Explaining Local-Government-Owned Enterprises in Different Sectors in China through the Legal Theory

The competing forces of ownership costs and regulatory costs explain the sectoral distribution and historical development of state-owned enterprises (SOEs) in China. While SOEs are generally believed to incur higher ownership costs and have thus been reformed in many sectors, they continue to play a significant role in others. This chapter focuses on several sectors where a trend of "advance of the state, retreat of the private sector" has been observed. In the water utilities sector, empirical evidence suggests that in prefectures where the government fails to frequently adjust water tariffs according to the law to reflect changes in production costs, SOEs are more prevalent, indicating that challenges in tariff regulation likely deter private investment. In the steel and coal mining sectors, frequent changes in state policy have also likely negatively affected private investment. Additionally, in the commercial banking sector, the state maintains SOEs probably due to concerns that regulatory failures could lead to a financial crisis. These examples illustrate how regulatory costs influence the development of SOEs in regulated sectors in China.