Grasp the Large, Let Go of the Small: The Transformation of the State Sector in China

Abstract

Starting in the late 1990s, China undertook a dramatic transformation of the large number of firms under state control. Small state-owned firms were privatized or closed. Large state-owned firms were corporatized and merged into large industrial groups under the control of the Chinese state. The state also created many new and large firms. We use detailed firm-level data to show that from 1998 to 2007, (i) state-owned firms that were closed were smaller and had low labor and capital productivity; (ii) the labor productivity of state-owned firms converged to that of private firms; (iii) the capital productivity of state-owned firms remained significantly lower than that of private firms; and (iv) total factor productivity (TFP) growth of state-owned firms was faster than that of private firms. We find the reforms of the state sector were responsible for 20 percent of aggregate TFP growth from 1998 to 2007.

Trends and Cycles in China's Macroeconomy

“…Even within the SOE sector, there is a degree to which a firm is controlled by the state, depending on the actual share of capital owned by the sate. Nonetheless, Hsieh and Song (2015) find that the SOE share of total revenue, calculated according to their definition, is close to the official aggregate data in the China's Statistical Yearbooks from 1998 to 2007 published by the NBS. 18 Different SOE definitions notwithstanding, a robust finding is that privatization appears to be a critical factor in driving TFP growth of the SOE sector.…”

The effects of privatization on exports and jobs

“…Privatization was accelerated in 1995, when the government endorsed the policy of "grasp the large, let go of the small" [9]. Under this policy, a large number of small-and medium-sized SOEs were privatized, whereas large SOEs-such as the China FAW Group in the automobile industry and the China Sinopec Group in the petrochemical industry-remained state-owned.…”

Disturbances in Heaven

“…In many respects, the state sector today has been deeply transformed (Hsieh and Song 2015). Decades of reform have converted China's command economy into a modest but strategically significant state sector.…”