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A Model of China's State Capitalism

Listed author(s):
  • Xi Li

    ()

    (Department of Accounting, Hong Kong University of Science and Technology
    Institute for Emerging Market Studies, 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
    Institute for Emerging Market Studies, Hong Kong University of Science and Technology)

Registered author(s):

    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.

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    File URL: http://iems.ust.hk/wp-content/uploads/2015/02/IEMSWP2015-12.pdf
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    Paper provided by HKUST Institute for Emerging Market Studies in its series HKUST IEMS Working Paper Series with number 2015-12.

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    Length: 75 pages
    Date of creation: Feb 2015
    Date of revision: Feb 2015
    Handle: RePEc:hku:wpaper:201512
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