Resurgence of State-Led Growth in China?

Nicholas R. Lardy (PIIE) and Zixuan Huang (PIIE)

December 30, 2016 11:15 AM

A new report from the Chinese statistical authorities shows that for the first time in almost four years the growth of profits of state-controlled industrial firms has exceeded that of private registered industrial firms.

An earlier post on China Economic Watch examined an apparent massive surge in the role of state firms in capital formation and a concomitant decline in the role of private firms in the first half of 2016. The conclusion was that the relative role of state firms had increased, but not nearly as much as official data suggested.

According to the latest figures, state-owned firm profits rose 8.2 percent through November while profits of private enterprises climbed only 5.9 percent. Is this a harbinger of a return to state-led growth under President Xi Jinping?

Figure 1 Growth of industrial profits (year-to-date), February 2012-November 2016 (percent)
PIIE.com

In short, no. Profits of state industrial enterprises in 2016 have been recovering from a disastrous decline of more than 20 percent in 2015 (figure 1). In contrast, profits of private registered firms rose by almost 4 percent in 2015. Thus the more modest growth of profits of private industrial firms this year is from a much stronger relative base.

This looks like a cyclical recovery of profits of state firms rather than a fundamental realignment in the relative roles of state and private firms.

Indeed, the share of industrial profits generated by state-controlled firms, which has been declining for at least a decade, is only about half the share of private registered firms and has not surged this year (figure 2). In short, this looks like a cyclical recovery of profits of state firms rather than a fundamental realignment in the relative roles of state and private firms. Registered private firms racked up profits of RMB2.1 trillion in the first 11 months of this year, while state-controlled firms’ profits were only RMB1.1 trillion.

Figure 2 Share of industrial profits (year-to-date), February 2006-November 2016 (percent)
PIIE.com

These data understate the relative profit position of private industrial firms. Data on state industrial profits is comprehensive, including profits of traditional state-owned companies as well as the profits of limited liability companies and shareholding corporations in which the state is the sole, majority, or dominant owner. Data on private industrial firm profits is for registered private companies only and excludes profits of limited liability companies in which the majority or dominant owner is private. On a comprehensive basis, profits of private industrial firms can be estimated to account for about 55 percent of total industrial profits, roughly three times the profits of state-controlled industrial firms.

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