Just How Powerful Are China’s State-Owned Firms?

The Wall Street Journal’s China Real Time Report blog looks at a new report from the U.S.-China Economic and Security Review Commission, which estimates that fully half of China’s GDP comes from state-owned enterprises, despite a common perception that the Chinese economy is already primarily market-oriented:

State-owned firms, the report argues, help Beijing pursue a buy-China procurement strategy, which sometimes excludes foreign firms from important development projects or require them to hand over important technology. Those practices are helping China build an aviation industry capable of competing with Boeing and Airbus, the report says. The firms can compete unfairly internationally, according to the report, because they can get below-market interest rates from state owned banks, favorable tax treatments and capital injections if they run into trouble.

The China commission, which is widely viewed as taking a hawkish attitude toward China, plays an important role in shaping congressional opinion. The Chinese government often contests its conclusions.

China expert Nicholas Lardy of the Peterson Institute of International Economics, says the report greatly overstates the role of state-owned firms, which he calculates as accounting for somewhat less than 30% of China’s economy.

But Brookings Institution China scholar Eswar Prasad says the commission report’s conclusions are plausible. “The definitional issues — figuring out whether a company is in fact owned by the state (or if the state has control through its ownership share) — is a tricky business,” he wrote in an e-mail. Mr. Prasad said that “effective state control of the economy” is probably higher than 50% of GDP because, for instance, China can use bank lending by state-owned banks to control firms ‘that are in principle privately owned.”

Read the full report from the U.S.-China Economic and Security Review Commission, titled “An Analysis of State-owned Enterprises and State Capitalism in China” (PDF).


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