“It is already four in the afternoon. Are you sure you want to finish drawing these accounting documents?” a manager asked me while I was working on an external audit project at a state-owned securities firm in China. I could only smile and say that I would finish it as soon as possible before five o’clock, their off-duty time.
There was no concept of off-duty for our project team. We usually left the building around midnight. This excessive diligence may be due to our understaffing, which contrasts starkly with our client, a State-Owned Enterprise (SOE).
Such as the securities firm we worked with, SOEs are extremely prevalent in China. Many are large enough to occupy the latest Forbes World Top 2000 in 2022 with 399 Chinese companies listed, most of which are SOEs. They are spread across different sectors of the economy, spanning the financial, banking, and energy markets.
As a crucial part of China’s economy, China’s state-owned enterprises are known as the backbone of China’s economy. And unlike their privately-owned counterparts, SOEs in China have unique advantages in the market. But despite their profound presence in China, due to their close connections to the Chinese government, geopolitical issues such as the US-China trade war have significant implications for their overall strategy.
As China’s economic clout grows, SOEs seek international expansion, vying to participate actively in the global market.
SOEs in Contemporary China
There are more than 150,000 SOEs in China. According to the state-owned Assets Supervision and Administration Commission of the State Council, the assets of all Chinese SOEs reached about US $21.67 trillion in 2017. In the same year, SOEs sold more than $7.67 trillion in goods and services. And in the final quarter of 2019, Chinese SOEs represented 4.5% of the global economy. China’s SOEs are essential not only for the domestic market but also for the worldwide market.
As a unique but dominant player in the Chinese economy, SOEs bear many controversies. Unlike private enterprises, SOEs often are accused of low economic performance and inefficiency.
A famous term in modern economics — “China Puzzle”— illustrates the unconventional economic development in China. The country lacks market-supporting institutions, and many government interventions characterize the market. Still, China’s economic growth ranks among the top in the world.
A significant reason for this is that many well-known Chinese banks are SOEs, with many ranking high in the latest Forbes World Top 2000 in 2022. Liu (whose full name cannot be revealed for anonymity reasons), a director from a large state-owned bank’s head office, speaks to SOEs’ advantages in the market, saying, “The core competitiveness of the bank can be summed up in six words: large, comprehensive, stable, innovative, excellent, and strong.” To stress their recent innovative strategy, Liu added, “The important increment that currently leads to the improvement of competitiveness comes from the empowerment of technology.”
And these dimensions that Liu mentioned explain SOEs’ competitiveness. With support from the government, SOEs in China have direct access to scarce resources with maximized resource mobility. As a result, it is easier for them to create capital-intensive industries. With ample government funds, SOEs can help maintain economic stability in China. The government can stabilize the price of products and support a relatively constant domestic market. Thus, SOEs intervene to provide social stability. And SOEs’ firm foundations, such as a sufficient supply of funds and political support, allow the quick adoption of advanced technology, mitigating the lower productivity caused by its public and monopolistic nature.
Not only are SOEs the bedrock of China’s economy, but they also exert social influence. Liu illustrates the enterprise’s response to the recent COVID-19 pandemic as an example: “First, the company adopted the method of working from home”; “Second, they pay more attention to the impact of the pandemic on society, organically combine helping the government to solve problems with accelerating their innovation and development, and actively respond to the needs of the public by rationally adjusting their business direction.”
Consequently, with a direct connection to the government, SOEs often become the social role models of policy followers and develop better policy responses with the vital industries they control.
However, SOEs can also be problematic at times. They require stricter management to counter corruption, a common phenomenon in SOEs globally. The working attitudes of employees pose another issue related to SOEs. Since market changes do not influence the company’s size, there is little room for promotion. Many employees have been doing the same job for a long time but can’t get promoted. The lack of upward mobility to higher positions discourages people from working hard.
Reactions to the US-China Trade War
Due to their connections with the national government, SOEs’ policies often react to geopolitical situations. A recent noteworthy circumstance is their reactions to the US-China trade war. During former U.S. President Donald Trump’s presidency, he imposed tariffs on almost all imports from China except for pharmaceutical products, totaling nearly $540 billion. The Chinese government implemented retaliatory tariffs exclusive to U.S. goods totaling $185 billion in 2018.
