In The “New China Playbook,” State Involvement In Business Has Grown Smarter

Forbes is out this week with our 20^th Global 2000 list of the world’s top publicly traded companies. One of the most striking trends in the past two decades is gains by China. Including Hong Kong, the number of Chinese companies totalled 346 this year, compared with only 43 two decades ago. During that time, China’s economy has been one of the world’s fastest growing and now ranks as the world’s second largest after the United States. China’s presence on the 2023 Forbes Global 2000 list is second only to the U.S., which has 611 members.

A big share of the increase in China’s total on the Forbes Global 2000 list is by state-owned enterprises, or SOEs: companies ultimately controlled by the Chinese government through ownership stakes. Long beyond their Mao Zedong era skill set, many are publicly traded with sprawling global operations. Underscoring their clout, all three Chinese members in the top five of the new Forbes Global 2000 list — the Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China — are considered SOEs.

Compared with 20 years ago, non-state-owned private sector companies such as e-commerce heavyweight Alibaba, Apple supplier Luxshare Precision, and Warren Buffett-backed EV maker BYD have also made striking gains on the list and dot this year’s ranking. Less highlighted, however, is government support for private sector businesses.

What are some of the more nuanced ways that China’s government supports private-sector companies? What role do SOEs in China’s economy play today, and to what extent are Chinese businesses developng new technologies likely to get government support? How can the U.S. respond?

I exchanged on those questions this week by Zoom with Keyu Jin, author of the new book, “The New China Playbook: Beyond Socialism and Capitalism.” Jin, 40, holds a Ph.D. from Harvard and is an associate professor at the London School of Economics. She splits her time between London and Beijing, and is a member of the board of Richemont. She spoke from London. Edited interview excerpts follow.

Flannery: What’s the role of SOEs in China’s economy today and what accounts for their staying power in changing times?

Jin: SOEs are part of “Team China for the Chinese government. They play a very important role in strategic sectors. They undertake large projects on behalf of the government, including infrastructure – such as when China wants to bid for the Olympics, build industrial parks or wants to tackle a new industry. The SOEs are seen as reliable companies for undertaking large projects or carrying out central government missions.

They are run as modern corporations. We have to see SOEs as having evolved substantially over the last few decades, and having had their productivities converge to a large extent with the private enterprises. But their objective is not solely to maximize profits as a private firm would — they also have obligations. Some are monopolies in strategic sectors.

Flannery: How important have mergers and acquisitions been over the years in their big growth?

Jin: Supremely important. This is part of the SOE reforms. Even in the last few years, there’s been consolidation of SOEs to avoid a “tournament-style” competition among the SOEs. There are fewer SOEs, but there’s been a concentration of power and state assets. Again, that’s in strategic industries, not in manufacturing and services.

Flannery: You mention in the book that state-private sector collaboration is more common than recognized. How important is collaboration between private sector companies and SOEs?

Jin: They’re hugely important. In fact, this is part of the unique model of the Chinese political economy system. In the book, I emphasize the “mayor economy” — local officials play a role in supporting the private sector, but local officials also control the local SOEs. They use SOEs as platforms to borrow in order to undertake large projects, and collaborations with the private sector. SOEs are often minority shareholders of private companies. In fact, an overwhelming number of private

companies have equity stakeholders that are SOEs. They can help private companies overcome institutional barriers, help arrange bank loans, help them get licenses and contracts or overcome red tape. Many private enterprises often seek SOE participation.

But the picture is complex. In some cases, having a state partner or minority stakeholder is troublesome, with inefficient decision-making or interventions. But it’s the network connections with these SOEs that are beneficial to the private firms.

And if we look at the data, the ones that have a closer link with the central (government) SOEs are actually the more productive ones. That overturns a common assumption that the private-public linkages are often corrupt and corrosive. In fact, the most productive companies are the ones that have state backing, or maybe they have become more productive because of minority state backing.

Flannery: How has that worked with EV makers?

