China's State-Owned Businesses Are Powerful, But Many Not Not Particularly Profitable

The common belief is that China's economic success is an object lesson in state capitalism. The government owns the biggest companies: as the economy grows at double-digit rates year after year, vast state-owned enterprises are climbing the world's league tables in every industry from oil to banking. Yet alongside the mighty state engine myriad smaller ones are whirring-and probably more efficiently.

China's state-controlled entities are not particularly profitable. A study by Qiao Liu, a professor at the University of Hong Kong, concludes that the average return on equity for companies wholly or partly owned by the state is barely 4 percent, despite the benefit of cheap leverage provided by government-controlled banks. According to a recently published paper by Liu and a colleague, Alan Siu, the returns of unlisted private firms are no less than 10 percentage points higher.

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