The Nature and Performance of China's State-Owned Enterprises

The Nature and Performance of China's State-owned Enterprises Paul C. Hubbard Submitted in fulfilment of the requirements for the degree of Doctor of Philosophy of the Australian National University November 2018 ii Candidate's Declaration This thesis contains no material which has been accepted for the award of any other degree or diploma in any university. To the best of the author’s knowledge, it contains no material previously published or written by another person, except where due reference is made in the text. Paul C. Hubbard Date: 11 November 2018 Paul C. Hubbard The Nature and Performance of China's State-owned Enterprises iii Acknowledgements This thesis is the main publication from three years I spent as a Sir Roland Wilson Scholar at The Australian National University, from 2014–2017. The scholarship, jointly funded by the Commonwealth and the Sir Roland Wilson Foundation, supported my leave from the Department of the Treasury. My research proposal concerning the role of China’s state-owned enterprises combined my longstanding interest in China with what was then an emerging public policy issue in Australia – how to understand the ever-increasing wave of Chinese investment coming to Australia. In some ways this was an echo of Sir Roland’s own scholarship, doctoral investigation of capital imports and the terms of trade (Wilson, 1931). I particularly thank Lauren Bartsch, Bruce Chapman, Jenny Corbett, Ted Crook, Melanie Fischer, Ken Henry, Martin Parkinson, Steve Sedgwick, Joan Uhr, Michael Wesley, and others associated with the Sir Roland Wilson Foundation, and especially my fellow Sir Roland Wilson PhD Scholars. From the Australian Government, I express particular thanks for ongoing interest in my work to Sam Bide, David Gruen, Rob Heferen, Jon Karatsoreos, John Lonsdale, Jason McDonald, Adam McKissack, Stewart Nixon, Sam Reinhardt, Irene Sim, Lina Wong, David Woods, Jessica Xu and Dong Zhang. A highlight of the Sir Roland Wilson scholarship is the financial support to incorporate study overseas. I was very fortunate to be a Visiting Scholar at the National School of Development at Peking University in 2015. This was rewarding for me both as a scholar, and personally, since it provided an opportunity for my family to accompany me to China for an extended period. I especially want to thank Yang Yao for hosting me in China, and to my teachers, colleagues, classmates and co-authors at Peking University including Cecilia Fu, Yiping Huang, Tao Kong, Xiaohui Lu, Jiajun Xu and Han Yao. Also Sarah Du, Jingyi Li and Zhengjun Zhang from King Parallel for helpful comments and insights into SOE management and reform. I thank the many colleagues, discussants, and sponsors for the academic conferences I was able to attend. Yongding Yu, who attended my thesis proposal seminar, set a high bar. I was privileged to be the only economist from a non-Chinese background to attend the 2015 China Youth Economic Forum at Xiamen University; to participate in the 14th Asia-Pacific Rim Universities’ Doctoral Students Conference at Zhejiang University; to be welcomed as a Young Fellow at the 37th Pacific Trade and Development (PAFTAD) Conference at the Institute of Southeast Asian Studies in Singapore; the China: Wealth and Power Conference at the Australian National University; the 8th Asian Dynamics Institute Conference at the University of Copenhagen; and the Third International Conference on New Structural Economics at Peking University. Also Shan Guo, Richard Herd, Dan Rosen, and participants at the OECD-National School of Development joint conference on ‘China’s SOE Reform: Domestic and International Paul C. Hubbard The Nature and Performance of China's State-owned Enterprises iv Perspectives’. I thank participants at a Peking University-ANU Workshop on Overseas Direct Investment for helpful discussion and feedback on the nature of monopoly in China. I learned a lot from working with co-authors on journal articles and working papers – extracts of some of which are adapted into this thesis; others on unrelated topics including the Asian Infrastructure Investment Bank, long-term GDP projections and Chinese overseas investment do not appear as part of this thesis, but were nevertheless an important part of my scholarship. These include Kjeld Erik Brødsgaard, Linlin Zhang, Guilong Cai (Brødsgaard et al., 2017), Mike Callaghan (Callaghan and Hubbard, 2016), Limin Luo and Zhen Qi (Luo, Qi and Hubbard, 2017), Dhruv Sharma (Hubbard and Sharma, 2016), Patrick Williams (Hubbard and Williams, 2017), Weibing (Ben) Xiao (Hubbard and Xiao, 2017) and Jiajun Xu (Xu and Hubbard, 2018). In addition to this thesis, I was happy to be involved with many great colleagues at the East Asian Bureau of Economic Research, including as a frequent contributor to the East Asia Forum and as a guest editor, with Fan He, for the East Asia Forum Quarterly. Also to Mark Fabian, Sam Hardwick, Rebecca Mendelsohn, Adam Triggs, Jiao Wang, and others involved with EABER. I was also closely involved in a research project on Chinese overseas direct investment, funded