Friday, December 13, 2013

Changes in Ownership Structure of Firms in China over the last 10 years

Private vs Public Sector in China - Changes from 2003 to 2013

China Scholar Scott Kennedy has analysed China's Public vs Private Ownership Structure on his Blog - The China Track. In his article he analyses the structure of the Chinese Economy based using four categories of Firms - SOE's (public sector), Private Firms, Sole Proprietorships and Foreign Companies. He compares them using the following data - their absolute numbers, the Registered Capital of each category, most importantly on the Proportion of Capital owned by each category-type within the Overall Economy; and the average size of firm in each category. In this way we are able to identify the Relative dominance of each type of Firm within the Chinese Economy. More specifically the relative dominance of the Private and Public Firms becomes clear to us. He makes a time comparison between 2003 and 2013 and so we get a dynamic picture. Based on this we are able to make sense of the direction in which the Ownership structure of Chinese firms has been moving in the current period.

He starts with 2013: 

SOEs - China has 2.3 million SOEs which is 4.1% of the nearly 56.6 million companies. Their Registered Capital is 43.3 trillion, which is 46.6% out of a total registered capital of 93 trillion (across all firm types).  Average Capital/SOE = 18.8 million. He finds that in 2013, SOE or Public Sector Firms own almost 47% of the Total Capital.

Next private Firms can be broken up into Private (having multiple owners) ; Sole Proprietorship (single ownership) and Foreign owned Firms.

Private Firms - China has 11.6 million Private Firms which is 20.5 % of the Total. Their Registered Capital is 35.3 trillion, which is 38.0 % out of the total registered capital of all companies.  Average Capital/Private Firm = 3.0 million. Private (multiple owner) type of Firms own 38% of the Total Capital.

Sole Proprietorships - China has 42.2 million Proprietorships (Single) which is 74.6 % of the Total. Their Registered Capital is 2.2 trillion, which is 2.4 % out of the total registered capital of all companies.  Average Capital/Proprietorship = 0.05 million. As expected, Sole Proprietorships though so numerous own only 2.8% of the Nation's Capital.

He finds that in 2013, the Domestic Private Sector Firms (which includes Private & Proprietorship Firms) own 38.0 + 2.4% = 40.4% of the Total Capital.

Foreign Companies - China has 0.44 million Foreign Companies which is 0.8 % of the Total. Their Registered Capital is 12.1 trillion, which is 13.0 % out of the total registered capital of all companies. Average Capital/Foreign Firm = 27.4 million.  He finds that in 2013, Foreign Firms own 13% Capital employed in China.

Next he compares this with the situation 10 years earlier.

In 2003 

SOEs - China had 4.1 million SOEs which was 13.2% of the nearly 31.2 million companies. Their Registered Capital was 62.3 % against 46.6% in 2013.  So one can see that over the last 10 years the Public Sector capital has dropped by nearly 15%!

Private Firms - China had 3.3 million SOEs which was 10.5 % of the nearly 31.2 million companies.
The Registered Capital of Private Domestic Firms has increased from 14.9 % in 2003 to 38% in 2013!

Proprietorship Firms - China had 23.5 million which was 75.4  % of the total. The same proportion as in 2013!. They employed almost 1% capital.

Foreign Firms - China had 0.29 million Foreign Firms which was 0.9  % of the total - same as in 2013! Their Registered Capital was 21 % in 2003. Over the last 10 years the capital employed by Forign Firms has dropped by 8% points to 13% now in 2013.  A drop of nearly 35% in their proportion within the National Total! 

Essentially we can conclude that out of the proportion of Total Capital of all firms, Domestic Private Firms (both types) have seen their Proportion of Capital increase by a massive 24% (from 16% to 40% approx). This has occurred at an expense of Public-SOE firms whose proportion in the Total capital has decreased by nearly 16% (from 63% to 46% approx) and it is a result a reduction in Foreign Firms whose proportion in Total Capital has dropped by 8% (from 21 % to 13%). As is common knowledge we see that SOEs have lost considerably but not substantially. They seem to be retaining control of almost half the National Economy and stabilising at that high level.

We also find that currently on an average SOEs employ almost 6 times the amount of Capital which a Domestic Private Firm does. We also see that a Foreign Firm employs almost 9 times the Capital employed by a Domestic Private Firm. The Domestic Private sector has gained very substantially in this period. Are its glory days behind it and would it stabilise at around this level? Based on its size compared to the size of SOEs and Foreign Firms one might be tempted to say that even if it does not radically increase its proportion out of the Total Capital Employed certainly a period of consolidation lies ahead and the Size of Domestic Private Firms is likely to rise substantially in the coming years.

Scott Kennedy notes 3 further points:
1) The domestic private firms have developed capacity to increase at the expense of not just SOEs but also the Foreign Firms. They are now competitive and technological equipped to gradually start rolling back the foreign MNC challenge.
2) The average SOE firm has substantially increased its size in terms of registered capital! At a six-fold increase this has been far greater than for the others. It might have been due to some consolidation and mergers among them.
3) He concludes that process of slow constant erosion of SOEs and Foreign Firms by the Domestic Private Firms is on. Maybe this trend will slow down as the SOEs have reorganized themselves by 2013. He notes that unlike 10 years ago when the SOEs had tremendous access to Power, currently each of these blocks - SOEs, Domestic Private Firms and Foreign Firms have growing clout within the political system.

Please click here to access Scott Kennedy's article on the above issue.

Some other interesting facts about the Chinese Economy.
SOE Sales - While the SOEs own 46% of the Total Capital of Firms, their sales are substantially lower. They sell only 25%  of the product output of China.

Global Accumulations - China's Integration into and Appropriation by Global Capitalism
As regarding exports, many argue that China's Trade Surplus is unfairly and wrongly biased in China's favor. They say that in many cases while China imports parts, it exports the finished product. The export price  of the Branded product is much much higher than the prices of the parts.

Let us see this through the example of of iPhone assembly operations in China. The parts of an Apple iPhone reach China from the US and neghbouring countries. It is valued at around $163. China assembles these parts for a cost of only $7!! These iPhones are then exported to the US where say this model sells for around $400. The export of this iPhone from China will be valued at the final sales price of  $400 and not at $170!! So while China earned $170 - $163 = $7, its trade figures reflect a trade surplus of $400- $163 = $227!! This happens in many cases where the finished product is exported from China. This is also/ primarily a way for the se Large Corporates to show no profit in the US and nso pay o taxes in the US. These corporates get away without paying taxes and these profits are transferred to Tax Havens  (No-Low Tax countries.

Local Accumulations - Local Capitalism at Play in China
LAND - It is estimated that close to a close to 4 million Chinese farmers lose their land every year to their local governments who are in league with Real Estate Land Mafia or expanding industries. This is partly to generate funds for the Local governments who face a hard budget constraint since their revenues were slashed during of reallocation-redistribution of Centra-Local Tax Finances in several rounds of Fiscal Policy Alterations. And it is partly a corrupt rent-seeking exercise. It is said that each acre of land of land is purchase from the Chinese farmer at a cost of around $18,000 and sold tothe builders or industrialists at a price of $720,000!! An increase by a factor of 40. Or a profit margin in the region of 4,0000%. Once must clarify that these are only approximate figures and more than anything they vary drastically from region to region. For example, resale prices in Pearl River, Wenzhou and Yangtze delta will be much higher than at other locations.

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