China smaller companies offer greater growth potential, says Matthews Asia’s Henry Zhang

The opportunities in China’s SME sector are seen as better then larger sized former state owned enterprises (SOEs), according to Matthews Asia’s Henry Zhang.

China’s embrace of capitalism has benefited its socialist society over the last three decades. The country’s foundation for capitalism has been based on private ownership. This privatisation occurred in two stages: firstly, with agriculture in rural areas as the government aligned the economic interests of farmers directly with the output of their own plots of land.

Secondly, with the privatisation of China’s state-owned enterprises (SOEs) in urban areas. Despite having undergone some (ongoing) hurdles, China’s smaller firms have seen rapid growth as a result of both reform stages. The management styles of China’s SOEs differ vastly from the country’s small and medium enterprises (SMEs), due mainly to their differing incentive structures.

Unlike private entrepreneurs who seek to maximize their economic interests, executives of SOEs must typically adhere to government policies while pursuing profit at the same time. However, maximizing shareholder value sometimes conflicts with state goals and SOE managers rarely have share-based incentives. SMEs also tend to be more capital-efficient than SOEs.

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