Economy China After and Before Crisis

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We are the (National) Champions: Understanding the Mechanisms of State Capitalism in China Li-Wen Lin Curtis J. Milhaupt*

Introduction China’s emergence as a global economic power poses enormous explanatory challenges for scholars of comparative corporate governance. While China appears to present a new variety of capitalism, frequently labeled “state capitalism,” the features and implications of this system are still poorly understood.1 Particularly since China’s economic system may be in its early stages of development, understanding the mechanisms by which state capitalism currently operates and how they may change as Chinese enterprises globalize is a pressing task for researchers. One highly distinctive characteristic of state capitalism in China is the central role of about 100 large, state-owned enterprises (SOEs) controlled by organs of the national government in critical industries such as steel, telecom, and transportation. Although few of these firms are household names in the West, they dominate major industries in China and are increasingly active in global markets. As The Economist recently noted, “as the economy grows at doubledigit rates year after year, vast state-owned enterprises are climbing the world’s league tables in

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Lin is a PhD Candidate in the Sociology Department of Columbia University. JSD, University of Illinois. Milhaupt is the Parker Professor of Comparative Corporate Law, and Fuyo Professor of Japanese Law, Columbia Law School. Helpful comments on an earlier draft were received from Yuen Ang, Donald Clarke, Robert Ferguson, Ronald Gilson, Jeffrey Gordon, Benjamin Liebman, Nicholas Howson, Mariana Pargendler, Hugh Patrick, Randall Peerenboom, Frank Upham, and participants at workshops in Beijing, and at Columbia, Cornell, Fordham, NYU and Vanderbilt Law Schools. We also thank interviewees in Beijing from business, government, and academia who generously shared their knowledge and insights with us. Interviews were conducted on an anonymous, background basis. 1 As one commentator puts it, “[H]aving co-opted Western capitalism and mirrored many of its surface features, China today poses an unprecedented and profound challenge to Western capitalism that scholars and policymakers have only begun to grasp.” Marshall W. Meyer, Is it Capitalism?, 7 Management & Org. Rev. 5, 8 (2010).

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Electronic copy available at: http://ssrn.com/abstract=1952623

every industry from oil to banking.”2 China now has the world’s third largest concentration of Global Fortune 500 companies (sixty-one)3, and the number of Chinese companies on the list has increased at an annual rate of 25% since 2005. These are China’s national champions. More than two-thirds of Chinese companies in the Global Fortune 500 are state-owned enterprises. Excluding banks and insurance companies, 4 controlling stakes in the largest and most important of the firms are owned ostensibly on behalf of the Chinese people by a central holding company known as the State-Owned Assets Supervision and Administration Commission (SASAC), which has been described as “the world’s largest controlling shareholder.”5 Though the elite firms such as Sinopec or China Mobile are listed on stock exchanges in Shanghai, Hong Kong or other world financial capitals, they are nested within vertically integrated groups. Their majority shareholder is the “core” company of the group – which is itself 100% owned by SASAC. The core company coordinates the group’s activities and transmits business policy to group members, who are contractually bound to promote the policies of the state. Individual corporate groups are often linked through equity ownership and contractual alliances to groups in the same or complementary industries, provincial level business groups, and even to non-economic state-controlled institutions such as universities. Top managers of national champions simultaneously hold important positions in the government and the Communist Party....
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