In neoclassical economics, it is assumed that private firms incentivized purely by profit maximization constitute the pillars of the economic system. State ownership and state intervention in the economy is permitted only in the case of a market failure (e.g., externalities, monopoly, information asymmetries), and SOEs are an exception to private ownership. By contrast, state ownership is the historical default in China; it is the very basis of communism, which originally aimed to abolish private property. This is also reflected in the Chinese name of the Chinese Communist Party (CCP) “共 产 党”, which directly translates to “The Shared Production Party”, stressing the importance of public ownership. The reform and opening up policy initiated by Deng Xiaoping in 1978 started China’s transition away from an almost 100%
state-owned economy towards “socialism with Chinese Characteristics” and “the socialist market economy”.5 Deng allowed private and foreign competition in selected downstream and light industry sectors, where the competition was deemed to contribute to the CCP’s economic and social development goals. China did not go through the rapid and disruptive privatization of its state industry that was seen in formerly socialist countries in central and eastern Europe (Liu
& Green, 2005; Murrell, 1993; Zeng, 2010). In fact, changes to property rights in the Chinese state sector were first realized in mid 1990s; gradual and incremental reforms in the state sector have been the trend (Bai et al., 2006).
In the 1980s, SOEs were still providing social services to state workers and the so-called “Iron Rice Bowl” (铁饭碗) remained dominant for public employees (Leung, 1994). SOE reforms
5 The term “socialist market economy” was introduced by Jiang Zemin during the 14th National Congress of the Communist Party of China in 1992: “The objective of the reform of the economic structure will be to establish a socialist market economy that will further liberate and expand the productive forces. The socialist market economy is a component part of the basic system of socialism” (CCP, 1992)
42 were kicked off with the dissociation of a limited number of SOEs from the government and the widespread introduction of the industrial contract responsibility system (R. Li & Cheong, 2019, p. 49). In 1987, the contract responsibility system, under which managers were allowed to share part of the SOE’s profits, covered 93% of all SOEs (Huang, 1999, p. 99). Simultaneously, the state motivated the introduction of a joint-ownership system to SOEs. In 1990 and 1991 respectively, the Shanghai and Shenzhen Stock Exchanges were founded, which presented the first opportunity for SOEs to become listed in China. In 1993, the Third Plenary Session of the 14th National Congress announced that SOEs would be legal entities in a “modern enterprise system”. This marked the formalization of the socialist market economy: gradually, market economic principles would be decoupled from capitalism, and instead presented as objective economic laws governing both the “socialist market economy” and liberal market economic systems. This included the idea of mixing planning and market:
The proportion of planning to market forces is not the essential difference between socialism and capitalism. A planned economy is not equivalent to socialism, because there is planning under capitalism too; a market economy is not capitalism, because there are markets under socialism too. Planning and market forces are both means of controlling economic activity.6 (Deng Xiaoping at his Southern Tour in 1992 cited in CCP, 2017b).
In 1997, the 15th Party Congress took this a step further by enshrining private ownership as a key element in China’s economy. It also gave a green light to the corporatization of SOEs by endorsing ownership diversification policies under on Premier Zhu Rongji’s “grasping the large, releasing the small” (抓大放小) campaign, which effectively laid off around 30 million state-employed workers (Cai, 2002; Gan et al., 2018: 9). In 2002, the Party sent a strong pro-market signal when it amended its constitution to invite private entrepreneurs to join the Party. In 2005, the China Securities Regulatory Commission (CSRC) allowed state enterprises listed on China’s stock exchanges to set up equity incentive plans for enterprise management – albeit under stringent conditions (Ran & Cheok, 2016, p. 249). A year later, the government announced that the system with separate tradable and non-tradable shares for SOEs would be phased out, further narrowing the gap between privately-owned enterprises (POEs) and SOEs in terms of corporate structure and registration. The creation of State-owned Assets Supervision and Administration
6 Original text: 计划多一点还是市场多一点，不是社会主义与资本主义的本质区别。计划经济不等于社会主
义，资本主义也有计划；市场经济不等于资本主义，社会主义也有市场。计划和市场都是经济手段。
43 Commission (SASACs) in 2003 came with a mandate to preserve and increase state-owned assets through continued corporatization, consolidation of SOEs into larger units and business groups, and institutionalization of state–SOE relations (see Article 2). As of 2017, about 93% of the 124966 SOEs reporting within the SASAC system are corporatized entities, including many with mixed-ownership structures (SASAC, 2016).
