Capitalism with Chinese Characteristics Part II: The State-Capitalism System
China Institution Secrets #5
China also has something the United States no longer has at comparable scale: a vast state-capital system able to build infrastructure, absorb long-cycle risk, and invest in system capacity.
Part I has already shown that Chinese private capital is not the shadow of state planning, nor a special species that does not pursue profit. Like American private firms, Chinese private enterprises pursue growth opportunities, market share, technological advantage, economies of scale, supply-chain control, brand power, and future excess returns. They overinvest. They fight price wars. They go through industry shakeouts. They also produce world-class companies through competition. The behavior of Chinese private firms in electric vehicles, solar, batteries, internet platforms, consumer electronics, home appliances, express logistics, AI applications, and advanced manufacturing can all be understood through the logic of capitalist competition.
But this is only half of the China story. What truly distinguishes China from the United States and most Western economies is not that China lacks capitalism. It is that, beyond Chinese capitalism, there also exists a vast state-capital system. This state-capital layer includes central SOEs, local SOEs, state-controlled listed companies, state-owned financial institutions, policy finance, local government investment platforms, public infrastructure companies, and industrial-policy tools. They do not operate entirely according to the return function of private capital. Instead, they undertake investment tasks with longer time horizons, larger externalities, and stronger system-level characteristics. China’s distinctiveness lies precisely in the coexistence of private capitalism and a state-capital system, both embedded in one ultra-large industrial economy.。
I. China’s Distinctiveness Is Not the Absence of Capitalism, but a Different Capital Structure
If American capitalism mainly relies on private capital expanding under the impulse of growth expectations, then the Chinese model is better understood as a two-layer capital structure. One layer is private capital, responsible for market competition, technological iteration, commercial efficiency, and the discovery of growth opportunities. The other layer is state capital, responsible for infrastructure, energy, power grids, finance, transportation, telecommunications, resources, regional development, and long-term system capacity. China’s economy is neither a pure SOE economy nor a typical Western private-capitalist economy. It is a mixed-capitalist system. In this system, private capital pursues profits that can be internalized, while state capital undertakes many investments that generate large externalities, require long payback periods, produce dispersed commercial returns, but are critically important to the functioning of the entire economic system.
Fixed-asset investment data directly illustrates this two-layer structure. In 2024, China’s fixed-asset investment, excluding rural households, reached RMB 51.44 trillion. Of this, private fixed-asset investment was RMB 25.76 trillion, accounting for roughly 50.1%. The remaining portion was about RMB 25.68 trillion, or roughly 49.9%. Here, one must be careful: the National Bureau of Statistics’ category of “private fixed-asset investment” is not synonymous with “non-state investment.” It refers to investment by domestic entities with collective, private, or individual ownership characteristics, as well as entities controlled by them. It does not include foreign-invested enterprises or Hong Kong, Macao, and Taiwan-invested enterprises. Therefore, the portion obtained by subtracting private investment from total investment cannot simply be equated with “state-capital investment.” A more accurate term is non-private fixed-asset investment, which includes state-controlled investment, public-sector investment, foreign investment, Hong Kong/Macao/Taiwan investment, and other non-private investment. State-controlled and public-sector investment likely account for a large share of this category. Even with this qualification, the structure is highly revealing: in fixed-asset formation, a field directly tied to long-term productive capacity, China does not rely solely on private capital. Private capital and non-private capital almost equally participate in large-scale capital formation.
Even more important is the structure of investment momentum. In 2024, China’s total fixed-asset investment grew by 3.2%, while private fixed-asset investment declined by 0.1%. Infrastructure investment grew by 4.4%, manufacturing investment grew by 9.2%, and investment in the production and supply of electricity, heat, gas, and water grew by 23.9%. These figures show that during a period of property-sector adjustment, weaker private-sector confidence, and unstable demand expectations, China was still able to maintain investment in infrastructure, energy systems, and manufacturing capacity through non-private investment, state-controlled investment, public works, and policy capital. Private capital becomes more cautious during downturns. State capital can perform a stronger countercyclical and long-cycle function.
