Centralization or Decentralization? Evolution of State-Ownership in China (2022)

See all articles by Franklin Allen

Franklin Allen

Imperial College London; European Corporate Governance Institute (ECGI)

Junhui Cai

University of Notre Dame - Mendoza College of Business

Xian Gu

Durham University Business School

Jun "QJ" Qian

Fudan University - International School of Finance (FISF); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Linda Zhao

University of Pennsylvania - Statistics Department

Wu Zhu

Tsinghua University - School of Economics & Management

Abstract

We re-examine the state sector and its role in the Chinese economy through the equity ownership networks of 40 million firms from 1990 to 2017. Our measure uncovers a broader array of state-owned enterprises (SOEs) than the existing measures. State ownership witnesses dual trends: decentralization—the scale of capital from the central government has been declining—and indirect control—a rising number of SOEs with provincial and city government ownership stakes and increasing hierarchical distance between existing and new SOEs from their ultimate state owners. The increase in hierarchical distance and expansion of SOE networks can be explained by the openings of new high-speed rail routes. Firms with minority state ownership stakes and greater hierarchical distance to the central and provincial government owners have better performance as measured by higher profitability and productivity.