China’s National Champions: Demystifying China’s Stodgily Operated Entities

Updated: Jan 23, 2021

When Mao Zedong and the Communist Party of China (CPC) declared victory over Chiang Kai-shek and the Nationalists in 1949, the People’s Republic of China (PRC) that emerged bore the scars of Japanese invasion and two decades of civil war. In that moment, China began its resplendent recovery from a nation of broken cities, homes, and lives to the world’s second largest and most dynamic economy.


In facilitating this recovery, the PRC outlined numerous economic policies ranging from the Great Leap Forward to 13 different five-year plans. One of the key aspects of China’s economic recovery involves utilizing state-owned enterprises (SOEs). The Organisation for Economic Co-operation and Development (OECD) defines SOEs as entities where “the state has significant control through full, majority, or significant majority ownership.” The PRC has provided tremendous support[note] SOEs received access to subsidies and tax incentives (Ma, J. (2012, January 1). State-Owned Enterprises: Partners and Competitors. Retrieved January 9, 2018, from[/note] and protection[note]China artificially raised the barriers of entry in key SOE industries.[/note] to improve its adolescent enterprises’ competitiveness with more mature, foreign competitors.

In spite of the immensity of several Chinese SOEs,[note]Chinese SOEs are the second, third, and fourth largest companies in the world in terms of revenue (Fortune Global 500 List 2017: See Who Made It. (n.d.). Retrieved January 10, 2018, from[/note] few outsiders understand what they are and how they operate. The dearth of understanding is driven by the SOEs’ black-box style business practices, which stem from the lack of public accountability and financial disclosure.[note] Chinese SOEs typically do not release audited financial statements.[/note] These, in turn, have contributed to the current state of SOEs and challenge their feasibility moving forward.


Today the PRC has roughly 150,000 SOEs, which generate one-third of Chinese GDP and employ 20 percent of China’s workforce. Of the 150,000 SOEs, the central government directly manages 101 strategically important SOEs through the State Assets Supervision and Administration Commission (SASAC). The 101 SOEs alone have assets valued at nearly $7.7 trillion, and the three largest generated revenues of over $845 billion in 2016.

While the size and performance of China’s SOEs appears impressive, their rosy exteriors belie severe faults: debt and corruption.

Debt. Chinese banks see loaning to an SOE as a risk-free investment. After all, the SOE is controlled by the government, and the government will step in and prop up the SOE if solvency issues arise. However, the perceived safety of loaning to SOEs has resulted in SOEs receiving 30 percent of all loans. This is troubling for two reasons:

  1. Chinese SOEs are vastly overleveraged with debt valued at $14.4 trillion[note]Wang, X. (2017, October 05). China’s twenty-year dream of SOE reform still unfulfilled. Retrieved March 15, 2018, from[/note] – an amount representing 115 percent of Chinese GDP;[note]Reuters. (2016, May 10). Ballooning state firm debt poses contingent risk to China – Moody’s. Retrieved January 10, 2018, from[/note] and

  2. Private firms with high-growth potential could be precluded from accessing the capital that they need to grow.

Corruption. While the crushing debt load facing SOEs is troubling, the alleged corruption is far more worrisome. Research on firm corruption in the PRC indicates that SOEs have a 35 percent higher level of corruption than privately owned firms.[note]Wang, Y., & You, J. (2012). Corruption and firm growth: Evidence from China. China Economic Review, 23(2), 415-433[/note] Corruption among Chinese SOEs is generally borne out by embezzlement by [note]On October 12, 2017 Chinese officials Jiang Jiemin and Li Chuncheng were sentenced to prison sentences of 16 and 13 years respectively. Jiemin was CEO of China’s largest oil company (CNPC and PetroChina) and a leading member of an organization that oversaw China’s biggest SOEs (SASAC). Chuncheng was a ranking party official. Both were convicted of bribery. (Spegele, B., & Chin, J. (2015, October 12). China Sentences Two in Corruption Fight. Retrieved January 10, 2018, from[/note] [note]Chang Xiobing was sentenced to six years for bribery. He served as CEO of Chinese SOE’s China Unicom and China Telecom. (South China Morning Post May 31, 2017)[/note] and alleged accounting improprieties. In July 2017, the Chinese National Audit Office (CNAO) confirmed suspicions relating to SOEs’ dubious accounting practices. The CNAO examined 20 of the 101 SOEs directly controlled by the Chinese government and found 18 were using improper accounting practices. In total, the examined SOEs overstated revenues by a combined 200.1 billion yuan (almost $30 billion) and income by 20.3 billion yuan (around $3 billion).While it’s unlikely that the rest of China’s other 150,000 SOEs are overstating revenues to the extent of the firms audited, the lack of transparency precludes the public from evaluating management’s stewardship of communal resources.