This is the fundamental difference between the capital structures of China and the United States. Of course, the United States also has public investment, government procurement, industrial policy, defense spending, and a basic research system. But large-scale corporate capital formation in the United States still has to be justified primarily through private capital markets and private firms’ expectations of future returns. Capital enters at scale only when a sector can generate a credible narrative of large future private returns, such as software, AI, platforms, finance, cloud computing, biotechnology, semiconductor design, oil and gas resources, or military contracts. China has an additional layer of state capital that can continue investing in fields where private returns are insufficient, dispersed, too long-dated, or too externality-heavy. High-speed rail, power grids, ultra-high-voltage transmission, ports, expressways, bridges, urban rail transit, water infrastructure, 5G networks, industrial parks, space programs, and basic energy systems all fall into this category.
Data on above-scale industrial enterprises also shows that China is not simply an “SOE economy,” but a composite industrial system made up of state-controlled, joint-stock, private, and foreign-invested enterprises. In 2025, China’s above-scale industrial enterprises generated RMB 139.20 trillion in operating revenue, RMB 7.40 trillion in total profits, and an operating profit margin of 5.31%.
Among them, state-controlled enterprises generated RMB 37.38 trillion in operating revenue and RMB 2.06 trillion in total profits, with an operating profit margin of 5.50%. Private enterprises generated RMB 50.54 trillion in operating revenue and RMB 2.28 trillion in total profits, with an operating profit margin of 4.51%. Foreign-invested enterprises and Hong Kong, Macao, and Taiwan-invested enterprises generated RMB 25.77 trillion in operating revenue and RMB 1.74 trillion in total profits, with an operating profit margin of 6.77%. Joint-stock enterprises generated RMB 112.54 trillion in operating revenue and RMB 5.54 trillion in total profits, with an operating profit margin of 4.92%.
These ownership categories are not simply additive. In particular, joint-stock enterprises overlap statistically with state-controlled, private, and foreign-invested enterprises. But the data are sufficient to establish one fact: China’s industrial system is not a single-ownership structure. Multiple forms of capital operate at the same time.
What is especially important in this data is that state-controlled enterprises generated less operating revenue than private enterprises, but their profit margin was slightly higher than both the overall industrial average and the private-enterprise margin. In 2025, the operating profit margin of state-controlled above-scale industrial enterprises was 5.50%, higher than the 5.31% margin for all above-scale industrial enterprises and higher than the 4.51% margin for private enterprises.
This does not mean that SOEs are naturally more efficient, because sector composition differs greatly. But it does refute one crude assumption: state-owned enterprises are not necessarily low-profit departments. Many state-controlled enterprises are concentrated in energy, resources, finance, telecommunications, electricity, public utilities, and basic industries. They perform system-level functions, but they also retain substantial revenue and profit weight.
Therefore, what truly distinguishes China from the United States is not whether capital seeks returns. The real distinction is what kind of capital is allowed to invest according to what kind of return function.
American private capital mainly pursues firm-level capital returns, even though it can also invest ahead of demand during bubbles and periods of imagined future growth. Chinese private capital likewise pursues commercial returns. But China also retains a state-capital layer that can incorporate considerations beyond enterprise profit: infrastructure coverage, supply-chain completeness, employment, regional development, energy security, technological autonomy, financial stability, national security, long-term productivity, and social stability.
This is the true specificity of China’s capital structure.
II. The Core Function of the State-Capital Layer: Investing in System Capacities That Private Capital Cannot Fully Internalize
State capital is not capital that does not calculate returns. It calculates returns across a broader scope, a longer time horizon, and more dimensions. Private capital is usually very good at investing in opportunities where profits can be internalized: platforms, software, finance, consumer brands, real estate, high-end manufacturing, resource development, patented drugs, AI models, semiconductor design, and business models that can generate network effects. In these fields, returns can be relatively clearly reflected in corporate income statements, stock prices, market capitalization, cash flow, and shareholder returns.