Despite these large changes in the governance, functions and corporate structures of SOEs, their special position in China’s economy and politics remains constant. At the beginning of the Xi Jinping era, the decision of the Third Plenary Session of the 18th Central Committee meeting of the CCP in 2013 reflected this by vowing to uphold the direction of reform towards the
“socialist market economy” (CCP & People’s Daily, 2014). SOEs in contemporary China span the two elements of “socialist” and “market” in the “socialist market economy”, and reflect the history of gradual and selective opening of downstream sectors to private competition. SOEs are ultimately owned by and serve the Party-state, but they nevertheless operate in a market context.
Current SOE reforms as laid out since 2013 focus on further regulatory reforms, property rights reform, and operational reforms (see Article 1 and NDRC and SASAC, 2015; State Council, 2015a, 2015b, 2017, 2018). At the regulatory level, reforms emphasize classified and tier supervision as well as the establishment of state-owned capital investment companies, implying a shift in the government’s role from a manager that oversees daily operations to a shareholder that focuses on investment returns (SASAC, 2017b). At the level of property rights, mixed ownership and securitization of state-owned assets are promoted (State Council, 2015b). Finally, at the operational level, the reforms aim to establish a hybrid corporate governance system that combines international standards for corporate governance with stronger Party leadership (CCP, 2017a, 2020). Taken together, the emerging system can be described as Party-led state capitalism (Blanchette, 2020; Naughton & Tsai, 2015, p. 10). Some of the key features of this model include (only some of the items in the list are unpacked and analyzed in the dissertation):
Direct and absolute central control over key upstream industries such as oil and gas, defense industry, telecommunications, defense and finance. This is combined with continued –and sometimes increased – state ownership in pillar industries such as auto-making, steel production, pharmaceuticals, manufacture of general and special purpose machinery, and manufacture of communication equipment, computers etc.
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Strong Party control over SOE personnel. This is organized through personnel control mechanisms and enterprise Party organizations creating a hybrid Party-led model of corporate governance (see Article 4). In practice, “State control” means Party control and intertwined state, Party and business hierarchies.
A system of economic organization that relies on market incentives. Large parts of the economy operate on a market basis in which private companies compete fiercely among themselves, and often with foreign multinational corporations as well. This is a kind of capitalism, not just a “planned economy in disguise” (Naughton & Tsai, 2015, p. 18).
Local variety in state capitalism and industrial policy implementation. China’s central industrial policy is often not clearly formulated and thus subject to interpretation and implementation (see Article 2). Local government levels selectively implement industrial policy by engaging SOEs under their control, and by providing subsidies, tax incentives and land fitting to their specific interests.
State control over the financial sector. State-owned banks remain dominant despite a recent opening of the financial sector and equity markets. For example, in 2018 the state controlled about 30% of all mainland-listed companies, which constituted more than 60% of total market capitalization (Article 3; see also NBS, 2018; CSMAR data).
The investor state. The creation of an investor state begins with the establishment of state-owned capital investment companies whose operations are strongly influenced by Party and government policy priorities. This marks a shift in the government’s role: from a manager that oversees daily operations to a shareholder that focuses on investment returns (Chen & Rithmire, 2020).
Government-linked economic actors enjoy benefits. This goes for preferential access to loans, subsidies and licenses, both also shows up in the welfare regime, where state workers continue to enjoy special welfare benefits (see discussion of mixed-ownership reforms in Article 1).
The Party-led state capitalist model mixes traditional taxonomies in new ways: “systems of ownership” (private vs. state) and “systems of economic organization” (planning vs. market) are increasing blending together (Lindblom, 1980). The shift from a planned authority system to a market authority system did not lead to a similar change in ownership systems. Barry Naughton (1995) refers to the process of change in economic organization in China as “growing out of plan”. This is not to say that China has left planned economics behind. The workings of the
45 National Development and Reform Commission (NDRC), China’s industrial policy plans, and the five-year plan system, are all good examples of the continued importance of planning in China. The transition from state planning to market coordination has been more extensive than the one from state ownership to private ownership (see Figure 2.1).
Figure 2.1: Illustration of China’s reform path using Lindblom’s taxonomy
Source: author’s illustration based on ideas in Lindblom (1980).