China's wave of regulatory restrictions on private-sector businesses in 2021 has been widely interpreted as reflecting a decisive turn, driven by President Xi Jinping for several years, toward a new economic regime with a greater role played by state-owned enterprises (SOEs). But is China's private sector truly being crushed? Evidence presented in a new PIIE Working Paper tells a different story—that among China's largest companies, the private sector is expanding rapidly and at a faster rate than SOEs.
The new PIIE paper has collected and analyzed data on the changing shares of the state sector and the private sector among China's largest companies for more than a decade. The data show that China's private sector has grown not only in absolute terms but also as a proportion of the country's largest companies, measured by revenue or (for listed ones) by market value, from a very low level when President Xi was confirmed as the next top leader in 2010 to a significant share today. SOEs still dominate by revenue among the largest companies, but their preeminence is eroding. To be sure, the Communist Party has attempted to develop its presence in the corporate world, including in the private sector, through various means. But equity ownership structures matter. China's private-sector companies are focused on profit maximization and value creation in ways SOEs are not.
The Chinese idiom "state advances, private sector retreats (国进民退)," which has been widely used to describe China's economic trends does not, therefore, represent the main picture of what has been going on under President Xi in China's business world so far, even in the most recent years.
Rapid rise of private sector among China's largest companies
Unlike in most countries, shares of many of China's largest companies are not listed on a stock exchange. That is the case for the state sector as well as the private sector, even though many unlisted SOEs have much of their activity conducted in their majority-owned listed subsidiaries. Thus, the paper examines both listed and unlisted companies, using two partly overlapping rankings of China's largest companies.
The first sample is ranked by revenue, a proxy for a company's activity. The data derive from the research conducted by the business magazine Fortune for its yearly Fortune Global 500 ranking, from which the paper extracts the companies from mainland China. This group has grown fast, from 15 companies in the 2005 ranking (based on 2004 revenue) to 130 in the 2021 ranking (based on 2020 revenue). Their aggregate revenue grew from $2.8 trillion in 2010 to $8.8 trillion in 2020, a similar rate as the expansion of China's nominal GDP, which reached nearly $15 trillion in 2020. Their aggregate headcount was 21 million in 2020, slightly under a twentieth of China's total urban employment, a ratio that has been fairly stable over the past decade.
The paper's second sample is limited to mainland Chinese companies whose shares are listed on a stock exchange, typically in Shanghai, Shenzhen, Hong Kong, and/or New York, including companies like Alibaba and Tencent that have adopted variable-interest-entity arrangements to circumvent China's onerous regulations on foreign ownership in certain sectors such as internet services. The paper constructs yearly top 100 rankings of Chinese listed companies from 2010 through 2021, based on year-end market capitalization. Their aggregate headcount and revenue levels are significantly lower than those of the first sample, as would be expected since they do not include some gigantic yet unprofitable unlisted SOEs, and conversely they include some high-growth young companies that hold much promise but are still relatively small. Together, these largest 100 listed companies represent about two-fifths of the entire market capitalization of all Chinese listed companies.
The ownership of these largest Chinese companies involves a range of investor categories. These include, among others, the Chinese state at the central and local (e.g., provincial or municipal) levels, directly through government ministries or departments (such as the Ministry of Finance of the central government) or indirectly through specialized agencies (such as the State-owned Assets Supervision and Administration Commission or SASAC at the central and local levels), state investment entities (such as Central Huijin Company, China Securities Finance Corporation, and the National Integrated Circuit Industry Fund), or SOEs that mix commercial and investment activities (such as China National Tobacco Corporation); founders and/or their relatives, management, and corporate pension funds of private-sector companies; private-sector companies like Alibaba and Tencent acting as venture capitalists; and foreign investors, e.g., diversified entities like Japan's Softbank or Thailand's Charoen Pokphand, and global asset managers like BlackRock or Canadian pension funds.
The paper includes case studies to illustrate the diversity and complexity of ownership patterns of some prominent Chinese companies such as Ping An of China and ZTE. It also has two appendices that detail the latest rankings (respectively, of Chinese companies in the 2021 Fortune Global 500 ranking and of Top 100 listed Chinese companies as of end-2021) with indication of each company's most significant shareholders.
For the purposes of this study, the private sector is defined as those companies, labeled "nonpublic enterprises" in line with Chinese practice, in which state entities hold less than 10 percent of equity capital. Within the state sector, a distinction is drawn between SOEs, in which the state owns a majority stake, on the one hand, and "mixed-ownership enterprises," in which the state holds only a minority position, i.e., between 10 and 50 percent, on the other hand. The methodologies, as well as numerous additional findings, are presented in detail in the paper.