But many capacities that are crucial to a country’s long-term competitiveness are not easily captured as profits by any single firm. Roads reduce logistics costs for the whole society. Power grids support the entire industrial system and the absorption of renewable energy. High-speed rail changes the connectivity of city clusters and the movement of labor. Ports support the export system. Communications networks support the platform economy and digital governance. Industrial parks support supply-chain clustering and engineering density. These benefits are dispersed across the entire economic system, rather than concentrated on the income statement of one investing entity.
This is precisely the economic logic behind the state-capital layer. It can invest in system capacity, not just the profit of individual projects. A high-speed rail project may not generate a very high ROE for the railway company itself, but it can expand the radius of city clusters, reshape regional development, improve labor mobility, reduce business and travel costs, and bring second- and third-tier cities into a larger economic network. A UHV transmission project may not be fully explained by the profit margin of a single enterprise, but it can connect western renewable energy, coal-power bases, and hydropower resources with eastern load centers, improve national energy dispatch, support renewable-energy absorption, and reduce power constraints across the industrial system. A port or expressway project may have limited short-term cash returns, but it can reduce manufacturing logistics costs, improve export efficiency, and expand the market radius of enterprises. An industrial park may not itself be a high-profit asset, but it can organize land, financing, suppliers, equipment makers, engineers, logistics, and local government services into the same space, creating the economies of scale of an industrial cluster.
This kind of system return is the most important function of China’s state-capital layer. It does not replace the market. It creates more operating space for the market. Once this “system capacity” is translated into concrete infrastructure data, the gap becomes very visible.
By the end of 2024, China’s operating high-speed rail mileage had reached roughly 48,000 kilometers, with a plan to reach about 60,000 kilometers by 2030. By the end of 2025, China’s operating high-speed rail mileage further surpassed 50,000 kilometers. By contrast, the United States still has no comparable nationwide dedicated high-speed rail network. Acela and Brightline can reach relatively high speeds on certain local segments, but they are better understood as local high-speed or quasi-high-speed services, not a China-style high-speed rail system connecting major national city clusters.
The financial return of high-speed rail can of course be questioned. But what it truly changes is the radius of city clusters, population movement, business costs, regional connectivity, and the time distance of the national market. No private firm would build a national high-speed rail network for the sake of society-wide mobility efficiency. That is exactly why the state-capital layer and public investment exist.
The gap in power-grid and new-energy infrastructure is equally obvious. China has already built the world’s most complete ultra-high-voltage transmission system. RAND noted in 2024 that China already had 34 UHV lines, while the United States had no UHV lines in the strict sense. Subsequent data shows that since China’s first UHV project entered operation in 2009, the country has built 19 UHV AC lines and 20 UHV DC lines, with total transmission length exceeding 40,000 kilometers. China also plans to put another 15 UHV lines into operation between 2026 and 2030.
UHV transmission is not a project whose returns can be easily internalized by a single enterprise. Its real function is to transmit western renewable energy, coal-power bases, and hydropower resources to eastern load centers; improve national energy-dispatch capacity; support renewable-energy absorption; and reduce electricity constraints across the entire industrial system.
The United States, of course, has a vast power system. But in cross-regional long-distance transmission and national-level grid coordination, it still faces multiple constraints: permitting, interstate coordination, regulation, capital-return requirements, and local opposition.
EV infrastructure also shows that China’s state-capital layer is not simply “subsidizing companies.” It is building the underlying environment capable of changing the market demand curve. By the end of 2024, China had about 3.6 million public charging points, accounting for nearly 70% of the world’s public charging infrastructure. By 2025, China’s public charging network had expanded further to roughly 4.717 million public chargers.