This initiated a tit-for-tat trade war between the two largest economies in the world. Following the Trump administration’s announcement of tariffs on solar panels and washing machines in January 2018, China’s Customs Tariff Commission of the State Council in April imposed additional tariffs of 25% on 106 items of products, including automobiles, airplanes, and soybeans.
As significant international trade actors in China, SOEs took action to influence the trend of the trade war. They adapted strategies to help the economy adjust to the challenging situation. As Liu describes, to mitigate the economic difficulties caused by the trade war, “their Bank expanded its responsibility to serve the real economy.” He says, “in the first half of 2022, the Bank increased domestic RMB loans by 1.61 trillion yuan, hitting a record high and ranking first in the market.” Thus, the bank benefits the economy by increasing support in critical areas and weak fields in the real economy.
SOEs took further steps to support the Chinese Communist Party in “combating” the U.S. government. The relationship between U.S. enterprises and China’s SOEs illustrates this phenomenon. Joseph Jiang, China’s National Sales Manager of an American company in the oil and gas industry, expresses the difficulties during the trade war.
“Starting from the US-China trade war, we have been seeing the business climate has been deteriorating so that many big U.S. companies and their products are not among the preferred choices, especially by the big SOE customers,” Jiang says. He introduces the concept of SOE’s “bottle-neck” policy when referring to localization. In response to the trade war, SOEs quickly adjusted their strategy to suit political interests, encouraging the local firms to replace the U.S. companies with substitutes despite their immature technology.
Nevertheless, the strategy to support the government in the trade war created troubles for SOEs. The “bottle-neck” policy adopted by SOEs is risky. The substitute local technology replacing the United States is not mature enough. As a result, Mr. Jiang believes the approach was bold. In addition, most companies in China suffered trade losses in the China-US Trade War, including SOEs. The Chinese government’s subsidies to them reflect their shortage in capital inflow. According to statistics, China had $35 billion in export losses in the US market. SOEs that have contributed significantly to China’s economy are in a similar situation.
Aside from different enterprises’ perspectives, Han-hui Hsieh, a postdoctoral scholar from the Department of Political Science and International Relations at the University of Southern California, analyzes this circumstance from the angle of political influence. He comments, “Though the trade war causes negative outcomes, it cannot stop the rising of China’s power.” He expresses confidence in the resurgence of China’s economy. Specifically, he describes SOEs as a double-edged sword. “Although SOEs might lack efficiency, in this case, they can respond more quickly to the government’s needs and impose obstacles on foreign enterprises and companies.” In terms of international relations, he agrees that, theoretically, SOEs in China may act as an “economic deterrence.” However, he stresses that he cannot find an “empirical case” to support the argument.
Transformations to Globalization
SOEs are trying to expand to the world market to adapt to globalization and complex interdependence. These expansions may reshape the international order in the 21st century.
Unlike the outward foreign direct investments (FDI) strategy, Chinese SOEs have promoted unique initiatives, such as the ‘Beijing Consensus’ and ‘win-win’ cooperation, closely tied to Beijing’s interests. Before gaining a foothold in the developed world, these initiatives have reshaped developmental trajectories in multiple developing countries across Latin America and Africa.
Liu depicts the progress in the internationalization of the bank in his experience. “The past ten years can be the bank’s most rapid decade of international development.” He mentions an old saying in the market about the so-called “Big Four” of the Banking industry in China, which are all SOEs. He describes their expansions vividly. “ICBC wants to go overseas, ABC wants to enter the city, CCB wants to go to the countryside, and Bank of China wants to go ashore.” He also shows the data: “As of June 2022, the bank has established 421 overseas institutions in 49 countries and regions and established business relationships with 1,434 foreign banks in 142 countries and regions.”
As a result, China’s SOEs are following the pace of the times to globalize and occupy overseas markets. As a unique economic force that belongs to China, SOEs are still anomalies in the liberal international order. Suppose they can better cope with the potential problem of lower productivity. In that case, SOEs may be on a more sustainable trajectory.