TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

China is considered by many to be the defining example of state-run capitalism, but the Economist reports that not only are most companies majority privately-owned, but they are driving China’s economic growth:

China’s state-controlled entities are not particularly profitable. A study by Qiao Liu, a professor at the University of Hong Kong, concludes that the average return on equity for companies wholly or partly owned by the state is barely 4%, despite the benefit of cheap leverage provided by government-controlled banks. According to a recently published paper by Mr Liu and a colleague, Alan Siu, the returns of unlisted private firms are no less than ten percentage points higher.

That’s rather incredible, because it’s very difficult for private businesses to get loans through official channels. Operating outside the law is a significant risk for them:

Nevertheless, this form of business has inherent limits. To the extent that firms operate outside the law, they are vulnerable to shakedowns from local officials and mood-swings in Beijing. Although success brings praise, too much of it can invite envy and scrutiny. Each new list compiled of China’s greatest tycoons is often accompanied by stories about those on earlier lists who later fell foul of the law. In his remarks last year Mr Zheng, the provincial party official, said that the significance of private business was not understood: businessmen were often criticised (perhaps a veiled reference to being jailed) without good reason and if continually squeezed, would emigrate, sapping China’s vitality. The prospect of expropriation undermines the willingness of these entrepreneurs to make the long-term investment needed to develop brands, novel products and capable middle-management.