Astate-owned enterpriseof the People's Republic of China (Chinese: 国有企业) is a legal entity that undertakescommercial activities on behalf of an ownergovernment.
As of 2017[update], thePeople's Republic of China has morestate-owned enterprises (SOEs) than any other country, and the most SOEs among large national companies.[1]: 137 As of the end of 2019, China's SOEs represented 4.5% of the global economy[2] and the total assets of all China's SOEs, including those operating in the financial sector, reached US$78.08 trillion.[3]
State-owned enterprises accounted for over 60% of China'smarket capitalization in 2019[4] and estimates suggest that they generated about 23-28% of China'sGDP in 2017 and employ between 5% and 16% of the workforce.[5] Ninety-one (91) of these SOEs belong to the 2020Fortune Global 500 companies.[6] Almost 867,000 enterprises have a degree ofstate ownership, according toFranklin Allen ofImperial College London.[7]
The role of theChinese Communist Party (CCP) in SOEs has varied at different periods but has increased during thegeneral secretaryship of Xi Jinping, with the CCP formally taking a commanding role in all SOEs as of 2020.[8][9]
The state sector is a major part of China's economy, with SOEs accounting for approximately 25% of the national GDP as of 2020.[10]: 6 China's SOEs are among the largest global firms by revenue, and of the 135 Chinese companies on theFortune Global 500 list (2023), 85 are state-owned.[10]: 6–7 SOEs are important to domestic equity markets, accounting for about 40% of total market capitalization and 50% of company revenues on theShanghai Stock Exchange andShenzhen Stock Exchange.[10]: 6
When China's SOEs were first created, they served as instruments for carrying out national goals and providing social stability via theiron rice bowl.[11] Through thedanwei system, SOEs provided workers with housing, amenities, and social welfare benefits, functioning as communities where employees worked, lived, and socialized.[12]: 196 Through this system, which existed until the late 1990s, urban SOE workers had higher levels of social welfare benefits as compared to other workers.[12]: 283 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.[12]: 283
SOEs continue to support stability through providing employment and maintaining low prices for key economic inputs.[10]: 8 SOEs spend much of their investment on infrastructure development in China's less developed interior provinces, and therefore also perform aredistributive role.[10]
SOEs support China's industrial policy by channeling resources into sectors that the state regards as key, like artificial intelligence, nuclear power, and aerospace.[10]: 8 The work of SOEs helps China to move up the industrialvalue chain.[10]: 155 Foreign business of SOEs also helps to address excess industrial capacity in China.[10]: 155
SOEs have monopolies in the industries oftelecommunications, military equipment,railroads, tobacco,petroleum, andelectric power.[13]: 62 SOEs have a primary role inChina's energy sector.[14] Its five large state-owned power generation companies are:Datang,Guodian,Huadian,Huaneng, andChina Power Investment Corporation.[15] Its state-owned grid companies areState Grid Corporation of China (SGCC) andChina Southern Power Grid Corporation.[16]
MostChinese universities are SOEs.[17]
SOEs are important to major government initiatives including thetargeted poverty alleviation campaign,Made in China 2025, and theBelt and Road Initiative.[10]: 8–9 China's SOEs are at the forefront of global seaport construction, and most new ports built by them are part of the BRI.[18] State-owned banks are important sources of funding for port construction.[19] Large overseas projects by SOEs can also be politically important toChina's international relations.[10]: 156
SOEs that compete in the market are largely owned by provincial or sub-provincial governments.[20] A significant cluster of these SOEs are joint ventures with foreign companies in theautomotive industry.[20]
In addition to their own operations, SOEs invest in private enterprises.[21] 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.[22] Sometimes in investing in private enterprises, SOEs acquire enough shares to nationalize them.[23] Over the period 2018–2020, 109 publicly traded enterprises with more than $100 billion in collective total assets were nationalized in this way.[23]
China's SOEs have historically provided most of its outboundforeign direct investment.[10]: 155 Outbound FDI from SOEs have benefitted from policy support including export buyers' credits and concessional loans frompolicy banks.[10]: 155
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.[24] 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."[25]