By contrast, public charging points in the United States grew by 20% in 2024, but the total still remained below 200,000. EV demand is not a naturally given number. It is shaped by price, model availability, refueling or recharging networks, road experience, charging convenience, policy stability, and consumer confidence.
China’s EV market has been able to scale so quickly, reaching a current penetration rate of about 55%, far above the roughly 9% level in the United States, not only because corporate competition is intense and vehicle prices have fallen, but also because charging networks, urban roads, local policies, and grid infrastructure have jointly reduced the real cost for consumers to adopt electric vehicles.
Communications infrastructure follows a similar logic. By the end of 2024, China had built roughly 4.19 million 5G base stations, and by May 2025 that number had risen further to 4.486 million.
The United States does not have a fully comparable official statistic for 5G base stations. According to the Wireless Infrastructure Association’s broader wireless-infrastructure count, the United States had about 248,050 macrocell sites and 197,850 outdoor small cells by the end of 2024, but this is not a pure 5G metric.
A 5G base station is not necessarily a high-profit asset by itself. But it reduces the operating costs of digital applications, the industrial internet, logistics dispatch, urban governance, mobile payments, short video, e-commerce, smart manufacturing, and future AI terminals. Many of China’s digital-economy business models do not take place on an abstract “internet.” They take place on a physical network supported by telecom operators, tower companies, electricity, fiber-optic networks, urban infrastructure, and end-user devices.
New-energy and port systems further show that China’s system capacity is not a single-sector advantage, but a mutually reinforcing structure across multiple layers of infrastructure. By the end of 2024, China’s cumulative installed solar capacity had reached roughly 886 GW, including about 375 GW of distributed solar and about 511 GW of centralized solar. By contrast, U.S. utility-scale solar capacity stood at roughly 121 GW by the end of 2024.
China does not merely manufacture solar modules. It expands solar manufacturing, project development, grid connection, energy storage, UHV transmission, and local energy planning within one integrated system.
Ports follow the same logic. In 2024, China’s port cargo throughput reached roughly 17.6 billion tons, while container throughput reached about 330 million TEU. By comparison, U.S. container port throughput in 2024 was about 59.7 million TEU.
Port throughput is not merely a transportation statistic. Behind it lies the combined result of export-oriented manufacturing, inland logistics, rail and road connections, industrial clusters, customs efficiency, warehousing systems, and global shipping networks.
These infrastructure gaps show that the core function of China’s state-capital layer is not to replace the market, but to expand the market’s physical and organizational boundaries. High-speed rail expands the radius of population and business mobility. UHV transmission expands the radius of energy dispatch. Charging networks expand the consumption radius of electric vehicles. 5G expands the radius of digital applications. Centralized solar and power grids expand the radius of the new-energy industry. Ports expand the export radius of manufacturing.
Once these system capacities are built, the commercial opportunities available to individual firms are enlarged. EV companies are no longer facing only consumers in isolated cities, but a national market supported by charging networks. Solar companies are no longer facing only module exports, but a domestic power system capable of continuously absorbing new-energy installations. Manufacturing firms are no longer facing only local suppliers, but a national supply chain connected through ports, railways, highways, and industrial parks.
III. Mercantilism Creates a Unified National Market
A unified national market never emerges automatically from population size. It has to be continuously created by state capacity through infrastructure, institutional coordination, logistics networks, energy networks, communications networks, and standards systems. What China’s state-capital layer truly does is transform fragmented, broken, and local markets into a national market that can be entered, circulated through, traded across, and expanded.
Private capital can certainly build infrastructure in some areas. But it is rarely willing to spend decades continuously building high-speed rail, power grids, ports, communications networks, charging networks, and industrial parks under conditions of low profits, heavy assets, and high externalities. China’s distinctiveness is not that it lacks markets. It is that it uses state capital and public investment to continuously expand market space. State capital first builds system capacity; private capital then competes, iterates, reduces costs, and expands on top of that system. This is the real meaning of “the state builds the market, and the market releases growth.”
