THE BRIEF: State vs Private Enterprise
THE BRIEF: State vs Private Enterprise
Trying to make sense of things
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Key Message:
Today we start with China’s third sector (State sector) and how it relates to the Private sector. We share some charts depicting their respective shares of China’s economy. As we’ve previously covered, Private sector business confidence is in a slump with no clear path out of it, mainly caused by policy and the shift in regulatory actions of 2020-2021. We conclude that the CPC wants both the State and Private sectors to thrive, but also wants them to follow their guidance and directives.
We think mostly everyone saw the GDP data dump last Monday, so we’ll move along.
Biggish news this week: The Communist Party and State Council issued a joint statement (Chinese) to make the private economy "bigger, better, stronger". That sounds great, but let's back up a second. What is the private economy?
Most economies have a public and private sector. The public sector consists of all levels of government and government-controlled enterprises. The public sector provides services to society, for example: national defense, education, social welfare, police and fire fighting. The private sector is households, private companies, and voluntary organizations.
China has a third sector/economy: the State sector. Continued in Section 1.
“Officials of the modern state are, of necessity, at least one step—and often several steps— removed from the society they are charged with governing. They assess the life of their society by a series of typifications that are always some distance from the full reality these abstractions are meant to capture.” - James C. Scott, Seeing Like a State
Contents
I. The Third Sector: The State
In addition to the private (minqi 民企) and public/government (zhengfu 政府) sectors, China has a third: the state sector (guoqi 国企). We’ve noticed this tends to confuse people who look at China’s economy & market with a Western frame of mind. Let us explain.
The state sector includes State-Owned-Enterprises (SOEs) that operate outside the usual public economy’s purview of societal services of national defense, education, welfare, transportation infrastructure, and so on. Also, China’s SOEs cover a much larger breadth than the U.S.’s government-sponsored enterprises (GSEs) such as Fannie Mae. They aren’t comparable to GSEs.
Two Children Analogy
One way to think about it is the Communist Party of China (CPC) is like a father of two children (types of economic entities), Little State (guoqi 国企) and Little Private (minqi 民企). Little State is older, born around the founding of the People’s Republic of China. Little Private was born with the market reforms under Deng Xiaoping, some 30+ years later. We’ll refer to both as the State sector and the Private sector from now on.
Governance differences
The State sector is very close to the Party, for example: in SOEs Party Committees are above the Board of Directors. The Private sector also must have party committees, but this is relatively new and really only present in firms with at least 3(?) party members and their true power or influence is debatable. (The goal of the Party Committees is less debatable, we think it’s about injecting their “guidance” into all parts of the economy.)
The owners/overseers of the State sector are government departments:
SASAC for central SOEs (yangqi 央企),
local and provincial SASAC for non-central SOEs (guoqi 国企), and
Central Huijin (a sub-subsidiary of the Ministry of Finance) for financial SOEs.
(By the way, another point for our opinion that there’s a major split between the finance-types and everyone else in China’s government).
The owners of the Private sector are mostly individuals or non-state entities. (Note: some SOEs are shareholders of private enterprises but below a controlling threshold.)
Industry differences
The State sector spans many industries but tends to be dominant in utilities, oil & gas, aerospace, transportation, telecom, heavy industry, healthcare, banking and finance.
The State sector is implicitly and sometimes explicitly backed by the government, which makes them lower-risk borrowers for bank loans. Cheaper access to debt helps the State sector operate in capital-intensive industries.
The implicit/explicit government backing also makes them lower-risk employers for those seeking stable employment.
These industries tend to change more slowly.
Private sector tends to dominate in information technology, internet, real estate, wholesale, retail, e-commerce, catering, restaurants, daily services and (ahem) fintech (Ant Group), online education & after-school training.
Some of these industries were initially overlooked (ignored?) by the State sector (internet, e-commerce), which allowed the companies to grow very large.
These are mainly consumer-facing industries and tend to change more quickly.
What about industrials? The industrials are much more balanced. We think the Private sector had tailwinds from WTO ascension and the influx of foreign capital, management ideas and technology.
Overall, Tao Wang estimates that the State sector accounts for 30-40% of China’s economy (chart below). While not dominant, it is much larger than most developed and emerging economies.
Recent developments
The CPC has been strengthening control over the State sector in the last 10 years and wants to do the same with the Private sector (see Party Committees and Golden Shares).
In the past 3-5 years, several of the predominantly Private sector industries got destroyed by a series of regulatory changes and new laws (internet, fintech, online education, after-school training). This is a major driver of the current malaise.
Our child analogy is not without reason. We see a (resurgent?) paternal instinct in China’s governance. One could call it a renunciation of Engels’ withering state idea. Going further: What if Deng Xiaoping’s famous mantra of taoguangyanghui 韬光养晦 was also pushing CPC’s paternal instincts ‘to keep a low profile’ towards the private sector? What if that has ended?