Financial performance of SOEs was not a major concern untilChina's reform era.[26] With the exception of a small number of national monopolies, SOEs compete in the market as privately enterprises do.[27] 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.[28]: 7 Although China's SOEs seek to make profits, they do not necessarily seek to maximize them.[10]: 7 Academic Wendy Leutert describes them as frequently behaving as "'asset maximizers' rather than 'profit maximizers'."[10]: 7
When China'sNationalist government controllednortheast China from 1946 to 1948 after the end of theSecond Sino-Japanese War, it restructured formerly Japanese enterprises into SOEs.[12]: 6–7 It also confiscated the enterprises of puppet states, such as theWang Jingwei regime.[12]: 71 Most of these enterprises were re-organized into theNational Resources Commission, China Textile Construction Company, and China Merchants Steam Navigation Company.[12]: 71
After the war, the Nationalist government focused on industrial reconstruction inManchuria.[12]: 95 As a result, it many SOEs in inland China were privatized, transferred to local governments, or shut down.[12]: 95
Following the CCP victory in theChinese Civil War, one of the party's early steps was to nationalize enterprises that the defeatedNationalists had controlled.[29]
At thefounding of the People's Republic of China, 27.8% of the country's industrial output came from SOEs.[12]: 7 Over the 1950s, the government gradually restructured the industry under state ownership.[12]: 7 By 1956, SOEs produced more than 80% of China's industrial output.[12]: 7
In the early years of the PRC, the Manchuria region had the highest concentration of SOEs.[12]: 101 These were prominent in the PRC heavy industry-focused method of "socialist industrialization" (a term adopted from the Soviets).[12]: 101
The policy trend from the early to mid-1950s was to centralize control over SOEs.[12]: 169 SOEs were generally within the authority of central government industrial ministries during theFirst Five-Year Plan period of 1953–1957.[12]: 238 Proponents of centralizing authority over SOEs includedGao Gang.[12]: 169
During theGreat Leap Forward, control of SOEs was largely decentralized, with control being transferred to local governments instead of the central government.[12]: 231 This process of decentralization also significantly increased the power of local CCP organizations.[12]: 238
During theThird 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.[30]
During theCultural Revolution, significant amounts of authority over national SOEs was transferred to local CCPcadres andPeople's Liberation Army officials.[12]: 25 Among the major SOEs transferred to local control during this period wereDaqing Oil Field, Changchun Auto Manufacturing, andAnshan Iron and Steel.[12]: 255
The period from 1978 to 1991 was characterized by "deal track" economic reform of SOEs.[10]: 68–69 The relationship between the state and SOEs shifted from central command to strategic bargaining.[10]: 69 SOE leaders were significant in experimentation with reform policies and could negotiate with their administrative superiors on various matters, including production targets and budgets.[10]: 69
Beginning the late 1970s, SOEs became allowed to pay bonuses to workers.[13]: 10
As a response to the return ofSent-down youth, SOEs in the late 1970s and 1980s often started collectively-owned enterprises to create employment opportunities for the family of SOE workers.[12]: 283 This approach to providing jobs was particularly common innortheast China.[12]: 283
UnderDeng Xiaoping's leadership, the trend towards localizing authority over SOEs was reversed, and SOE management was again centralized.[12]: 260 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.[12]: 275 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.[12]: 275
Beginning in the early 1980s, the central government began to develop multi-regional "general companies" which became the predecessors of central SOEs andnational champions.[10]: 38, 45
In 1984, theState Council issued a directive to expand the autonomy of SOEs.[31] SOEs were also allowed to sell surplus goods on the market once they had met their quotas.[31] 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.[13]: 10 Rather than requiring SOEs to remit profits to the state, SOEs were instead subjected toincome tax.[10]: 44 Implementation of this policy was hampered by political contentions and too-hasty introduction.[10]: 44–45 Following adoption of "substituting taxes for profits", SOE profits declined for 22 consecutive months.[10]: 44–45
After the failure of the tax-for-profit approach, China implemented its Contract Responsibility System which remained in place until the middle 1990s.[12]: 273 Through this system, SOEs submitted an amount of their profit to the state per their contracts with the state, but could keep remaining profits.[12]: 273 This was intended to increase the managerial autonomy of SOEs without privatizing their ownership.[12]: 273
Increased diplomatic openness in the 1980s and 1990s helped SOEs to negotiate better trade terms.[12]: 271
