After decades of China’s market-oriented reform, why do state-owned enterprises (SOEs) remain predominant in certain sectors of the economy while retreating to near irrelevance in others? Existing scholarship largely attributes this layout of state ownership to an intentional government choice. In his pathbreaking and meticulously researched book, Zeng challenges this view. Introducing and applying an original analytical framework he terms the Legal Theory of State-Owned Enterprises (LTS), Zeng argues that the distribution of state ownership and SOEs is shaped mainly by two competing social costs: ownership costs and regulatory costs. Accordingly, China’s current SOE practice is more an endogenous response to the limitations of the law than an intentional political design.
Zeng’s central theoretical contribution in this book is the introduction and establishment of the LTS framework, which is elaborated in chapter one. LTS builds on Ronald Coase’s insight that firms exist because contracts are costly and Henry Hansmann’s argument that ownership is determined jointly by ownership costs and transaction costs. Zeng extends these theories to explore regulatory costs, focusing on the social costs arising from diverse forms of governmental intervention, such as regulations, taxation and subsidies. These costs include enactment costs, enforcement costs and, most significantly, the costs of opportunistic behaviour by either government or the regulated enterprise. From the perspective of LTS, Zeng points out that SOEs leave residual control rights with the government through ownership, effectively reducing regulatory costs, particularly in industries with high regulatory costs, such as natural monopolies and sectors with greater information asymmetry. However, SOEs themselves also incur higher ownership costs, such as agency costs and soft budget constraints. Therefore, the actual distribution of enterprise ownership depends on the trade-off between regulatory and ownership costs: in ordinary industries, private enterprises may play a more important role due to lower ownership costs, whereas in industries with high regulatory costs, SOEs retain their dominant positions.
Chapters two through five apply the LTS framework to four domains. Chapter two examines local-government-owned enterprises (LGOEs) across the economic sectors of water utilities, coal mining and commercial banking. It demonstrates how sector-specific regulatory costs, rather than governmental design, contribute to the persistence of state ownership. Chapter three presents a rigorous empirical analysis of 438 judicial decisions under Article 8 of China’s Administrative License Law, which concerns compensation when legal transitions force enterprise closures. The findings reveal that legal protection for private enterprises exhibits a hierarchical pattern: courts tend to offer stronger remedies to corporate plaintiffs than to individuals, higher-level courts tend to award greater compensation, and outcomes vary by sector. Zeng argues that the hierarchy is closely connected with various degrees of regulatory costs. Chapter four turns to public-private partnership (PPP) contracts in the infrastructure sector, where the government has stated a preference for private investors, yet SOEs still hold a dominant market position. Through an empirical analysis of judicial cases, Zeng has found that SOEs possess competitive advantages because they can mitigate government opportunism, namely, the risk that the government may unilaterally breach or terminate contracts. In comparison, the existing judicial system offers relatively weak protection for private investors. Chapter five discusses why China’s corporatization reforms have produced only partial convergence with the modern corporate form. The persistence of state presence within SOEs reflects an institutional trade-off: full corporatization would reduce ownership costs but increase regulatory costs by weakening the state’s control mechanism.
The book makes unique contributions to the fields of Chinese studies and trans-disciplinary research at the intersection of law and economics. First, LTS strongly challenges the conventional view that privatization is the universal remedy for inefficiency. By disaggregating the costs of regulation in various fields, Zeng shows that successful privatization depends on the completion of legal institutions, especially those capable of managing governmental opportunism. Second, LTS demonstrates that SOE governance is not monolithic. The degree of corporatization, the strength of limited liability, and the extent of state interference in SOEs all reflect a weighing of ownership costs and regulatory costs. These conclusions are particularly heuristic for China’s current efforts to deepen SOE reform, as they underscore the importance of upgrading and completing the legal institutions that underpin the marketplace. Moreover, as China seeks alignment with high-standard international economic rules, including those regarding SOEs, LTS offers an analytical foundation for identifying when treaty flexibility, such as reservations and transition periods, may be warranted due to persistently high regulatory costs.
One may expect a particularly fruitful avenue for future research to concern the legal domains that generate regulatory costs. The book develops its analysis primarily within the framework of administrative law. However, enterprises are also embedded in private law, including contract, corporate and property law, which the book touches on in chapter five’s discussion of the corporate form. Moreover, antitrust enforcement, fair competition review and sector-specific regulatory regimes could offer rich settings in which regulatory costs take on distinctive shapes. Applying the LTS lens to these areas could further illuminate the institutional trade-offs the book explains so insightfully.
This book will be of substantial value to a wide range of audiences. For researchers in Chinese law and political economy, this book offers theoretically rigorous and empirically grounded research on the distribution of SOEs in the English-language academic literature. For scholars of corporate governance, it constructs an analytical framework that can be applied and tested in other jurisdictions with significant state ownership stakes. The book is also suitable for graduate courses in Chinese law, corporate law, administrative law and comparative political economy, as it provides a clear theoretical structure, accessible case studies and rigorous empirical analysis.
In sum, the book is an academic work of considerable intellectual ambition and analytical sophistication. By insisting that the costs of relying on legal mechanisms be taken as seriously as the costs of state ownership, Zeng has reframed a long-standing debate and opened new terrain for scholarship and policy on the institutional foundations of China’s economic model and, more broadly, on where the boundary between state and market should be drawn.
