THE HEADQUARTERS OF China Central Television, designed by Rem Koolhaas and Ole Scheeren, looks like a monstrous space invader striding across Beijing. The headquarters of the China National Offshore Oil Corporation resembles an oil tanker emerging from a shimmering sea. It was designed by Kohn Pedersen Fox, an international firm of architects, and sits directly opposite China’s ministry of foreign affairs. All over central Beijing you see state companies erecting giant monuments to themselves, reflecting their huge power and their vision of themselves as agents of modernisation.

That vision is not confined to Beijing. Petronas, Malaysia’s state-owned oil company, has built 88-storey twin towers in the heart of Kuala Lumpur. In Moscow, VTB, Russia’s second-largest state bank, has its headquarters in a sleek glass skyscraper in the spanking new Moskva City Business Complex.

The most striking thing about state-owned enterprises (SOEs) is their sheer collective might in the emerging world. They make up most of the market capitalisation of China’s and Russia’s stockmarkets and account for 28 of the emerging world’s 100 biggest companies. True, the state-owned sector as a whole has been in rapid retreat. It now makes up only about a third of China’s and Russia’s GDP, against almost all of it two decades ago. But this decline is the result of selective pruning rather than liberalisation. Governments have been letting go of the small in order to strengthen their hold over the large.

This has resulted in a couple of paradoxes. The SOEs are becoming wealthier and more powerful even as the overall state sector shrinks, and governments are tightening their grip on the commanding heights of the economy even as the private sector grows. The concentration of power in an inner circle of SOEs has been gathering pace over the past decade: China’s 121 biggest SOEs, for example, saw their total assets increase from $360 billion in 2002 to $2.9 trillion in 2010 (though their share of GDP has declined). And it has been given an extra boost by the 2007-08 financial crisis: in 2009 some 85% of China’s $1.4 trillion in bank loans went to state companies.

Governments are becoming more sophisticated owners. Only a handful of SOEs are still reporting directly to government ministries. Most governments prefer to exercise control through their ownership of shares: they have become the most powerful shareholders across much of the developing world from China to Thailand and from Russia to Saudi Arabia. Sometimes they hold all the shares, particularly in oil companies like Malaysia’s Petronas, transport firms like China’s Ocean Shipping Company and quasi-military outfits like Russia’s United Aircraft Corporation. But increasingly they prefer to dilute their shareholdings. The United Nations Conference on Trade and Development defines a state-owned company as one in which the state owns more than 10% of the shares. Some governments have mastered the art of controlling companies through minority stakes: in Russia, for example, the state has retained golden shares in 181 firms.

State enterprises have become more productive, thanks to a mixture of judicious pruning and relentless restructuring. In China their return on assets increased from 0.7% in 1998 to 6.3% in 2006 (though some say the figures are misleading). They have also become more international: companies that once served only their domestic market, such as Baosteel and Shanghai Electric, are striding onto the global stage. These three developments—more sophisticated methods of control, more productive use of assets and rapid globalisation—are going hand in hand.

The hard core of the state-owned sector are the national oil companies: the 13 giants that control more than three-quarters of the world’s oil supplies. Governments continue to keep a heavy hand on this industry. The Chinese state owns 90% of the shares in PetroChina and 80% of those in Sinopec. Even so, the national oil companies are being transformed by the same forces that are transforming the state-owned sector in general.

A few companies preserve the great tradition of state-sponsored incompetence and overmanning. Venezuela’s Petróleos de Venezuela, which is central to the patronage machine of the country’s president, Hugo Chávez, is an obvious example. More surprisingly, so is Mexico’s Pemex, which has successfully resisted numerous attempts to reform it. Malaysia’s Petronas has improved dramatically over the past five years. Saudi Arabia’s Aramco, which controls more than a tenth of the world’s oil and with it the fate of the world economy, is almost as well managed as private-sector oil companies such as Exxon Mobil. The Saudi monarchy has slimmed the company’s workforce, brought in professional managers, contracted out ancillary work and formed alliances with international companies.

The world is their oyster

More generally, national energy companies are no longer content just to sit at home and pump the oil or gas. They are increasingly venturing abroad in order to lock up future energy supplies or forming alliances with private-sector specialists to increase their access to expertise and ideas. Gazprom has been buying up oil and gas companies across eastern Europe and Asia. In 2008 it bought a 51% stake in Naftna Industrija Srbije, a Serbian energy giant. Chinese oil companies have been striking deals across Africa: in 2006 Sinopec bought a huge Angolan oil well for $692m. The multiplying alliances between national and international companies are not always successful: BP, for example, will not rush into any future deals with Russia’s Rosneft. But they are plugging national energy companies into the global market for people and ideas and closing the gap between the state-run and the private sector.

