In China's industrial sector, the shrinking share of state-owned enterprises (SOEs) is evident. This is due in part to the stronger growth of non-government-owned enterprises.
When communicating with my friends outside China, their misconception of Chinese State-Owned Enterprises (SOE) always surprises me. It seems that although Chinese SOEs play a major role in the Chinese economy, they continue to remain mysterious to most outsiders. For some people – even some long-time observers of China – Chinese SOEs are best described as dying dinosaurs that continuously absorb resources from the economy but produce little economic value. However, this impression is far from the case in nowadays.
That’s why I feel obliged to write something about the reality of this myth. In this blog post and the following ones, I’ll try to profile Chinese SOEs with data mainly from industrial sector, addressing questions regarding their size, profitability, leverage, and so on, hopefully presenting a clear picture to readers.
Today, I will tackle the question of how big are Chinese SOEs. This question can be rephrased in two different ways. First, how big are Chinese SOEs as a whole in the Chinese economy? Second, how big are individual SOEs compared with non-SOEs? Starting with the former question:
What is the share of SOEs as a whole in the Chinese economy? It depends on the criteria one chooses. This share is really negligible in terms of the enterprise number, but quite substantial in terms of assets.
The Second National Economic Census conducted in 2008 reveals that of all the 208 trillion RMB total assets of the secondary and tertiary sectors (industrial and service sectors), 63 trillion – or 30 percent of total – was held by SOEs. (SOEs here correspond to state sole funded corporations and enterprises with the state as the biggest share holder.) Meanwhile, in terms of enterprise number, there were 154,000 SOEs at the end of 2008, only accounting for 3.1 percent of the total enterprise number. Hence, the big picture is clear: SOEs control a substantial part of total enterprise assets in China despite the fact that their total number is marginal. As a corollary of this observation it follows that the average size of SOEs is much bigger than that of non-SOEs. This is indeed the case. In terms of average assets, SOEs are equal to 13.4 times of non-SOEs.
To analyze the developments, we now turn to the industrial enterprise survey dataset. As the National Economic Census is conducted once in 5 years, it is hard to study the dynamics with only the census data. Fortunately, there is another dataset that continuously dates back to 1999 readily available to us – the industrial enterprise survey data. This dataset is constructed and released by China’s National Statistical Bureau, covering all SOEs and other enterprises with annual sales larger than 5 million RMB in the industrial sectors. (Note: under the current foreign exchange rate, US$1 equals 6.8 RMB.) As non-state-owned small industrial firms (annual sales smaller than 5 million RMB) are excluded from the survey, this is a biased sample. However, enterprises covered by the survey in total account for almost 90 percent of total industrial value-added, suggesting this dataset is good enough to give a big picture of the overall developments.
The industrial survey data corroborates the Economic Census. In Figure 1, the dark blue line shows the share of SOEs number in total surveyed industrial enterprises, juxtaposed with the asset share shown by light blue line. At the end of 2008, SOEs only accounted for 4.8 percent of total enterprise numbers but controlled 43.8 percent of total assets owned by surveyed firms. Again, the data suggests that the average size of SOEs was much bigger than that of non-SOEs (15.5 times to be specific).
The shrinking share of SOEs in the industrial sector is evident in figure 1. This is on one hand due to the stronger growth of non-SOEs, and on the other hand, with less quantitative significance, reflects the fact that more non-SOEs that used to be excluded from the survey have crossed the 5 million RMB sales threshold and thereby entered into the sample. Once one takes into account the fact that the sample covers 90 percent of the industrial sector, or 39 percent of the national economy, the diminishing SOE share in the sample clearly points to a bigger role played by the non-SOEs in the Chinese economy.
It is worthwhile to note that the decline in the share of SOEs is much bigger than that in the share of SOE assets. Since 1999, the share of SOEs has declined from 37 percent to less than 5 percent in terms of numbers, and from 68 percent to 44 percent in terms of assets. This is to a large extent a result of the SOE reform – specifically the “grasping the big, letting go of the small” strategy – carried out in the past decade. Since the reform started in late 1990s, most small SOEs have been privatized or filed bankruptcy to lessen the burden of the government, while larger ones have been subsidized (directly or implicitly) and/or merged to hopefully create stronger firms controlling the commanding high of the national economy. This reform strategy is a big success in terms of creating large SOEs. As what is shown in figure 2 by the dark blue line, the average asset size of industrial SOEs increased from 134 million RMB in 1999 to 923 million in 2008, expanding by 589 percent in 9 years. Meanwhile, the average assets of non-SOEs only moderately increased from 36 million to 60 million, up by a dwarfed 67 percent.
With all these evidences in hand, we can now answer the question raised before: How big are Chinese SOEs? Even though their share in the economy continued to decline in the past decade, SOEs still make up a substantial part of the national economy – roughly controlling 30 percent of the total secondary and tertiary assets, or over 50 percent of total industrial assets. The average size of SOEs is much bigger than their non-SOE peers, with average assets of the former equaling over 13 times of the latter.
Now we know that Chinese SOEs have a relatively bigger average asset size, while they continue to account for a substantial part of the national economy. Naturally, one would ask what performances of these big SOEs are. This will be the topic of my next blog post – Chinese SOEs: how profitable are they?
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