This kind of system return is the most important function of China’s state-capital layer. It does not replace the market. It creates more operating space for the market. Many Western observers understand China’s state role as market suppression. But over the past four decades, one of the most important functions of Chinese state capacity has been precisely the continuous construction of markets. Expressways reduce logistics costs. High-speed rail expands the radius of human mobility. Ports and airports connect China to global markets. Power grids and communications networks support the expansion of manufacturing and services. Industrial parks reduce the entry costs of firms. Local government investment promotion helps supply chains cluster rapidly. Public education and infrastructure improve the quality of the labor market. These are not the opposite of markets. They are the preconditions for markets to operate at larger scale.
More precisely, China’s state-capacity machine has long performed the function of building a unified national market. China is not naturally an efficient unified market. A country with 1.4 billion people, vast territory, multiple levels of government, enormous regional differences, and a complex urban-rural structure can easily be segmented into many local markets without continuous infrastructure construction, institutional coordination, logistics networks, energy networks, communications networks, standards systems, and administrative integration. A large population does not automatically mean firms can reach demand at low cost. Large territory does not automatically mean a unified market. A complete range of industries does not automatically mean supply chains can coordinate efficiently. One of the core functions of Chinese state capacity is to continuously convert a potential ultra-large market into a real national market that can be entered, circulated through, traded across, organized, and expanded.
Behind this lies a deep form of mercantilist state capacity. The Chinese state machine does not simply stand outside the market and allocate resources. To a significant extent, it plays the role of market-maker. Building roads, bridges, power grids, ports, airports, industrial parks, communications networks, unified standards, investment-promotion systems, financial coordination mechanisms, logistics systems, education capacity, and engineering talent pipelines is, in essence, a process of lowering transaction costs, expanding market radius, improving factor mobility, and connecting dispersed local demand and industrial capacity into a larger national market. China’s marketization was not simply “the state exits, the market enters.” It was closer to “the state builds the market, and the market releases growth.”
This is also why many Global South countries and emerging economies struggle to sustain industrial upgrading. They may not lack entrepreneurs. They may not lack labor. They may not lack openness. Many countries have export-processing zones, tax incentives, low-wage labor, and foreign-invested factories. But they often lack the state capacity to connect these local advantages into a national industrial system. A port may exist, but inland logistics costs may remain very high. A particular industrial park may host foreign factories, but local suppliers may fail to develop. Labor may be cheap, but education and skills systems may be insufficient. Electricity supply may be unstable. The financial system may be too short-term oriented to support long-term manufacturing investment. The central government may have development ambitions, but local implementation may be fragmented and policy continuity weak. As a result, these countries can absorb some assembly functions, but struggle to form complete industrial chains; they can attract foreign factories, but struggle to cultivate domestic champions; they can rely on low wages for one round of growth, but struggle to convert that low-wage advantage into engineering capability, supply-chain depth, infrastructure density, and national market scale.
China’s state-capital layer fills precisely these gaps. China’s manufacturing competitiveness is not only about low wages, and not only about subsidies. It is about the state’s continuous ability to transform an ultra-large population community into an ultra-large market community. A unified national market is not an abstract slogan. It is the foundation of industrial upgrading. Only when firms can scale quickly in a sufficiently large domestic market, iterate rapidly, spread fixed costs quickly, and form supplier networks at speed can they build scale advantages in global competition. Only when local markets are connected by infrastructure and institutional systems can domestic demand become a training ground for industrial upgrading, rather than merely a set of dispersed consumption points.
This is also why the United States and many Western countries increasingly struggle to compete with China in certain ultra-large-scale, ultra-long-cycle, high-externality industries. The United States does not lack capital, technology, universities, entrepreneurs, or financial markets. On the contrary, the United States has the world’s deepest capital markets, the strongest software companies, the strongest platform firms, the strongest AI ecosystem, the strongest biotechnology sector, and the strongest semiconductor-design capabilities. But American capital is mainly organized around the logic of private returns. When a sector can generate high margins, platform monopolies, network effects, intellectual-property rents, or financialized returns, American capital can be mobilized with extraordinary force. Software, AI, cloud computing, chip design, financial markets, biotechnology, and premium consumer brands are all areas where American private capital excels.