Beginning in 1991, policymakers introduced the concept of enterprise groups, initially piloting the idea with 57 SOEs.[12]: 281 Through this organizational approach, a large SOE or a cluster of SOEs was re-organized into an enterprise group through which a parent company controlled various subsidiaries.[12]: 281 SOEs in enterprise groups separated profit-making assets into subsidiaries which could be listed on China's stock markets, thereby introducing private capital without eliminating state control and ownership.[12]: 281 Non-profit making assets and social welfare assets (like schools, housing, and hospitals) were either kept by the parent enterprise or transferred to local governments.[12]: 281 Housing assets were often then sold to SOE employees at below-market prices.[12]: 281 By May 1997, 120 SOEs (accounting for approximately 25% of SOE assets in the China) had been organized into enterprise groups.[12]: 281
With the goal of boosting innovation and efficiency, more than half of China's largest SOEs had established technical development centers by 1993.[14] The same year, the CCP issued its "Decision on Issues Related to the Establishment of aSocialist Market Economy System."[32] In the wave of reform thereafter, one goal was to separate SOE management from government and to empower a select group of SOEs with special property rights and autonomy.[32] The principles of the socialist market economy also legitimized the idea that ownership of SOEs could be structured in various forms, including majority state-owned joint stock companies.[10]: 48 In 1994, three of the largest industrial firms were selected for a pilot program of restructuring as state holding companies, thereby enabling partial public listings of their subsidiaries' assets:Sinopec,Aviation Industry Corporation of China (AVIC), andChina Nonferrous Metals Industry Group.[10]: 49
The1994 Company Law provided restructuring guidelines for SOEs, such as SOEs adopting more corporate structures like shareholding and limited liability, procedures for paying dividends, establishing subsidies, and bankruptcy.[33]: 31 The law stated that the government would continue to make supervisory appointments for SOEs and provided that workers would be consulted.[33]: 32 Some smaller SOEs sold their shares to workers and management, therefore making them privately owned.[33]: 31–32
Consistent withCCP general secretaryJiang Zemin andChinese premierZhu Rongji's strategy ofgrasping the large, letting go of the small, major SOE reform occurred in 1997,[32] which represented a change from the previously incremental reform efforts.[34] The state was encouraged to preserve large SOEs and to allow weaker ones to be "let go" through closing or consolidating.[35] Through "grasping the large", the state focused on developing a core group of large SOEs in strategically important fields deemed as part of thecommanding heights of the economy.[10]: 53 There was significant privatization of the smaller SOEs.[12]: 280–281 Privatization occurred gradually and selectively.[12]: 283
Other major policies that were part of the 1997 reforms included management and employee buyouts and the inclusion of foreign strategic partners.[34] Between 1997 and 1998, the number of industrial SOEs decreased by over 41%.[12]: 280
In 1998, the restructuring of the State Council resulted in the dissolution of the State Assets Administration Bureau, which had overseen central state-owned assets.[10]: 58 This began a period when an increased number of government and CCP bodies were involved in supervising SOEs.[10]: 58
In the late 1990s, layoffs from SOEs (sometimes without the promised compensation or pensions to those laid off) led to workerprotests.[12]: 283
With regard to SOEs, Jiang emphasized the need for goodcorporate governance.[10]: 56 In 1999, theDecision of the CPC Central Committee on Several Major Issues Concerning the Reform and Development of SOEs stated that all restructured SOEs must "clarify the responsibilities of the shareholders' meeting, the board of directors, the board of supervisors, and the management to form a corporate governance structure, with each assuming responsibility, coordinated operations, and effective checks and balances".[10]: 56
In the early 2000s, Jiang and Zhu's administration sought for large industrial SOEs to repackage assets for public listings.[10]: 55 This involved separating core production functions of the SOEs from the noncore business and social welfare functions, and putting the production functions into subsidiaries which could be publicly listed as joint stock companies.[10]: 55
The general trend since 2000 has been for SOEs to increase in importance consistent with a broader resurgence of state activity in the market.[36] SOE mergers have been routine since 2000.[37]
Beginning in 2003 withHu Jintao'sadministration, the Chinese government increasingly funded SOE consolidation, supplying massive subsidies and favoring SOEs from a regulatory standpoint.[38] These efforts helped SOEs to crowd out foreign and domesticprivate sector competitors.[38]