by an Industry Partner Research Linkage Project under the Australian Research Council, the centrepiece of which is a database of Chinese investment into Australia ably put together by Susan Travis, Jingyi Li, with much helpful guidance from Derek Scissors. I was pleased to attend its launch in October 2018. I thank those who read and commented on my blog at chinasoe.wordpress.com, where I considered many early thoughts – most of which did not make it into this thesis, but all of which contributed to my thinking. I would like to thank Arjuna Mohotala for assistance in crafting my Three Minute Thesis, and Jonas Rodekohr for trusting me with supervising his own research project. I also thank Karin Hosking for her professional copyediting of this manuscript prior to submission. I thank my academic panel, chaired by Shiro Armstrong, and assisted by Bob Breunig, Peter Drysdale and Jane Golley, for giving me a complete intellectual experience. I met Professor Drysdale at a dinner for the Australian Fulbright Alumni Association after I returned from the US a decade ago. In 2011 he was the first to encourage me to refine my broad interest in Chinese economic policy making into this PhD topic. His 2016 appointment as an Officer in the Order of Australia (AO) cited his contribution as a “mentor to young economists”. Once becoming one of Peter’s young economists, I observe that neither age nor distance permits escape from his orbit. I offer this thesis in celebration of his 80th birthday. And finally, for the patience, forbearance and support without which this entire endeavour would have been quite impossible, I express my thanks to Karen, Chris, James, Imogen, Carmen – and Evelyn. Paul C. Hubbard The Nature and Performance of China's State-owned Enterprises v Abstract Much commentary and analysis conceives of a generic Chinese ‘state sector’ which is stubbornly inefficient and, sometimes simultaneously, the central pillar of an assertive ‘state capitalism’. This thesis argues that the nature and performance of state ownership varies across the Chinese economy in ways that can’t be reduced to homogenous ‘state’ or ‘non-state’ sectors. The introductory chapter recalls China’s transition from a planned industrial state monopoly to a mixed economy in which non-state firms dominate state-owned enterprises’ (SOEs’) share of activity in competitive sectors. Chapter 2 argues for SOE performance to be assessed according to the sector in which it operates, and the state owner’s objectives therein. Where an SOEs is operating in market that depart from conditions of perfect competition, or when the state owner’s objectives encompass broader policy goals, the maximisation of profits may not be a good benchmark for an SOE’s contribution to the economy, or social welfare more broadly. Chapter 3 surveys the sectoral distribution of state ownership and reveals the diversity of state owners. Projecting from current fixed-asset investment shares, it shows that China’s share of state ownership in aggregate is approaching levels similar to OECD mixed economies such as the Netherlands or Sweden. While China’s largest corporate conglomerates tend to be controlled by the central government, these prominent ‘national champions’ are not representative of state ownership more broadly. Ownership rights over most of China’s 160,000 SOEs are exercised directly by hundreds of state owners, including at the local level, or indirectly, by other SOEs. Chapter 4 tests the extent of state monopoly within China’s vast array of industrial sectors. Monopoly is measured by the Herfindahl-Hirschman Index (HHI) of market concentration in 521 industrial subsectors using enterprise-level data. To account for the SOE conglomerates observed in the previous chapter, a novel adjustment is made to group SOE observations according to their administrative relationship (lishu guanxi). These estimates confirm that large central state monopolies remain in oil (a strategic resource), electricity (a network utility) and tobacco (an administrative monopoly). By contrast, Chinese manufacturing subsectors are mostly unconcentrated, with ownership weighted toward private companies and local SOEs. Chapter 5 compares SOE and non-SOE profit per unit of fixed assets (profitability) within manufacturing, based on regression analysis of enterprise-level data pooled from 2011–2013. While smaller SOEs match non-SOE profitability, profitability of the largest SOEs is one-third lower than large non-SOEs. Because of their sheer size, this drags down the aggregate profitability of SOE manufacturing. SOEs also pay out a higher-than-expected share of value added in wages and taxes – further evidence of SOEs’ deviation from profit maximisation, even under competitive market conditions. This likely reflects the different distributional objectives between state and non-state owners. Paul C. Hubbard The Nature and Performance of China's State-owned Enterprises vi The thesis argues that SOEs’ broader contribution to GDP can be better illuminated using a value-added measure rather than profits alone.

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