State-Owned Enterprises in China

The role of government-owned companies in China's economy, how they were reformed, and the debate over their efficiency.

China’s economy mixes private businesses with powerful state-owned enterprises, or SOEs: companies owned and controlled by the government. They dominate key sectors such as banking, energy, telecommunications, railways and heavy industry.

Reform in the 1990s

Before reforms, SOEs employed a large share of urban workers and provided housing, health care and pensions to employees, sometimes called the “iron rice bowl”. Many were loss-making. In the late 1990s, under Premier Zhu Rongji, China restructured SOEs dramatically under a policy described as “grasp the large, let go of the small”. Large strategic firms were kept and strengthened, while many small and medium ones were sold, merged or closed. Tens of millions of SOE workers lost their jobs.

Today’s SOEs

Large central SOEs are overseen by a government body called the State-owned Assets Supervision and Administration Commission, or SASAC. Some, such as Sinopec, State Grid and China’s big state banks, are among the largest companies in the world by revenue. Local governments also own many companies.

The efficiency debate

Economists often find that SOEs are less productive and less profitable than private firms. Reasons include:

Soft budget constraints: SOEs can often rely on government support or cheap loans from state banks, reducing pressure to be efficient.
Political goals: SOEs may be asked to maintain employment or support policy aims rather than maximise profits.
Preferential access to credit that could otherwise go to more productive private firms.

Private firms generate a large share of China’s output, jobs and innovation, often summarised by the phrase that the private sector contributes about 60 percent of GDP and 80 percent of urban jobs.

The loan that goes to the wrong firm

A state bank has money to lend. A large SOE with an implicit government guarantee applies, as does a fast-growing private tech firm with no such guarantee. The bank may prefer the SOE because it seems safer, even if the private firm would use the money more productively. Economists argue this misallocation lowers overall growth.

Supporters’ view

Supporters argue SOEs help the government invest in infrastructure, maintain stability during downturns and pursue strategic goals like energy security. During crises, SOEs have been used to support investment and employment.

Thinking China's economy is entirely state-run

China's government plays a large role, but most jobs and much of its output and innovation come from private firms. The economy is a mix, with the state dominant in some sectors and private firms in many others.

Key takeaways

State-owned enterprises dominate key sectors in China, such as banking and energy.
Reforms in the late 1990s closed or sold many smaller SOEs and cut tens of millions of jobs.
SOEs are often less productive than private firms, partly due to soft budget constraints.
Private firms provide a large share of China's output, jobs and innovation.