A MODEL OF CHINAS STATE CAPITALISM

Chinas state-owned enterprises (SOEs) performed poorly compared to non-SOEs back in the 1990s. Yet despite their lower productivity, these SOEs began exhibiting higher overall prof-itability than the non-SOEs sometime after 2001, even though the markets became increasingly liberalized and GDP growth rates remained consistently high. To address this growth puzzle, we develop a general equilibrium model based on the following under-appreciated vertical structure featured in Chinas state capitalism: SOEs monopolize key upstream industries, whereas down-stream industries are largely open to private competition. We show how the upstream SOEs extract rents from the liberalized downstream industries in the process of structural change and globalization. The unprecedented prosperity of SOEs is shown to be a symptom of the incompleteness of market-oriented gradual reforms, which distorts factor prices, impedes struc-tural change, depresses GDP and reduces public welfare. We also explain how this vertical structure emerged in equilibrium and why this development model is not sustainable. Genera