Nicolas Véron

Financial Statements: The Party vs. shareholders: What drives corporate governance in China?

In today's session, Stanford Law School's Curtis Milhaupt and my PIIE colleague and coauthor Tianlei Huang debated the unique role of the Chinese Communist Party in corporate governance, and how to think about it in comparative terms vis-à-vis neighboring East Asian and other major economies. 

Financial Statements: Lessons for systemic liquidity risk from recent crises

Belatedly - in the session two weeks ago, I hosted Raghuram Rajan and Megan Greene to revisit the recent liquidity episodes and what may have been driving them.  

China’s state vs. private company tracker: now on a half-yearly pace

Following the in-depth analysis which Tianlei Huang and I published nearly a year ago on the respective shares of the private sector and state sector among China's largest companies, and the first update we published in October, the Peterson Institute has decided to publish our findings on market capitalization data as a regular tracker. The blog post below, published yesterday by PIIE, is the first such iteration.  

The private sector’s share of China’s largest listed companies continued to decline to 43 percent in the second half of 2022

The market assessment of economic and political developments in the second half of 2022 does not signal a decisive return to private-sector-led growth in China, even though that period includes the month of December, when China’s party-state unexpectedly ended its prior zero-COVID policy and signaled a more positive stance towards private sector development.

Latest data from PIIE’s semiannual tracker, “China’s state vs. private company tracker: Which sector dominates?”—which tracks market value of China’s top 100 listed companies (ranked by market value)—show a continued decline of the share of the private sector, from 44.5 percent at mid-2022 to 42.8 percent at year-end, continuing the downward trend of the previous two half-year periods from the 55.4 percent peak observed in mid-2021. Still, the private sector share remains higher than it was throughout the 2010s, when it rose dramatically from 8 percent at end-2010 to 36 percent at end-2019 (see figure).

It remains to be seen, then, whether China’s trajectory will be a pivot back to a Maoist-style economy that represses the private sector, or merely a new phase of market-driven development under changed political conditions. Building on our PIIE Working Paper published in 2022, the data presented here inform on the trend in the dynamism of China’s private sector beyond the rhetoric in China and the United States. The tracker focuses on the respective shares of state-sector and private-sector companies among China’s largest companies and thus provides a half-yearly market-based indicator of the private-state balance among Chinese companies. As in a previous update, the data at end-2022 suggest that President Xi Jinping’s “corporate rectification campaign” started in the summer of 2021 has dealt a heavy but far from lethal blow to China’s hitherto fast-rising private sector.

Recent discussions have focused on hybrid firms or ambiguous boundaries between private and state control. But the divide between the state sector and the private sector remains highly meaningful in analyzing contemporary China. As PIIE’s Nicholas Lardy and others have documented, the performance patterns and economic contributions of private-sector companies have differed from those of state firms since the early emergence of the former and restructuring of the latter during the bumpy era of the 1980s and 1990s. Large listed companies provide a decent proxy for the broader category of China’s largest companies, as more than half of the latter’s total revenue is made in listed entities. Stock prices are intrinsically forward-looking, subject to the whims of the market and occasional state intervention but not to political censorship or accounting manipulation.

The measures in PIIE’s semiannual tracker are not linked to general market price movements or index levels: If stock prices of state-sector listed firms rise or fall as much as those of private-sector listed firms, the relative shares that we track remain flat. As such, the respective shares of the private and state sectors can be viewed as decorrelated from cyclical growth and stock market dynamics, albeit somewhat related to structural growth trends if, as Lardy and others have argued, China’s growth is driven by private-sector expansion.

The measures in the tracker are based on the same methodology as in our 2022 PIIE Working Paper. All listed mainland Chinese companies are considered, including those that use mystifying variable-interest-entity arrangements, and are grouped into three categories: “state-owned enterprises” (SOEs) in which the state owns more than half of equity; “mixed-ownership enterprises” (MOEs) in which the state owns between 10 and 50 percent; and “nonpublic enterprises” in which the state owns less than a tenth of total equity, a conservative definition of China’s “true” private sector. In the definition used here, the state sector includes both MOEs and SOEs. Still, MOEs and SOEs are worth tracking separately, because state and party control is generally less direct and complete in the former than in the latter.

Even though market capitalizations can be observed in real time, these observations are intended to inform on structural trends rather than high-frequency fluctuations. To that effect, the data has been compiled yearly from 2010 to 2020 and half-yearly since 2021, as shown in the figure.

In 2022, additional quarterly monitoring indicated a pattern of small fluctuations rather than a monotonous soft decline: The share of the private sector fell to 42.1 percent at the end of the first quarter, then rose to 44.5 percent at mid-year, then fell back to 40.8 percent at the end of September (the lowest observation since end-2019), then rose back to its latest observed level of 42.8 percent at end-December. These additional quarterly data are not shown in the figure because that higher-frequency observation is not planned in future.

To sum up, the tug of war between the state and private sectors, as observed through the prism of market data presented here, remained largely static during a year that was otherwise rich in dramatic developments. Future updates will shed light on how the recent apparent signals of greater party-state friendliness towards the private sector are altering market participants’ assessment of its prospects relative to the state sector.