A Model of China's State Capitalism

Xi Li (), Xuewen Liu () and Yong Wang ()
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Xi Li: Department of Accounting, Hong Kong University of Science and Technology
Xuewen Liu: Department of Finance, Hong Kong University of Science and Technology
Yong Wang: Department of Economics, Hong Kong University of Science and Technology

No 2015-12, HKUST IEMS Working Paper Series from HKUST Institute for Emerging Market Studies

Abstract: Despite consistently lower productivity, China’s state-owned enterprises (SOEs) exhibited higher profitability than non-SOEs after 2001 while the opposite was true in the 1990s, even with markets becoming increasingly liberalized and GDP growth remaining high throughout the whole period. To address this growth puzzle, we develop a general-equilibrium model based on the following under-appreciated vertical structure featured in China’s state capitalism: SOEs monopolize key upstream industries, whereas downstream industries are largely open to private competition. We show how the upstream SOEs extract rents from the liberalized downstream industries in the process of structural change and globalization. The unprecedented prosperity of SOEs is thus symptomatic of the incompleteness of market oriented reforms, distorting factor prices, impeding structural change, depressing GDP, and reducing public welfare. We also explain how this vertical structure emerged endogenously, and why this development model of state capitalism is not sustainable. General implications for other countries are also discussed.

Keywords: structural change; growth and development; state capitalism; Chinese economy; state-owned enterprises (search for similar items in EconPapers)
JEL-codes: E02 E60 F63 O10 O43 P31 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2015-02, Revised 2015-02
New Economics Papers: this item is included in nep-mac and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:hku:wpaper:201512

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