But when competition shifts toward low-margin, heavy-asset, long-cycle, high-coordination-cost, high-externality sectors, the United States and many Western countries are prone to underinvestment. Private capital is reluctant to carry low-return infrastructure investment over long periods. Listed companies are reluctant to sacrifice current profit margins for system capacity twenty years in the future. Local governments often lack sufficient fiscal and administrative coordination capacity. Regulation, litigation, community politics, and environmental permitting raise construction costs. Public investment cycles are affected by elections, fiscal disputes, and partisan conflict. Industrial policy is difficult to execute with long-term stability. The result is that many links that are crucial to national industrial capacity are chronically undervalued, underinvested in, or outsourced under market logic.
The advantage of China’s state-capital layer is that it can internalize these dispersed external benefits into national investment decisions. It can build infrastructure ahead of fully mature demand. It can lay down foundational capacity before business models become clear. It can invest countercyclically when private capital becomes cautious. It can undertake universal-service investment when regional development is uneven. It can provide patient capital when the return cycle of strategic industries is too long. Its strength is not single-point innovation, but the long-term organization of material capability.
Of course, this system also has costs. State capital can produce redundant construction, debt accumulation, soft budget constraints, inefficient projects, and resource misallocation. Local governments may chase fashionable sectors and create homogeneous competition. SOEs may face weaker efficiency pressure because they carry multiple objectives. Policy finance and local platforms may hide risks. If the state misjudges a strategic direction, the scale of misallocation can also be very large. The Chinese model is not naturally superior, nor automatically efficient. The key issue has never been simply whether state capital exists, but whether state capital can maintain discipline, feedback, constraints, and correction mechanisms.
But in some key industries, the central question is often not whether there is waste, but who can build the foundational system first. Once railways, power grids, ports, communications networks, new-energy supply chains, city-cluster infrastructure, advanced manufacturing clusters, engineering talent systems, and industrial parks are formed, they reduce the cost of subsequent enterprise innovation and expansion, converting firm-level competitive advantages into national industrial advantages. This is the most important strategic significance of China’s state-capital layer: it transforms system capacities that private capital cannot easily build alone into the competitive foundation of the entire economy.
IV. Fortune Global 500 Evidence: China Is Not a Low-Profit SOE Economy, but a Two-Layer Enterprise System
Data at the Fortune Global 500 level provides a more direct view of the two-layer structure of China’s enterprise system. In the 2025 Fortune Global 500, Greater China had 130 companies on the list, while the United States had 138. If Taiwan and Hong Kong are excluded, the mainland China sample still includes 121 companies.
By a rough controlling-shareholder classification, about 86 of these companies are state-controlled enterprises, while 35 are privately controlled enterprises. The state-controlled firms generated roughly US$7.76 trillion in combined revenue and about US$378.6 billion in profit. The privately controlled firms generated roughly US$2.34 trillion in combined revenue and about US$133.3 billion in profit.
In other words, at the level of world-scale large enterprises, Chinese state-controlled firms do indeed dominate in aggregate scale. But private firms are no longer peripheral. They contribute roughly one-quarter of the revenue and profit in the mainland China Fortune Global 500 sample.
This structure itself is a miniature version of “capitalism with Chinese characteristics.” State-controlled enterprises are concentrated in sectors such as energy, electricity, oil, banking, insurance, construction, transportation, telecommunications, resources, infrastructure, and heavy industry. Privately controlled enterprises are more concentrated in internet platforms, electric vehicles, batteries, consumer electronics, home appliances, express delivery, retail, chemicals, private steel, solar supply chains, and advanced manufacturing.
