How strategic are China’s state firms?

Dinny McMahon of the WSJ has an excellent profile of a giant but obscure Chinese state-owned enterprise, Sinomach. I have been fascinated by SOEs since I first moved to China, and over the past couple of years I have also spent a lot of time digging into the finances and other technicalities of how the SOE sector works. Dinny’s piece nicely captures a lot of the key facts about the SOE sector today: 1) far from being world-straddling corporate giants, most Chinese SOEs are poorly performing companies suffering from a combination of arbitrary political goals and poor management; 2) a lot of “SOE reform” happened from 1998-2003, but not a lot has happened since, and there is a lot of room to further overhaul these companies — which indeed the government is now trying to do; 3) the government’s support for SOEs is based on the premise that they will develop “strategic” technologies to boost national security and competitiveness, but in fact the actual achievements in this area are decidedly subpar. (Those interested in more data and detail on these issues can look at the paper on SOE reform I wrote for the Paulson Institute.)

To close, here’s one lovely tidbit from the Sinomach story:

Despite China having passed through more than three decades of reform, Sinomach’s Erzhong unit—set up by China’s Red Army in 1958—still adheres to many of the traditional customs of the country’s major state-owned firms. It still pays retirees a living stipend, and runs a sports center with two swimming pools and a television station. Staples of the station’s programming, which is only available on the factory grounds and to people living in residential zones once owned by the company, include a U.S. English teaching program from the early 1990s and training programs for operating and repairing machinery and electrical equipment.

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