Jin: For instance, NIO is a very successful example where the Hefei government was a stakeholder and cashed out shortly after. It’s necessarily not the intention of the local governments to be a stakeholder for the long run. Often, there’s a financial gain, but more often than not it’s during the starting point where they can help the private entrepreneurs succeed. Once they’ve made a solid return on their investment, they cash out. They’re not long-term investors.

So, this is very different from subsidies. The direct financial support from the local governments is also very limited, and even more now as local coffers are no longer as full. Instead, local governments help to lever up social capital to help these promising companies raise funding without having a very involved financial interest in the company. This is one way in which local governments help out local entrepreneurs, but equally important is their help in creating an industrial cluster and coordinate a supply chain.

SOEs, however, are different, and unlike local officials can potentially be long-term stakeholders. The two have different interests — SOEs are more economically financially driven, whereas local governments care about the kind of jobs, number of jobs, talent attracted. They don’t have a purely financial objective.

Flannery: To what extent you see this kind of government-private collaboration helping China in its next chapter of a technology development, such as with AI?

Jin: We talk about public-private partnerships — PPP — all the time around the world. It’s often very inefficient or very limited in scope. This works much better in China. It’s not without its inefficiencies and waste but is a model where the public aspect actually does make a huge contribution. It will be critical for China’s AI or high-tech ambition, but we have to be nuanced about what kind of (government) role we’re talking about. For instance, the fact that the Chinese government has installed four million EV chargers all around the country is massively helpful, especially you compare it to the U.S. number, which is 140,000. But is the state good at picking winners? No, it has not been.

Innovation ultimately is an ecosystem that connects industries, labs and universities. In fact, China is taking inspiration from the Japanese and the American models where the state coordination of that ecosystem has played a very critical role. We cannot forget how much the U.S. government was behind the Internet, the personal computer or the jet. Tesla and SpaceX also have (received support) from the U.S. government. So I think it will play a critical role in China, especially in the sectors which require large amounts of funding over long and uncertain investment cycles.

But in many other scenarios, Chinese private companies don’t need the state’s help, such as consumer-related innovation. In fact, the less involvement there, the better are the results. But if you talk about the state role in areas that involve huge amounts of funding and patient capital, such as in quantum, space and even certain aspects of AI, it will be hugely important.

Flannery: How does the evolving China playbook that you describe in your book differ from the U.S., and how can the U.S. try to pursue a level playing field vis-a-vis China?

Jin: China needs more market and less state; the U.S. needs the opposite — a bit more state and stronger state capacity.

Ultimately, though, if we really look at many of these key cutting-edge fields, there’s a huge amount of what I call competitive collaboration between the U.S. and China. If you look at the renewables sector, for instance, Tesla opted for a Chinese battery maker, which is building factories in Germany. Japanese and American companies are investing with Chinese EV companies so they can bring the technology back home. This actually benefits both China and the U.S. but ultimately the world.

I don’t think we don’t want to kill that competition by suppressing Chinese competition to the U.S. — it’s ultimately a good thing, because the U.S. has actually seen higher concentration levels and more monopolies in the last couple of decades than more competition. It’s ferocious domestic competition in the vast China market with a lot of talent that is making Chinese companies so innovative. They have any choice but to compete.

Flannery: So how should U.S. seek a level playing field, apart from harnessing that fair competition?

Jin: Rather than trying to place all the blame on China, use competitiveness to make yourself stronger. Chinese competition spurs the U.S. forward because you have a competitor in your rear-view mirror. It’s the same analogy between Japan and the U.S. during Japan’s technological competition heyday in the 1980s. Japan pushed the U.S. forward.

For China, it should open up more to American and European businesses and give them a level playing field in the Chinese market. They are ready for the competition now—-and like the U.S., China needs more international competition, not less.

See related posts:

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U.S. Busness Interest In China Is Slowly Recoverying

Elon Musk Visit To Beijing Highlights Business Role In U.S.-China Ties

Businesses Could Face Pressure To Choose Sides In U.S.-China Competition

@rflannerychina