State capitalism also has a collection of companies that sit at the opposite end of the ownership scale from national energy companies: national champions that formally are privately owned but enjoy a huge amount of either overt or covert support from their respective governments. Sometimes such governments prefer to exercise their patronage at arm’s length because they have little experience of the sector; this is often true of the IT industry in China. Sometimes they offer their patronage to a private company after it has become a winner. Either way the end result is the creation of a new class of state companies: national champions that may not be owned by governments but are nevertheless closely linked to them.

 

China’s Lenovo likes to think of itself as a private-sector computer company, but the Chinese Academy of Sciences provided it with seed money (and still owns lots of shares), and the government has repeatedly stepped in to smooth its growth, not least when it acquired IBM’s personal-computer division for $1.25 billion in 2004. Brazil’s Vale also considers itself a private-sector mining company, but the government treats it as a national champion and recently forced its boss, Roger Agnelli, to step aside because it did not like his plans to sack workers. There is a long list of national champions that operate in the shadow of the state, including China’s Geely in cars, Huawei in telecoms equipment and Haier in white goods.

The wealth of nations

State capitalists are not just running companies; they are also managing huge pools of capital in the form of sovereign-wealth funds (SWFs). Leviathan is becoming a finance capitalist as well as a captain of industry.

The sovereign-wealth business was pioneered decades ago by the petrostates and by Singapore. The Kuwait Investment Authority was set up in 1953. But more recently the business has been turbocharged by two developments: the surge in energy prices and China’s accumulation of a vast current-account surplus. Today’s SWFs account for some of the world’s biggest pools of capital. The Abu Dhabi Investment Authority controls $627 billion, putting it in the same league as some of the largest American mutual funds. Saudi Arabia’s SAMA foreign-holdings company in December 2011 controlled $473 billion, China’s SAFE Investment Company $568 billion and China Investment Corporation $410 billion. In all, the world’s sovereign-wealth funds control about $4.8 trillion in assets, a figure that is likely to rise to $10 trillion by the end of this decade.

 

Sovereign-wealth funds come in two varieties: “savings” funds intended to find productive homes for investments, and “development” funds that also promote economic development. China Investment Corporation has focused on producing a portfolio of financial assets, for example, whereas Abu Dhabi’s various investment funds have been more interested in funding the region’s economic development to prepare for the day when the oil runs out. In 2008 Abu Dhabi created a fund that specialises in investing in high-tech companies, both at home and abroad. In its first big deal it formed an alliance with Advanced Micro Devices, an American chipmaker, to create a local semiconductor manufacturer, GLOBALFOUNDRIES.

The financial crisis of 2007-08 shifted the argument in favour of the second kind of fund. Soon after China Investment Corporation was set up in September 2007 it saw the money it had put into American investment banks turn to ashes. Petrostate SWFs have increased their emphasis on investing in science and research. Sovereign-wealth funds in Kuwait, Qatar, Russia, China, Kazakhstan and Ireland have been asked to support domestic financial institutions. Almost all funds are taking a more active interest in the way the companies they own are managed, for example by demanding a seat on the board.

Nasser Saidi, chief economist of the Dubai International Financial Centre, argues that the rise of the emerging world will inevitably force the global financial system to change, from a hub-and-spokes model (with London and New York acting as the hubs) to a spider’s-web model of many interconnected hubs. The 2007-08 crisis has dramatically speeded up this process: SWFs now like to do much of their business with each other rather than going through rich-world intermediaries. In 2009 China Investment Corporation and the Qatar Investment Authority signed a joint-venture agreement. In the following year a consortium of nine funds, including the Government of Singapore’s Investment Corporation, China Investment Corporation and the Abu Dhabi Investment Council, invested $1.8 billion in BTG Pactual, a Brazilian investment bank spun off from UBS, a Swiss bank.

It is possible for a country to have any or all of these institutions in place without being a member of the state-capitalist club. Norway boasts the world’s 13th-biggest oil company by revenue, Statoil, and its third-biggest sovereign-wealth fund, the Government Pension Fund, with $560 billion in assets, but requires both of them to behave like regular companies. These various elements can also be put together in a variety of ways. The next section will look at some of the different forms that state capitalism can take.