SOEs provide the systemic foundation; private firms provide market competition, efficiency pressure, and technological diffusion. China’s large-enterprise system is neither a purely state-owned economy nor a typical Western-style private-capitalist system. It is an ultra-large enterprise system jointly composed of state capital and private capital.
Profit-margin data further shows that Chinese SOEs cannot simply be described as “low-profit departments.” In this sample of 121 mainland Chinese Fortune Global 500 companies, state-controlled enterprises had a combined profit margin of roughly 4.9%, while privately controlled enterprises had a combined profit margin of about 5.7%. Private firms were slightly higher, but the gap was not large.
This aggregate result itself refutes two crude claims. First, SOEs are not naturally low-profit. Second, private firms are not indifferent to profit. What often determines profit margins is not ownership itself, but sector structure, asset characteristics, competitive intensity, and functional positioning.
A more detailed sector-level comparison makes the conclusion even clearer. In financials, the Chinese state-controlled financial-enterprise sample had a weighted net profit margin of roughly 15.6%, higher than the roughly 9.9% margin of the Chinese private financial-enterprise sample, and also not below the estimated 14.5% level of large U.S. financial firms. This shows that in highly institutionalized, license-based, balance-sheet-driven sectors such as banking and insurance, Chinese state-controlled firms are not low-profit departments. Of course, the high profitability of Chinese financial SOEs cannot be attributed simply to market competitiveness. It also reflects financial licenses, the deposit system, credit backing, interest-rate spreads, and the structure of China’s national financial system. But this is precisely the point: state capital in China is not only low-return infrastructure capital. It also includes high-profit financial capital.
In technology and internet, the picture is completely different. The Chinese state-controlled technology and internet sample had a weighted net profit margin of roughly 6.3%, compared with about 11.3% for Chinese private technology and internet firms and about 23.0% for large U.S. technology and internet firms. This shows that Chinese private capital is indeed more commercially profitable in technology and platform sectors, but U.S. firms still have the highest profit margins. The reason is not that Chinese private firms do not pursue profit. It is that U.S. firms capture more global technology rents, software rents, platform rents, cloud-computing rents, AI-chip rents, and digital-advertising rents. Chinese technology firms are more often positioned in hardware, applications, platform competition, and supply-chain integration. Their profitability is not weak, but their ability to capture global rents remains weaker than that of U.S. technology giants.
In autos, industrials, and equipment, Chinese private firms are much closer to large U.S. firms. The Chinese state-controlled sample had a weighted net profit margin of roughly 1.0%, compared with about 6.4% for Chinese private firms and about 6.8% for large U.S. firms. This set of figures is especially useful because it shows that Chinese private manufacturing is not simply a low-profit sector. The Chinese private manufacturing firms represented by BYD, CATL, Midea, Haier, Luxshare Precision, and others have already built scale, technology, supply-chain capability, and profitability in global competition. By contrast, the lower margins of some state-owned auto, equipment, and heavy-industry groups more likely reflect historical assets, employment responsibilities, industrial-policy tasks, local economic functions, and sectoral burdens. The core point is not that “SOEs must be inefficient” or “private firms must be efficient.” It is that in competitive manufacturing sectors, private firms are closer to a profit-maximization logic, while state-owned industrial enterprises often carry more non-profit objectives.
In heavy-asset and foundational sectors, Chinese SOE profit margins are lower, but this cannot be simply equated with lack of value. In energy and utilities, the Chinese state-controlled sample had a profit margin of roughly 3.4%, compared with about 6.4% for comparable large U.S. firms. In metals, mining, and materials, Chinese state-controlled firms had a margin of roughly 1.5%, Chinese private firms about 0.8%, and comparable U.S. firms about 5.3%. In engineering and infrastructure, Chinese state-controlled firms had a margin of roughly 1.0%, Chinese private firms about 4.8%, and comparable U.S. firms about 4.3%.
