Waning State Capitalism?

Dr. Yu ZHENG's picture

Despite the obvious slowdown of the Chinese economy, China’s overseas investment (COI) continues to record strong growth, increasing by 20 percent in the first seven months of 2015 according to China’s Ministry of Commerce. It is important to note, though, that the recent growth is mostly driven by private companies rather than state-owned enterprises (SOEs).

Rhodium Group estimates, for example, that private investors account for more than 80% of COI headed to the US in the first quarter of 2015. SOE profitability has been steadily declining since the global financial crisis. Central SOEs have been particularly hard hit by the recent plunge of the stock market, with their profit growth declining by 4.5% in the first seven month of 2015 according to China’s Ministry of Finance. With SOEs’s rapidly diminishing profits and rising debt burdens, will the once almighty state capitalism lose its fame? Not so soon. A long-awaited plan to overhaul the country’s SOEs was just released. Although the original, arguably bolder, blueprint was released in November 2013, creating high expectations for long overdue SOE reform, it has taken the government nearly two years to nail down the specifics after intense bargaining and compromise among different interest groups. A key message of the reform is that SOEs will continue to hold the primary role in the Chinese economy, though their management and operation will become more market oriented. What does this mean for COI? We can probably draw two implications. First, the Chinese government will provide greater support to help SOEs, particularly those in the “commercial” category, expand their global market. Second, SOEs will become more prudent in investing abroad as they become subject to more sophisticated corporate governance. In other words, we probably will see a different form, not the waning, of Chinese state capitalism in the global investment market.