A Model of China's State Capitalism

76 Pages Posted: 20 May 2012 Last revised: 15 Aug 2015

See all articles by Xi Li

Xi Li

University of Arkansas - Department of Finance

Xuewen Liu

Hong Kong University of Science & Technology (HKUST)

Yong Wang

Hong Kong University of Science & Technology (HKUST)

Date Written: August 2015

Abstract

This paper documents a hallmark feature of China's state capitalism as the state controlling the economy in a vertical economic structure: State-owned enterprises (SOEs) monopolize key industries and markets in the upstream, whereas the downstream industries are largely open to private competition. We develop a general-equilibrium model to show that this unique vertical structure, when combined with openness and labor abundance, is critical in explaining a puzzling fact about China's economy: SOEs outperformed non-SOEs in the past decade while the opposite was true in the 1990s. We show how the upstream SOEs extract rents from the liberalized downstream sectors in the process of industrialization and globalization. It implies that the unusual prosperity of SOEs in China can be merely a growth-undermining symptom of the incompleteness of market-oriented reforms rather than a proof of their efficiency dominance over non-SOEs. Emergence, sustainability, and other macroeconomic implications of this model are also discussed.

Keywords: State Capitalism, China Economy, Growth and Development, SOEs, Structural Change, International Trade, Sustainability

JEL Classification: E2, F4, O1, P2, G2

Suggested Citation

Li, Xi and Liu, Xuewen and Wang, Yong, A Model of China's State Capitalism (August 2015). Available at SSRN: https://ssrn.com/abstract=2061521 or http://dx.doi.org/10.2139/ssrn.2061521

Xi Li

University of Arkansas - Department of Finance ( email )

Fayetteville, AR 72701
United States

Xuewen Liu

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

HOME PAGE: http://xuewenliu.people.ust.hk/

Yong Wang (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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