China now has the second-largest number of Fortune Global 500 companies in the world. Most of the Chinese companies on the list are state-owned enterprises (SOEs) organized into massive corporate groups with a central government agency, known as SASAC, as their ultimate controlling shareholder. Despite these groups’ importance to China’s domestic economy and foreign investment strategy, many features of the SOE sector—particularly the organizational structure and governance characteristics of the SOE groups—remain a black box. Unpacking the black box requires moving away from the standard focus on agency costs in listed firms that predominates in the corporate governance literature. Instead, we examine the relational ecology in which the SOE groups exist, with a focus on institutionalized mechanisms linking the business groups with other organs of the party-state. We argue that through these linkages, Chinese managerial elites in the economy have assembled what Mancur Olson called an “encompassing organization”—a coalition whose members “own so much of the society that they have an important incentive to be actively concerned about how productive it is.”

Exposing the mechanisms of Chinese state capitalism in this way raises many questions for scholars and policymakers, the salience of which increases as the global interaction of Chinese firms expands. For example, is the rise of Chinese SOEs adequately explained by prevailing theories in the comparative corporate governance literature? How might the increased operation of Chinese SOEs in foreign markets change the institutional trajectory of corporate capitalism in China? Do the institutions of market and investment regulation in the United States adequately contemplate hybrid business-political actors like Chinese SOEs? By examining the organizational structure of SOEs, this Article provides a foundation for future research on a pivotal aspect of China’s contemporary political economy.