State Capitalism vs. Private Enterprise

62 Pages Posted: 2 Jan 2015 Last revised: 8 Feb 2017

See all articles by Donghua Chen

Donghua Chen

Nanjing University

Dequan Jiang

Wuhan University

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

Haitian Lu

Hong Kong Polytechnic University

Mingming Zhou

University of Colorado, Colorado Springs - College of Business

Multiple version iconThere are 4 versions of this paper

Date Written: February 6, 2017


We study the efficiency of capital allocations at state-controlled and privately owned business groups in China. Using highly granular data on within-group capital transfers, we document stark differences: while private groups allocate more capital to units with better investment opportunities, state groups do the opposite, especially when part of the “national team.” Minority shareholders in state owned enterprises suffer as a result. External monitoring by outside investors helps discipline state groups’ tendency to ignore investment opportunities. We trace capital allocation decisions to the objectives of the Chinese Communist Party, which incentivizes managers to maintain social stability. Consistent with the party’s policy preferences, capital allocations are used to prop up struggling employers in high-unemployment areas and when many young men enter the local labor market, but the interests of the party and of managers may be misaligned.

Keywords: State capitalism, business groups, internal capital markets, private enterprise

JEL Classification: G31, G32, G34, G15

Suggested Citation

Chen, Donghua and Jiang, Dequan and Ljungqvist, Alexander and Ljungqvist, Alexander and Lu, Haitian and Zhou, Mingming, State Capitalism vs. Private Enterprise (February 6, 2017). Available at SSRN: or

Donghua Chen

Nanjing University ( email )

Nanjing, Jiangsu 210093

Dequan Jiang

Wuhan University ( email )


Alexander Ljungqvist

Centre for Economic Policy Research (CEPR)

United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Haitian Lu (Contact Author)

Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom
Hong Kong

Mingming Zhou

University of Colorado, Colorado Springs - College of Business ( email )

1420 Austin Bluffs Parkway
Colorado Springs, CO 80933-7150
United States
1-719-255-5153 (Phone)

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