State‐owned Enterprises in China as Macroeconomic Stabilizers: Their Special Function in Times of Economic Policy Uncertainty

• Published date: 01 September 2023
• Author: Mingyue Fang,Rui Ruan
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/cwe.12503

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 87–115, Vol. 31, No. 5, 2023 87

*Mingyue Fang, Associate Professor, College of Economics and Management, China Agricultural University,

China. Email: fmingyue@163.com; Rui Ruan (corresponding author), Assistant Professor, Center for China

Fiscal Development, Central University of Finance and Economics, China. Email: ruanrui@cufe.edu.cn.

The authors are grateful to anonymous referees for their helpful suggestions. Mingyue Fang’s research was

supported by the National Natural Science Foundation of China (No. 72002213). Rui Ruan’s research was

supported by the National Natural Science Foundation of China (No. 72303266), the Program for Innovation

Research at Central University of Finance and Economics (CUFE), and the Program for Innovation Research

at Center for China Fiscal Development at CUFE.

State-owned Enterprises in China as Macroeconomic

Stabilizers: Their Special Function in Times of

Economic Policy Uncertainty

Mingyue Fang, Rui Ruan*

Abstract

China has many state-owned enterprises (SOEs) and they have accounted for a large

proportion of China’s GDP over the last four decades. China’s rapid growth contradicts

literature that focuses on the inefficiency of SOEs. This study shows that, in periods

of economic policy uncertainty (EPU), SOEs have performed a special function as

“macroeconomic stabilizers.” Using Chinese listed firm data from 2008 to 2019,

we investigate five aspects of SOEs’ unique functions as macroeconomic stabilizers:

employment, investment, growth, financial operation, and expectations. When EPU

increased, SOEs had more employment, higher investment expenditure, lower

performance volatility, more robust fi nancial structures, and more stable expectations

than private fi rms. We employ the US–China trade war as an exogenous shock on EPU

to conduct a difference-in-difference-in-differences approach to mitigate the problem

of potentially omitted variables. The fi ndings of this study provide a new perspective to

better explain the functions of SOEs in the 21st century.

Keywords: China, economic policy uncertainty, employment, investment, state-owned

enterprise

JEL code: G31, G32, P31

I. Introduction

In the past four decades, China has achieved spectacular economic growth. From 1978 to

2020, the average annual growth rate of China’s economy was 9.4 percent (Lin, 2021).

Mingyue Fang, Rui Ruan / 87–115 , Vol. 31, No. 5, 2023

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

88

China currently has the largest number of state-owned enterprises (SOEs) in the

world, and SOEs occupy an important position across the entire economy. In 2020,

SOEs contributed about 30 percent of the GDP in China (Lin, 2021). From the

perspective of investment, SOEs’ investment in fixed assets, e.g., machinery and

equipment, as a proportion of GDP was maintained at around 20 percent during

1980–2017, as shown in Figure 1. Investment by industrial SOEs accounted for

more than 36.87 percent of the investment of all industrial enterprises at the end of

2017. Besides the historically relatively high share of SOEs, Figure 1 also refl ects

an interesting feature: Overall, the investment ratio of SOEs is negatively correlated

with the GDP growth rate. This phenomenon is particularly evident after 2008.

However, the existing literature argues that SOEs are ineffi cient in comparison with

private enterprises (Boardman and Vining, 1989). Given that SOEs are relatively less

effi cient than private fi rms, why was there an increase in investment of SOEs during

the economic downturn? We speculate that SOEs are likely to play unique roles that

private firms do not have in a period of economic downturn. This means that we

need to recognize the functions of SOEs from new perspectives in addition to the

perspective of economic effi ciency.

Figure 1. SOE investment/GDP and GDP growth in China (1980–2017)

Source: National Bureau of Statistics of China.

Notes: This fi gure presents the time-varying Chinese SOEs investment to GDP ratio and Chinese GDP growth

rate during 1980–2017. The solid line represents the ratio of SOEs investment divided by GDP, and the

dashed line represents the GDP growth rate. SOE, state-owned enterprises.