Hu and PremierWen Jiabao created SASAC in 2003 to oversee the 189 central SOEs that existed at the time.[10]: 59 This ended the fragmentation of authority over state assets, which had increased after the dissolution of the State Assets Administration Bureau in 1998.[10]: 57–59
As part ofChina Western Development program, China's five large state-ownedhydropower companies planned, underwrote, and built the majority of dams on the river and its tributaries.[39]
On 12 August 2005, the State Council released theOpinions on Encouraging, Supporting, and Guiding the Development of Individual Businesses, Private Firms, and Other Parts of the Non-State Economy (commonly known as the 36 Articles).[33]: 46 The 36 Articles characterized the state-owned economy as the country's "mainstay" while stating that the private sector should also be guided and developed.[33]: 46–47 The 36 Articles also established the principle of equal treatment for state-owned enterprises and private enterprises in areas where both could operate, although many of these reforms were not thoroughly implemented.[33]: 47–48
Beginning in 2007, central government SOEs were required to provide to the central government a portion of their capital income, stock dividends, property transfer income, enterprise liquidated income, and other state-owned capital income.[13]: 48
SOEs were major beneficiaries of China's stimulus program following theGreat Recession, which began a period where the private sector withdrew and the state-owned sector expanded.[40]
Overall, China's focus on SOEs during the Xi era have demonstrated a commitment to using SOEs to serve non-market objectives and increasing CCP control of SOEs[41] while taking some limited steps towards market liberalization, such as increasing mixed (state and private) ownership of SOEs.[42] Along with increased mergers, promotion of mixed ownership, and management of state capital have continued; results have been mixed.[42] Transitioning solely state-owned enterprises to a mixed ownership was announced in 2013 at the18th Central Committee of the Chinese Communist Party and re-affirmed by the19th Party Congress.[43] Acting on this announcement, in 2014 SASAC launched national level pilot programs for mixed ownership reform; the results were mixed.[10]: 63
The pace of SOE mergers has increased under CCP General SecretaryXi Jinping.[37] The goals of China's current SOE mergers include an effort to create larger and more competitive national champions with a bigger global market share by reducing price competition among SOEs abroad and increasing vertical integration.[37]
Central SOEs were investigated as part ofXi's anti-corruption campaign.[10]: 66 TheCentral Commission for Discipline Inspection began inspections of two central SOEs in 2013, ten in 2014, 43 in 2015, 42 (and SASAC itself) in 2019, and 27 central SOEs in 2023.[10]: 63 From the beginning of the campaign through 2017, twelve top executives of core central SOEs were removed from office based on corruption charges.[10]: 63
In 2014, the Fourth Plenum of the 18th Central Committee announced "lifelong accountability" for major operational and investment decisions made by top officials in the public sector.[10]: 67 The State Council established a lifelong accountability system for SOE leaders in 2016.[10]: 67 Through this system, any SOE leader who violates regulations, causes the loss of state assets or causes other "serious adverse consequences" may be held legally liable for their lifetime.[10]: 67
On 1 January 2015, theCCP Politburo issued its SOE Executive Compensation Reform Plan, which instituted a "pay ceiling order" that in some instances cut the pay of SOE heads by 50%.[10]: 13
The2015 stock market turbulence and rising concerns about the security implications of relying on foreign technology led theXi administration to increase its commitment to SOEs.[10]: 62
Following an August 2015 directive, SOEs' articles of association are required to specify the leading role of CCP organizations in their firms.[44]: 80 The 2015 directive also increases the importance of party organizations within SOEs by requiring that theCCP committee secretary and the chair of the board must be the same person.[44]: 80
According to Xi, "[T]he dominant role of state ownership cannot be changed, and the leading role of the state-economy cannot be changed."[38] InXi Jinping Thought, the historical importance of state-owned enterprises is highlighted:[38]
[W]ithout the important material foundation that state-owned enterprises have laid for China's development over a long period of time, without the major innovations and key core technologies achieved by state-owned enterprises, and without state-owned enterprises' long-term commitment to a large number of social responsibilities, there would be no economic independence and national security for China, no continuous improvement in people's lives, and no socialist China standing tall in the East of the world.