These figures do show that Chinese heavy-asset SOEs have relatively low profit margins in many sectors. But many of these firms are also responsible for energy supply security, power-grid stability, infrastructure construction, railway and road engineering, resource security, urbanization, regional development, and countercyclical investment. A low enterprise-level profit margin does not mean a low system-level return.
This is the core difference between China’s enterprise system and America’s enterprise system. The American large-enterprise system looks more like a profit-maximization machine, especially in its ability to collect technology rents, financial rents, brand rents, and platform rents at the top of global value chains. China’s large-enterprise system, by contrast, contains both profit machines and system-capacity machines. Chinese private firms in internet platforms, electric vehicles, batteries, consumer electronics, home appliances, express delivery, and advanced manufacturing increasingly resemble American-style profit machines. But Chinese SOEs in energy, electricity, finance, telecommunications, transportation, construction, resources, and infrastructure function more like carriers of national system capacity. They may not have the highest profit margins, but they control the foundational systems on which the entire economy operates.
Therefore, when using Fortune Global 500 data to observe China, the most important conclusion is not that “SOEs are stronger than private firms,” nor that “private firms are more efficient than SOEs.” The real conclusion is that they perform different institutional functions. The core value of SOEs lies in systemness, long time horizons, foundational capacity, and strategic functions. The core value of private firms lies in competition, innovation, efficiency, and global market expansion. State capital builds the foundation; private capital competes on top of that foundation. State capital stabilizes the system; private capital drives iteration. State capital undertakes low-profit, high-externality, long-term investment; private capital undertakes high-competition, high-risk, high-growth market discovery.
From a higher level, then, U.S.-China competition is not simply a competition between “high-profit private capitalism” and “low-profit state capitalism.” It is a competition between two enterprise systems. The American system is better at converting technology, finance, brands, platforms, and intellectual property into high profit margins. The Chinese system is better at organizing infrastructure, manufacturing capability, supply-chain density, engineering capacity, and state capital into a complete industrial system. The strength of the United States is capital return. The strength of China is system capacity. The advantage of the American enterprise system lies in capturing profit pools. The advantage of the Chinese enterprise system lies in capacity, infrastructure, and industrial-chain organization.
The problem of the Chinese model also lies here. System capacity does not automatically equal capital efficiency. China’s state-capital layer can build infrastructure, but it can also create debt. It can stabilize the industrial system, but it can also protect inefficient sectors. It can undertake long-term investment, but it can also produce redundant construction. It can promote regional development, but it can also encourage local-government investment impulses. China’s real future challenge is not whether it needs state capital, but how to keep state capital disciplined, bounded, and subject to correction. If state capital lacks constraints, it becomes low efficiency and high debt. If it contracts entirely according to private-capital logic, it weakens infrastructure, energy security, the industrial foundation, and long-term system capacity.
So the conclusion of Part II is not a simple celebration of SOEs. It is an explanation of the function of the state-capital layer. What truly makes China different is that it places private capitalism and a state-capital system inside the same ultra-large economic system. Private capital pursues growth opportunities; state capital builds system capacity. Private capital is responsible for competition and efficiency; state capital is responsible for infrastructure and long-term externalities. Private capital produces world-class companies; state capital supports the energy, transportation, communications, finance, and industrial foundations behind those companies.
This system is imperfect. But it explains why China can simultaneously have systemic giants such as State Grid, CNPC, Sinopec, China State Construction Engineering, and ICBC, while also having globally competitive private firms such as Huawei, BYD, Tencent, Alibaba, PDD, CATL, Xiaomi, Midea, Luxshare Precision, and SF Holding.
China is not distinctive because it lacks capitalism. China is distinctive because it has a vast private-capitalist sector while also retaining a vast state-capital layer. The core of Part I is that Chinese private capital is still capital. The core of Part II is that what truly makes China different is the state-capital layer. The former explains why China has market dynamism. The latter explains why China has system capacity. Taken together, they define the real meaning of Capitalism with Chinese Characteristics.
A sobering and enlightening analysis.