These definitions refer to equity ownership, leaving open other, less easily quantifiable notions. The Chinese Communist Party is clearly striving to develop its influence in China's private sector, even though that influence remains considerably less direct than among SOEs. It would be an exaggeration, however, to say that China is unique in this respect. Government influence occurs with the private sector in Europe, Japan, South Korea, Taiwan, and other advanced economies—even occasionally in the United States. Such influence is surely greater in China, but that does not erase the importance of the divide between the state sector and the private sector. Ownership matters greatly for economic development outcomes, even under pervasive Party control of political matters. The advance of the private sector, which the paper documents, is thus of structural significance for China.
With these definitions in mind, figures 1 and 2 illustrate the rise of the private sector among China's largest companies, measured, respectively, by revenue (all companies) and market value (listed companies). As is clear in figure 1, SOEs still dominate by revenue among the largest companies, much more so than in the Chinese economy as a whole. But the share of the private sector has been steadily rising, from zero in the mid-2000s to 19 percent of the total ($1.7 trillion out of $8.8 trillion) in Fortune's 2021 ranking, which is based on 2020 revenue.
As for market value of the largest listed firms (figure 2), the private sector represented merely 8 percent in 2010 but soared above the 50 percent threshold in 2020, and retreated only slightly in 2021, to 48 percent. Thus, the state crackdown in 2021 on certain private-sector-dominated industries, such as internet platforms and after-school tutoring, has had some impact but stopped well short of reversing the prior advance of the private sector using the market value indicator.
Figure 3 shows similar rising trends for other metrics, based on the same respective samples of companies.
Not privatization, but displacement of SOEs by better-performing private firms
The advance of the private sector among China's largest companies does not appear to result from long-term planning or top-down decisions, but rather from bottom-up dynamics. Deng Xiaoping, the Chinese leader who was the main architect of China's embrace of markets starting in 1978, had predicted in 1980 that "whatever the proportion of the private investment will be, this will cover only a small percentage of the Chinese economy. It will by no means affect the socialist public ownership of the means of production." In the 1990s, facing the need to restructure the loss-making state sector, China under Premier Zhu Rongji made a deliberate choice to keep the largest concerns under state control, even as many smaller SOEs were liquidated or privatized. That policy became widely known by the four-character idiom "grasp the large, let go of the small (抓大放小)," preserving "public ownership as the mainstay (公有制为主体)" of China's economic model. In line with these choices, the first large Chinese companies to enter global corporate rankings, whether by revenue or by market value, were all from the state sector until the late 2000s.
Privatization has been virtually nonexistent among China's largest companies. Nor has the state gone out of its way to confer a comparative advantage on the private sector. On the contrary, President Xi declared in 2016 that SOEs must become "stronger, better and bigger." What explains the observed trend, instead, is that private-sector companies have been more dynamic and profitable than those in the state sector. What PIIE scholar Nicholas R. Lardy has described as the "displacement of SOEs" by private-sector companies has occurred despite a policy environment that clearly does not favor them.
The emergence of private-sector champions reflects the spectacular growth of internet content and e-commerce platforms, but also other areas where the private sector is strong, including manufacturing (e.g., electronics, electric cars, batteries, steel, and chemicals), consumer products and services, pharmaceuticals, and life-science companies. Some of the largest Chinese property developers are also private, though the real estate sector is currently ailing with the shakiness of China's property market and the failure of Evergrande among other developers. By contrast, financial services, telecoms, energy, and transportation remain dominated by SOEs. But the growth of large companies in those state-dominated industries has been comparatively less rapid. In terms of market value, some have even declined in absolute terms, e.g., telecoms and energy.
Of course, the structural trend of private-sector advance, which has characterized the decade of China's development under President Xi so far, may not be a guide to what will happen next. But claims of a pivot back to state-sector dominance have been made multiple times before, with reference to policy shifts in 1989-1990, 2003, the mid-2000s, 2008, 2009, 2010, 2012, 2017, 2019, and early 2020. Meanwhile, China's private sector has kept advancing. There is no compelling indication that this time is different.
1. Whereas it makes sense to compare the respective growth rates, the companies' aggregate revenue is not a measure of their value added or collective contribution to GDP, and thus cannot be directly compared with GDP figures.