs were also allowed to sell surplus goods on the market once they had met their quotas. Through the reform of "substituting taxes for profits" (li gai shui) the government sought to give SOEs incentives to pursue profits, sought to reduce SOE dependence on the government, and sought to increase market competition. Rather than requiring SOEs to remit profits to the state, SOEs were instead subjected to income tax. Implementation of this policy was hampered by political contentions and too-hasty introduction. Following adoption of "substituting taxes for profits", SOE profits declined for 22 consecutive months.
Jiang Zemin administration
After the failure of the tax-for-profit approach, China implemented its Contract Responsibility System which remained in place until the middle 1990s. Through this system, SOEs submitted an amount of their profit to the state per their contracts with the state, but could keep remaining profits. This was intended to increase the managerial autonomy of SOEs without privatizing their ownership.
Increased diplomatic openness in the 1980s and 1990s helped SOEs to negotiate better trade terms.