Can a Tiger Change Its Stripes? Reform of Chinese State-Owned Enterprises in the Penumbra of the State

Abstract

We thank the Penn China Research and Engagement Fund for financial support, as well as seminar participants at two conferences held at the Penn Wharton China Center. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Measuring distortions in international markets: Below-market finance

“…where is a risk-free rate; is an asset beta 26 for each industry, averaged globally; and ERP is an equity risk premium, i.e. the premium investors receive for holding equity as opposed to risk-free assets.…”

“…To verify results and assess their sensitivity to the choice of benchmarks, the analysis further compares the average required rate of return (RRR) for each sector against that sector's observed average return on 26 Betas are common financial indicators that measure the correlation between specific stocks (for a firm or a sector) and the overall market. They are formally defined as the covariance between specific stock returns and overall market returns divided by the variance of overall market returns.…”

“…In effect, below-market finance lowers companies' cost of capital below what it would be absent government support. This concerns both below-market borrowings and below-market equity since debt and equity are the two components of a company's weighted average cost of capital (WACC), which companies normally estimate by using the CAPM (Graham and Harvey, 2001 [26]). A lower cost of capital should in turn incite firms to invest more than they would otherwise, all other things being equal.…”

Measuring distortions in international markets

“…States, other OECD countries, Singapore, and Chinese Taipei have therefore been a regular feature over the period studied. 45 Chinese acquisitions of foreign semiconductor firms happened almost exclusively in the years 2014-18, with 2015-16 the record years. This followed the creation in 2014 of China's National IC Fund, which authorities initially endowed with CNY 139 billion (about USD 23 billion) to invest in the country's semiconductor industry.…”

Property Rights, Political Connections, and Corporate Investment

“…We have also tried to shed light on this concern empirically. We use two measures of financial constraint, the size-age measure (Hadlock and Pierce, 2010), and the external-finance reliance measure (Rajan and Zingales, 1998 Harrison et al (2019), which suggests that former SOEs that are private now --and our titling non-SOEs would fit this category --tend to still enjoy benefits of access to finance.…”