narrowed (Figure 10).<sup>15</sup> In the late 1990s, manufacturing sector returns to capital in SOEs lagged far behind private firms. Over time, the difference in returns declined to about 15 percentage points in 2011. This was still a sizable gap, which widened again after 2011, likely indicating continued SOE preferential access to capital.<sup>16</sup> The difference in the returns to labor between SOEs and private firms in the late 1990s was smaller than the one for capital—it declined over time and even turned positive in 2011–13.

The regression results for TFP show that the productivity gap between public and private manufacturing firms has also narrowed and become slightly positive in recent years. However, we interpret the differences in firm TFP with caution. Due to the lack of firm-level price data for outputs and inputs, only “revenue” TFP can be estimated (see the appendix). In revenue-based TFP measures, output is calculated using firm revenues deflated by industry-specific price indexes. Thus, revenue TFP combines quantity-based productivity and prices. Hence, differences in productivity between firms reflect changes in either efficiency or a firm’s market power (i.e., firm markups). For example, the efficiency of SOEs may decline relative to non-state firms, but a larger increase in mark-ups will result in a rise in their revenue productivity.

# **Figure 10 Relative efficiency of SOEs**

(percentage points relative to private firms) <!-- Start of picture text --> Return on capital Return on labor TFP<br>60<br>40<br>20<br>0<br>-20<br>-40<br>-60<br>1998 2000 2002 2004 2006 2008 2010 2012<br><!-- End of picture text --> Source: Authors’ regression estimates based on NBS’s Industrial Enterprise Survey. Note: The figure plots the coefficient on the ownership dummy by year.

Finally, the estimated differences in return on assets (measured using operating profits) reveal that manufacturing SOEs were less profitable than their private competitors throughout the period. In 2013, SOE profits were 9.0 percentage points lower than those of private firms (Figure 11). The deterioration in relative profitability of the state-owned firms coincided with an increase in their relative indebtedness since 2008. While the leverage ratio (total liabilities over total assets) of SOEs relative to private firms in manufacturing was on a declining trend before the global financial crisis, our estimates suggest that relative leverage rose again. The latest available data—aggregate numbers based on China’s Statistical Yearbook—suggest that the financial performance of SOEs weakened further between 2013 and 2016 but the negative trend may have started to reverse in 2017 (Figure 12).

> 15 The regressions were estimated with standard errors clustered by firm. The results are available from the authors upon request.

> 16 Cong and Ponticelli (2017) find that new credit under the 2009–10 economic stimulus package was allocated relatively more towards state-owned, low-productivity firms than to privately-owned, high-productivity firms. However, their results rely to a significant extent on the 2009–10 NBS Industrial Enterprise Survey data which we have found to be less reliable than in other years.

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