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

Abstract

In the late 1990s, China's industrial sector was dominated by state-owned firms. We document how this changed after 1998. More than 80 percent of the state-owned firms in 1998 were shut down or privatized by 2007. Among firms we classify as state-controlled in 2007, many were restructured and registered as private firms with a controlling share held by a stateowned conglomerate or were new firms established after 1998. In 2007, almost half of the state-controlled firms were registered as private firms, and about 40 percent were new firms established after 1998. The privatization and convergence in labor productivity decelerated after 2007, but the establishment of new state-owned firms continued at roughly the same rate. When we interpret these facts through the lens of an equilibrium model of heterogeneous firms, we find that the transformation of firms that remained under state control and the creation of new state-controlled firms together account for 21 percent of China's growth from 1998 to 2007 and 18 percent of its growth from 2007 to 2012. However, the exit and privatization of state-owned firms had a negligible effect on aggregate growth. 4. We do not have access to the microdata from 2008 to 2011. 5. The threshold was raised to 20 million RMB in 2011. 6. See Central Committee of the Communist Party of China (1999) for the formal announcement. As is typical with all the major reforms implemented in China, the official decision in 1999 was preceded by several years of small-scale experimentation. See Aivazian, Ge, and Qui (2005) for an assessment of the initial experiments with reforms in corporate governance.

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“…First, we study how the privatisation would have proceeded if the job protection measures had been in force in 1998. As stressed in numerous studies, privatisation is certainly a big part of the recent growth in China (Song et al ., ; Hsieh and Song, ; Li, ). Using a decomposition of growth rates, Deng et al .…”

“…Capital is calculated by the book value of fixed asset net of depreciation. To control for industry effects, we follow Hsieh and Song () and use industry labour share to weight capital intensity (Cap./emp. ), value added per worker (Va./emp.…”

“…First, we study how the privatisation would have proceeded if the job protection measures had been in force in 1998. As stressed in numerous studies, privatisation is certainly a big part of the recent growth in China (Song et al, 2011;Hsieh and Song, 2015;Li, 2015). Using a decomposition of growth rates, Deng et al (2007) study the between and within components of productivity growth (measured as average labour productivity) in China for the 1995-2003 period.…”

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“…Research questions have addressed whether these SOEs are relatively inefficient and whether the transformation of SOEs has contributed to China's economic growth. According to Hsieh and Song (2015), the underlying principle of China's SOE reform can be described as "Grasp the large, let go of the small," which means that the government should privatize small SOEs but still control the large, important ones. However, they found that the privatization of SOEs from 1997 to 2008 accounted for only 3% of the aggregate growth in China's industrial output.…”