Why Mixed-Ownership Reforms Cannot Fix China’s State Sector

Curtis Milhoupt of Columbia Law School and Wentong Zheng of the University of Florida Law School argue that state ownership is just one part of the problem facing inefficient firms in China. He shows that large firms, whether state or private, are broadly similar, arguing that policy conditions, not just ownership, need to change.


The roof of a PetroChina gas station collapses after heavy snow in Xingtai, Hebei province, November 12, 2009. Widespread snow across northern China on Monday evening paralysed traffic in many places and brought roads in the capital, Beijing, to a crawl. Lighter snow is expected in coming days, according to weather forecasts on the website of China's National Meteorological Centre. REUTERS/China Daily (CHINA ENVIRONMENT SOCIETY) CHINA OUT. NO COMMERCIAL OR EDITORIAL SALES IN CHINA - RTXQMOYAs the urgency to overhaul China’s economy builds, attention has increasingly focused on how to reform China’s state-owned enterprises (SOEs). Economic reforms have significantly reduced the scale of SOE involvement in the Chinese economy. Yet these firms still account for a substantial share of both assets and employment and dominate many important sectors, including electricity, telecommunications, railroads, civil aviation, petroleum, and banking. The details of China’s ongoing SOE reforms are still emerging but appear to revolve around the corporatization of SOEs, the streamlining of SOE management and supervision, and the efficient allocation of SOE assets in the overall economy.

One aspect of China’s emerging strategy has received a disproportionately large amount of attention—namely, ownership reform, which was also the subject of another of our policy memos, co-written by Marshall Meyer from the Wharton School at the University of Pennsylvania and Wu Changqi from the Guanghua School at Peking University. A central component of the current plan has been to convert more Chinese SOEs into so-called “mixed-ownership” firms—in other words, firms in which the state and private shareholders hold joint equity stakes. But Milhaupt and Zheng argue that the introduction of private capital into SOEs will not, in itself, alter a key determinant of behavior in the Chinese economy: the relationship between firms and the state.

Indeed, they say, the boundary between SOEs and privately owned firms in contemporary China is blurred by China’s institutional environment, which permits the state to exercise significant influence over firms irrespective of its equity ownership stakes and where firms of all ownership types compete for state-generated rents. As a result, SOEs and many large, privately owned firms in China actually share substantial similarities. And these similarities exist in areas commonly thought to distinguish SOEs from private firms, such as market access, receipt of state subsidies, proximity to state power, and the execution of government policy objectives.

One crucial policy implication of their new Paulson Policy Memorandum, therefore, is that merely adjusting the ownership structure of SOEs will not, in reality, yield significant changes in how SOEs are positioned in relation to the state. As a result, focusing on SOE ownership reforms deflects attention from an even more pressing policy issue: how to create an institutional environment more conducive to the growth and innovativeness of all firms in China, regardless of where they fall along the spectrum from state to private ownership.

To put this point bluntly, Milhaupt and Zheng’s analysis suggests that meaningful efforts to improve China’s economic performance and innovative capacity should focus not on ownership-based reforms in the state sector but rather on measures to transform the role of the state from an active market participant to the designer and arbiter of neutral, transparent rules for market activity. This transformation can only be accomplished by limiting the reach of the state in the economy and by introducing accountability into the state’s relationship with business enterprises of all types.

Some of the recent initiatives undertaken in the name of SOE reform, such as the ongoing consolidation of some of the SOEs under central administration, actually strengthen the grip of the state in key sectors. These initiatives undercut the prospects for boosting growth and enhancing innovative capacity in the Chinese economy. In simplest terms, Milhaupt and Zheng make the case for institutional, not ownership-based, reforms.


Curtis J. Milhaupt

Parker Professor of Comparative Corporate Law, Director of the Parker School of Foreign and Comparative Law, Fuyo Professor of Japanese Law, Director of the Center for Japanese Legal Studies; Columbia Law School

Curtis MilhauptCurtis J. Milhaupt is the Parker Professor of Comparative Corporate Law, Director of the Parker School of Foreign and Comparative Law, Fuyo Professor of Japanese Law, and Director of the Center for Japanese Legal Studies, all at Columbia Law School. He is also a member of Columbia University’s Weatherhead East Asian Institute.

Professor Milhaupt’s research and teaching interests include the legal systems of East Asia, comparative corporate governance, law and economic development, and state capitalism. In addition to numerous scholarly articles, he has co-authored or edited eight books, including Regulating the Visible Hand? The Institutional Implications of Chinese State Capitalism (2016), Law and Capitalism: What Corporate Crises Reveal about Legal Systems and Economic Development around the World (2008) and Transforming Corporate Governance in East Asia (2008). His research has been profiled in The Economist, the Financial Times, and the Wall Street Journal, and has been widely translated.

Prior to entering academia, Professor Milhaupt practiced corporate law in New York and Tokyo with a major law firm. He holds a J.D. from Columbia Law School and a B.A. from the University of Notre Dame. He also conducted graduate studies in law and international relations at the University of Tokyo.

Wentong Zheng

Associate Professor of Law, University of Florida Levin College of Law

Wentong ZhengWentong Zheng is Associate Professor of Law at the University of Florida Levin College of Law. He received his J.D. and Ph.D. in Economics from Stanford University, where he was an executive editor of Stanford Law Review. Prior to joining the University of Florida, he worked in private law practice at the law firm of Steptoe & Johnson LLP and taught at SUNY-Buffalo Law School.

His research focuses on legal and economic issues confronting private businesses and regulatory agencies in a globalized world. He has written extensively on trade remedies, subsidies, antitrust and competition policy, international intellectual property, and Chinese state-owned enterprises. His work has appeared in an array of journals, including the Georgetown Law Journal, UCLA Law Review, Notre Dame Law Review, Stanford Journal of International Law, and elsewhere.

Topics: Economy, SOE Reform