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A Model of China's State Capitalism

Author

Listed:
  • 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)

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.

Suggested Citation

  • Xi Li & Xuewen Liu & Yong Wang, 2015. "A Model of China's State Capitalism," HKUST IEMS Working Paper Series 2015-12, HKUST Institute for Emerging Market Studies, revised Feb 2015.
  • Handle: RePEc:hku:wpaper:201512
    as

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    File URL: http://iems.ust.hk/assets/publications/working-papers-2015/iemswp2015-12.pdf
    File Function: First version, 2015
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    References listed on IDEAS

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    Cited by:

    1. Liu, Zheng & Wang, Pengfei & Xu, Zhiwei, 2017. "Interest-Rate Liberalization and Capital Misallocations," Working Paper Series 2017-15, Federal Reserve Bank of San Francisco.
    2. repec:eee:moneco:v:94:y:2018:i:c:p:94-113 is not listed on IDEAS
    3. Hui He & Nan Li & Jing Fang, 2016. "China’s Rising IQ (Innovation Quotient) and Growth; Firm-level Evidence," IMF Working Papers 16/249, International Monetary Fund.
    4. repec:eee:jcecon:v:46:y:2018:i:2:p:515-543 is not listed on IDEAS

    More about this item

    Keywords

    structural change; growth and development; state capitalism; Chinese economy; state-owned enterprises;

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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