Xi Jinping Thought also emphasizes the role of SOEs as part of the dominant position of state ownership necessary forcommon prosperity.[45]
Lai Xiaomin, the former president of state-ownedChina Huarong Asset Management announced in 2015 that during the operation of China Huarong Asset Management, the embedded CCPcommittee will play a central role, and party members will play an exemplary role.[46] As Jin et al. wrote in 2022,[47]
The overarching principle of SOE reform is to firmly implement the Party's leadership and the modern enterprise system. This principle creates a political governance system in China's SOEs—a Party-dominated governance system characterized by Party leadership, state ownership, Party cadre management, Party participation in corporate decision-making, and intra-Party supervision.
Xi emphasizes the leadership function of the CCP in SOEs and states that SOEs must make the party their "political core".[10]: 66 He emphasizes the importance of CCP branches within SOEs.[33]: 113 CCP branches within China's SOEs are the governing bodies which make important decisions and inculcateits ideology.[48] In 2019, a CCP rule required SOE articles of association to require that major decisions must be discussed by the SOE's party committee before they are considered by management or by the board of directors.[44]: 80
Since 2020, SOEs have been directed to hire more recent university graduates in order to reduce youth unemployment.[10]: 156
In 2023, multiple state-owned enterprises, includingShanghai Municipal Investment Group, established internalPeople's Armed Forces Departments run by thePeople's Liberation Army.[49][50][51] They are expected "to work together with grassroots organizations to collect intelligence and information, dissolve and/or eliminate security concerns at the budding stage," according to thePeople's Liberation Army Daily.[50]
In 2024, the Chinese government announced SOE management would be assessed based on stock market performance.[52]
Central SOEs (中央国有企业) are non-financial sector companies owned by the central government and administered through SASAC.[10]: 10 These are the central SOEs which cover industries deemed most significant to the national economy,[28]: 6 such as those in the defense, telecommunications, petroleum, or electricity industries.[10]: 10 Central SOEs are further categorized based on their size and strategic importance.[10]: 10 "Core" enterprises described as "important backbone SOEs" include enterprises such asChina Mobile,State Grid, andSinopec.[10]: 10
The directors of the central SOEs overseen by SASAC are appointed through thecadre system.[12]: 302 The directors of the 50 largest are appointed directly by theParty's Central Committee and are equivalent in rank to ministers or vice ministers.[12]: 302 Leaders of core central SOEs are assessed by theOrganization Department of the CCP.[10]: 10 SASAC appoints the heads of non-core central SOEs.[10]: 13 The heads of non-core central SOEs have departmental-level rank.[10]: 11 Although central SOE heads have rank equivalents, they are notcivil servants.[10]: 11
The position of Chairman is typically the highest authority in a central SOE.[10]: 75 Typically, a single person at the SOE holds both the title of Chairman andCCP Committee Secretary.[10]: 75
SASAC establishes yearly metrics for evaluating SOE leadership, such as operating revenue, profits,economic value added (EAV), and total new contract value.[10]: 13
Central SOEs are primarily structured as enterprise groups.[10]: 10
As of 2017, central SOEs held RMB 6 trillion (USD 904 billion) in assets in more than 185 countries.[10]: 155
As of 2023[update],SASAC oversees 98 central SOEs.[12]: 302 Companies directly supervised by SASAC have been reduced and consolidated through mergers according to the state-owned enterprise restructuring plan with the number of SASAC companies down from over 150 in 2008.[53]
Governments below the national level operate portfolios of SOEs which operate both domestically and abroad.[54] These SOEs are much more numerous than central SOEs, but each is smaller.[10]: 10 Examples of regional or local SOEs include:
As of 2019[update]
According to Chinese media, units have been established this year in at least 23 SOEs nationwide, nine of them in Wuhan.
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