Internationally, there have been negative remarks about China's state-owned economy, with a major complaint aimed at China's subsidies to these companies. China's state-owned assets regulator has been constantly challenged on this issue.

"From the perspective of subsidies alone, there are no direct subsidies for state owned enterprises specifically," said Qi Yue, deputy director of Capital Operation Research at the State-owned Assets Supervision and Administration Commission (SASAC), adding that state owned enterprises (SOEs) are taking more social responsibilities, such as building railways, telecommunications infrastructure and power grid facilities in remote areas, projects traditionally deem as unprofitable yet vital for healthy economic development, to lay a solid foundation for the country's social development goals.

Cheap bank loans for SOEs

However, the topic of cheap bank loans for state-owned firms is another point with constant debates and arguments. Chinese banks, especially state-owned mega banks, have been backing SOEs with more credit support. The relationship between state-owned enterprises and state-owned banks are close by nature, and if there are defaults by SOEs, there's a high chance that they will be bailed out as well. Even today, more than 60 percent of the bank loans are given to SOEs, and then a bigger portion of the rest will be given to large private companies. Small firms only get a tiny portion of the total bank loans.

That is why many market spectators have the feeling that SOEs are crowding out private investment.

"But economic downturns especially post-COVID, there's a different argument," said Wang Dan, chief economist at Hang Seng Bank China, adding that the private parties are not investing in such a difficult time to reduce financial pressure and thus the SOEs are the only hopes for China to achieve quick economic recovery.

"This is exactly what happened after the COVID-19 breakout. We saw that SOEs are the ones which return to production first, and then their suppliers from the private sector can also recover," elaborated by Wang.

SOEs vs. non-state capital

To level the playing field, China is pushing for the mixed-ownership reform among SOEs, allowing these powerful companies to introduce non-state capital, be it private or foreign. These strategic external investors are participating in the management of SOEs, not only funds, but also ideas.

For this kind of reform, the focus of the debate is on the actual control of the decision making, because private capital can be very important shareholders but the final decisions are usually made by state-owned parties of all the reforms.

"We believe this institutional change is the most difficult, so private investors must be given more cash incentives and other social rewards to stay motivated to improve SOE efficiency. At the same time preserving the state interest," said Wang.

That's why regulators are giving SOE executives more autonomy in making corporate decisions. The new regulation approach aims to prevent excessive state intervention in making market based corporate decisions among SOEs.

Mixed-ownership reform

To fast-track mixed-ownership reform, China launched a 200-billion-yuan ($31 billion) fund in Shanghai last December, focusing on two key areas of investment. The fund will attract private capital to state-owned sectors and co-invest with SOEs in private firms to create synergies among these different types of companies.

Central SOEs have become shareholders in more than 6,000 non-state companies since 2013, according to data from SASAC. The regulator said that state-owned economy and private economy have always been supporting each other in coordinated development.

"As of now, more than 70 percent of Central SOEs are mixed-ownership firms, up 20 percent from the proportion in 2012," said Li Hanshi, Deputy Director of Enterprise Reform Research at SASAC. Li added that 60 percent of the provincial level SOEs have become mixed-ownership entities with 70 percent of them seeing profit growth since the introduction of non-state capital into their businesses.

Overall, the blending of state and non-state capital will increase the resilience of the country's industrial chains, said SASAC, adding that private firms and foreign companies are all independent market entities and potential mergers and reorganization among them will be market oriented, driven by the willingness of these companies.