Comparing the Performance and Access to Capital of Chinese Private Firms and SOEs

Highlighting findings from a selection of scholarly articles from this week's assigned readings in my Political Economy of China course.

Disclaimer:

Apologies to the reader; today’s post is not an op-ed but a consolidation of 15 pages of data-heavy notes from scholars of the Chinese economy. While this post is a bit of a slog, there is exceptional insight to be gleaned from the empirical studies of the featured economists’ research. Enjoy, you wonks!

XU ET. AL., 2014, “POLITICAL ECONOMY OF PRIVATE FIRMS IN CHINA”

Defining rent as increased accessibility to bank loans, Xu finds that, “in the old [Maoist] regime, the Party social elites did not enjoy statistically detectable rents.” In 2002 and 2004, constitutional amendments positively private recognized the role of entrepreneurs to economic growth. By 2009, the private sector’s share “national total GDP soared to 50%.” However, “short-term bank loans issued to the private sector” only increased by a meager 4.9%. Despite no “obvious difference” in performance between firms owned by CPC [Communist Party of China]/PC [People’s Congress] members and those owned by non-CPC/PC members as measured by return over equity and return over sales, the marginal effects of CPC and PC membership on obtaining bank loans in 2010 was +6% and +18% in 2010, respectively. Ironically, the constitutional changes supporting private entrepreneurship was not accompanied by improved access to capital markets but increased rent-seeking by politically-connected elites.

XU ET. AL., 2015, “INSTITUTIONS AND MANAGERIAL TASK ALLOCATION: EVIDENCE FROM CHINESE ENTREPRENEURS”

“Entrepreneurs of firms that are charged with higher levies, that is, are suffering more severe property rights violation, tend to allot more time to lobbying activities, thus costing time used for management activities”

For entrepreneurs facing fees, fines, and other ad hoc levies at the local level, it pays to be politically-connected, unsurprisingly:

On average, politically connected entrepreneurs charged higher levies spend approximately 3 percent less of their time lobbying (about 11 percent of the mean) than others. At the same time, these entrepreneurs allocate 4.4 percent more of their time at work on management (about 7.4 percent of the mean) than others.

TSAI, 2015, “THE POLITICAL ECONOMY OF STATE CAPITALISM AND SHADOW BANKING IN CHINA”

SOEs receive over 85 percent of loans extended by state-owned commercial banks, and account for over 60 percent of publicly listed businesses in China’s stock market.

SOEs disproportionate access to loans and share of the Chinese stock market is brought into sharp relief by Tsai’s 2016 paper…

TSAI, 2016, “WHEN SHADOW BANKING CAN BE PRODUCTIVE: FINANCING SMALL AND MEDIUM ENTERPRISES IN CHINA”

The vast majority of Chinese firms are privately-owned and operated SMEs:

The NBS’s Third National Economic Census (2014) reports that as of year-end 2013, there were 8.2 million ‘corporate enterprises’ (qiye faren), of which 7.85 million or 96.5 per cent were micro and small corporate enterprises. Estimates that include medium enterprises have found that SMEs account for at least 98 per cent of registered enterprises in China (Shi, 2012)… approximately 95 per cent of China’s SMEs are privately owned or controlled.

Predictably, private SMEs operating with hard budget constraints and under conditions of strict market discipline significantly outperform SOEs:

GAN ET. AL., 2017, “DECENTRALIZED PRIVATIZATION AND CHANGE OF CONTROL RIGHTS IN CHINA”

Gan investigates how the decentralized nature of Chinese privatization through management buyouts (MBOs) is associated with marked efficiency gains, contradicting the “well-known, but puzzling, result from other transition economies is that privatization to managers does not result in efficiency gains.” Compared to non-MBOs, MBOs witness an increase of “4.4% in return on assets (ROA) and close to 6,000 RMB, or 750 USD, per employee per year.” This efficiency is not for want of a soft budget constraint but due to the imposition of hard budget constraints:

MBOs are significantly less likely to obtain land subsidy, 59% versus 67%… less likely to obtain direct allocation of land (19% versus 31%)... are slightly more likely to purchase land at substantially subsidized prices (40% versus 36%)... least likely to receive R&D funding (1% versus 3%);

market discipline:

MBOs are more likely to exist in competitive markets (84% versus 75%) and fewer monopolies (2% versus 14%) 

and superior management incentives and practices:

MBO firms are significantly more likely to use performance-based bonuses (54% versus 47%), to establish a board of directors (84% versus 76%), and to adopt international accounting standards and professional independent auditing (11% versus 8%), all significantly at the 1% or 5% level.

Despite MBOs undeniably superior performance, Gan’s findings apropos access to capital markets are consistent with Xu and Tsai’s:

Ninety-five percent of firms report that personal savings account for at least 70% [of financing] for MBOs.