Why have Chinese State Owned Enterprises (SOEs) stayed so big and, in many cases, gotten bigger in recent years? Work from Jim Huangnan Shen from the University of London, School of Oriental and African Studies (et. al.) clarifies some notions that were, until this work, mostly anecdotal.
From around 1998 the Chinese government initiated a policy of SOE consolidation and the number of SOEs declined rapidly from that time in a process meant ‘to invigorate large enterprises and let go small ones’. But along the way the big got bigger and as a result their political clout also increased. Three factors explain this apparently counter-reform result.
First, there’s the role of managers in the larger groups. Their overall benefits increase in line with their firm’s profitability; and the bigger the firms the bigger the payoffs.
Second, the tax benefits for the government of fostering large, profitable businesses are compelling. This may have become especially handy after the 2008 GFC when China committed to a Rmb4trn spending package and found itself in need of funds suddenly.
Finally, the employment benefits of large enterprises have also been too beneficial for government to ignore. Particularly the social stability effects of having so much labor gainfully employed.
The paper notes along the way the profitability of the larger SOEs hasn’t been so different from the private sector which is almost certainly another factor that’s contributed to their increase in scale.
My two pennyworth. The fact that the increasing scale of SOEs in recent years has occurred with such obvious benefit to both the government and society makes a case for their reform and/or containment very hard indeed now. They’re almost certainly crowding out private sector initiative but for as long as that second order effect hides from plain sight this is a process that’s beginning to look worryingly baked-in now.
You can access the paper in full via the following link Why Do Chinese SOEs Want To Get Bigger?
Happy Sunday.