The Feasibility of SOEs Moving Forward

Although SOEs enjoy many benefits, they are encumbered with the incongruent expectations of both promoting societal welfare by maximizing employment and increasing profits by enhancing competitiveness and operating efficiency.

In the past, SOEs benefitted from decades of overly indulgent handouts and protectionist policies from the PRC. However, if SOEs are to be a driving force of growth in the PRC, rather than the brakes, they need real reform. Although the PRC understands the need to reform its SOEs, their operation has largely remained unchanged for decades. Presently, the PRC is in the process of rooting out corruption and is actively considering consolidation and mixed-ownership as ways to fix its SOEs.

Rooting out Corruption. Since 2012, the PRC has been actively working to root out corruption in all aspects of itself – including its SOEs. While rooting out corruption is a major step in the right direction, the PRC must demand radical increases in transparency if it is to maximize the effect of its anti-corruption campaigns. In November 2017, Transparency International (TI) released its 10 Anti-Corruption Principles for State-Owned Enterprises. The PRC would do well to implement TI’s recommendations, including following best practices for governance, public reporting, and ensuring that third-parties interacting with SOEs adhere to anti-corruption policies.

Consolidation. In addition to the PRC’s efforts to root out corruption in its SOEs[note]China’s anti-corruption began in 2012 and has targeted individuals ranging from management in SOEs to high-ranking members of the CPC.[/note], many party members are proposing consolidation as a way to improve firm competitiveness. Those who favor merging SOEs reason that combining companies will enhance existing economies of scale; however, many merging companies are unable to achieve the economies of scale that they desire. Typically, struggling businesses have real issues – making them bigger rarely yields remediation.

Mixed Ownership. Besides anti-corruption policies and mergers, the PRC is now attempting to transition from a state-ownership to a mixed-ownership model. The PRC is employing two methods to achieve mixed-ownership:

  1. Strategic Investment. The rationale underlying strategic investment is clear: a struggling, debt-ridden firm receives an infusion of capital, a strategic partner, and access to gifted management. For example, several of China’s largest tech giants invested $12 billion in state-owned China Unicom. The move was billed as a way for China Unicom to improve its 4G capabilities as well as make steps toward 5G implementation. In addition to profiting from Unicom’s future success, Unicom’s private investors are tech companies that are uniquely qualified to capitalize on Unicom’s improvement. In the future, PRC officials and businesses would do well to find potential win-win opportunities for strategic investment.

  2. SOE Listing on an Exchange. In addition to seeking investment and ownership from profitable, private entities, a number of SOEs are listing on PRC exchanges (i.e., Shanghai, Shenzhen, or Hong Kong). Currently, 66 of the 101 SOEs directly managed by the PRC are listed, albeit only a small percentage of ownership is available.

While both forms of mixed-ownership inject desperately needed capital into SOEs, there is an ideological split surrounding the mixed-ownership movement among leading CPC[note]CPC refers to the Communist Party of China[/note] officials. Those dissenting abhor mixed-ownership as a move towards privatization, which they decry as “wrong-headed thinking.”[note]Wu, W. (2017, June 17). How the Communist Party controls China’s state-owned industrial titans. Retrieved January 09, 2018, from[/note] Still, other party members posit that mixed-ownership affords the SOEs the opportunity to improve productivity and innovation.


Today, China stands strong as a global superpower; however, its long-term development remains hamstrung by its resistance to weaning its SOEs off of state support. Moving forward, SOEs need to eliminate corruption, deleverage, and improve operating efficiency. While these objectives are quite simple in theory, execution is elusive. Further, any real progress in reforming SOEs must include adapting expectations as a prerequisite. At the present, Chinese SOEs may be considered too big to fail; however, failing to enact real change just might make them too big not to.



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