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China’s State-Owned Enterprises Will Continue in the Post Covid-19 Trade War

Jul 29, 2020

COVID-19 has put the brakes on the world economy, and China has been no exception. These effects have rippled across many countries that have benefitted from China’s lending spree over the past couple of decades, and whose economies have now taken a plunge. Many, if not all, are now in desperate need of debt restructuring or debt forgiveness. The current situation will also force China to rethink the role of state-owned enterprises (SOEs).  

Much has been written and debated about China’s SOEs and their inefficiencies. These so-called “zombie enterprises” not only create market distortions, but also constitute a significant drag on the Chinese economy. In the case of these companies, it is the state that decides which industries will be protected, who will receive subsidies, and who gets favorable loans, rather than allowing private markets to determine which companies grow or shrink.

The overwhelming evidence for the efficiencies gained by an open market versus a mercantilist approach are already well understood and not up for debate. With their share of Western educated elites, Beijing must certainly recognize this as well. The question is: why does Beijing cling to this state capitalist model?


First, the CPC recognizes that its legitimacy depends in part upon a steady stream of vital resources such as oil and gas that must be imported. As such, these resource networks cannot be threatened in any way.

Second, trade routes such as those flowing through the Arabian Sea, Bay of Bengal, and the Strait of Malacca, transit some of the world’s most ungoverned and volatile regions in the world, and are constantly vulnerable to piracy, terrorism, and possibly blockades and attacks in times of war. 

Third, the states in these regions are also ones generally in desperate need of infrastructure investment. Indeed, these latter two factors are correlates because infrastructure investment is generally recognized as a critical driver for economic development. It is in these three factors where the SOEs, the BRI, and related geopolitical issues begin to converge.


One of the key solutions to addressing China’s industrial overcapacity over the past few years has been the BRI, which has been further solidified by President Xi. As most of the countries in the BRI are low-income or middle-income, their development relies heavily upon external aid. Currently, some 130 countries have signed cooperative agreements with China on the BRI.

While the COVID-19 pandemic has no doubt changed the dynamics between debtor nations and China, what is noteworthy is that Beijing has often written-off loans without a formal renegotiation process, even when there were few signs of debt distress. A 2019 paper from the National Bureau of Economic Research (NBER) indicates that there have been 140 cases of debt write-offs and restructurings with developing countries since 2000.

The governing nature of SOEs has played a significant role. Private enterprises assess a project in terms of its financial viability. If a project has no foreseeable return on its investment, then there is simply no business rationale for its undertaking. SOEs are different in that state ownership in a company facilitates the control of these companies such that profit maximization is not the only consideration for an SOE. Instead, decision-making will likely be based upon any number of Beijing’s broader political and foreign policy objectives. This “clientelist” relationship between the government and SOEs makes it hard for such enterprises to make trade and investment decisions that may not support China’s broader foreign policy objectives.


No doubt, these debt write-offs and renegotiations are initiated to create goodwill and enhance bilateral relations, but they actually go much further. According to a roundtable of China scholars at the Brookings Institution in Washington, the strategic agendas pursued by these SOEs “play out differently in different countries, which is illustrated by China’s approach to resolving debt, accepting payment in cash, commodities, or the lease of assets.” These strategic agendas come into focus where China’s investment “aligns with China’s strategy of developing its access to ports that abut key waterways.” As a tool of economic statecraft, profit maximization is not necessarily the critical deciding factor—if, in fact, the deciding factor at all. Therefore, it would be a mistake to view the BRI in the context of traditional Western aid.

Additionally, it is virtually impossible to achieve a high degree of precision on the level of China’s loans overseas to the developing world. Generally, China funds BRI projects through its policy-banks such as the China Development Bank and the Export-Import Bank of China via China’s SOEs. Neither these banks nor the recipients themselves share the rates at which these loans are made. This no-strings-attached opaque lending approach not only allows recipient countries to evade international standards such as human-rights, transparency, and environmental standards, but it can also lead international investors to underestimate the risks involved in buying these countries’ bonds or making loans to these countries.

The Paris Club, which tracks sovereign bilateral borrowing, would normally track these transactions. However, since China is not a member, the NBER analysis highlights that it “has not been subject to the standard disclosure requirements.” Therefore, China does not provide its direct lending activities related to the BRI. The NBER study estimates that nearly half of China’s loans to the developing world are “hidden debts” that “distort policy surveillance.”


Likely by design, the opacity of these transactions also makes it difficult to connect the dots on the intent of the loans. By their actions, however, places like Sri Lanka, Djibouti, Pakistan, the Maldives, the Solomon Islands, and sub-Saharan Africa all appear to support Beijing’s interests in one or more of these five broad ways:

1) Strategic location for basing, logistics, and intelligence collection;

2) Strategic resource flow to China;

3) Resource route risk mitigation and emergency response;

4) Compelling countries to switch their diplomatic allegiance from Taiwan, and;

5) Attempts to divide the Western alliance, as it has done with Piraeus Port, or with 5G technology.

As Beijing approaches the centenary of the founding of the People’s Republic of China in 2049, members of the CPC have embarked upon a multi-tiered and multi-dimensional campaign to become a “fully developed, rich, and powerful” country by that year. A critical component of this campaign has been the role played by SOEs.

The COVID-19 pandemic has not only hit the brakes on this campaign but will also complicate Beijing’s need to balance its geopolitical interests against the precipitous decline on the assets of SOEs as well as declining investments in the private sector. A return to long-term growth will require Beijing to not only find efficiencies in the allocation of resources, but also to find efficiencies in productivity, which will not happen without the private sector,

While reform of China’s SOEs may result in a mixed-ownership structure consisting of public/private investment, China’s mercantilist approach, at least for the foreseeable future, is not something the US will be able to change as Chinese Foreign Minister Wang Yi recently invoked the coming of the “New Cold War” with Washington. The hard truth, as Robert Samuelson has noted, is that protecting the state owned firms may be more political than economic and “that’s why it may be so hard to change.” Whatever strategies the US policymakers would consider in developing to manage the Sino-American relationship, Washington must begin with this political elephant in the room.

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