AMONG investors it is fashionable to say that China’s state-owned enterprises (SOEs) do not matter much any more and that entrepreneurs now power the world’s second-largest economy. But China’s SOEs are still hard to avoid. They account for 40% of its stockmarket and a third of its investment, and they dominate heavy industry. On the global stage, SOEs’ appetites sway commodity prices and many are expanding abroad.

These empires of men and machines account for 45 cents of every dollar of debt in China, so their health determines whether the country’s financial system will escape a crisis or blow up. And SOEs have become a loaded gun on the negotiating table between China and America. Treasury officials argue that China has broken the promises it made upon joining the World Trade Organisation in 2001 about further liberalising its economy. According to one negotiator, it is “abusing the system” by subsidising SOEs which in turn rig markets, dump cheap exports abroad and deter foreign firms from winning market share in China.

Schumpeter is sympathetic to the complaints, but to hear the other side, he met the State-owned Assets Supervision and Administration Commission (SASAC), an agency at the heart of China’s industrial deep state. It controls 100-odd of the largest SOEs. The overall impression is of an organisation that wants to modernise state firms, but which is struggling to reconcile goals that appear to be fundamentally contradictory.

Forty years ago most industries were government departments without proper book-keeping or independent regulators. Today 63% of SASAC’s portfolio is listed on the stockmarket. Reform was intended to make firms more efficient and responsive to market signals. In the 2000s it was possible to dream that China might eventually relinquish control of its SOEs.

But after the subprime crisis in 2008 things went in the other direction. China’s stimulus programme led SOEs to expand and run up debts. Since Xi Jinping became China’s leader in 2012, he has bossed about both SOEs and private firms. On February 22nd the state seized control of Anbang, a private insurer that is accused of fraud (see article). Some reckon the Chinese government may have indirectly helped fund Geely’s purchase of a 9.7% stake in Daimler, which was announced on February 24th. At least 30 SOEs listed in Hong Kong have changed their constitutions since 2016, to give the Communist Party a formal role in their governance. The top 60 listed SOEs, excluding banks, collectively trade at a lowly 1.2 times capital employed—suggesting investors are unsure if they are run for politicians or shareholders.

While SASAC is not explicit about it, it has three, conflicting, objectives: to boost profits and cut debts; to persuade foreigners that SOEs have more autonomy, and to cement the party’s muscular role. According to SASAC, the Party wants to guide the conduct of SOE bosses but not micromanage. SASAC itself does not want to be responsible for firms’ results, but wants to set the boundaries of strategy. So if PetroChina, an energy giant, bought an oilfield, for example, SASAC says it would not intervene, but if it tried to buy a goldfield it would. Likewise, SASAC caps the salaries of SOEs’ top brass whereas it is relaxed about underlings’ pay.

One option would be to copy Singapore. It has Temasek, an independent firm with holdings in “strategic” listed firms. Temasek is expected to maximise long-term returns and rarely meddles. SASAC replies that China’s SOEs are too big for this structure to work well. The top 60, excluding banks, have a market value of $1.5trn, seven times that of Temasek’s holdings. SASAC argues that a Chinese Temasek, huge and with autonomy, would have too much power (SASAC is also enormous but part of the government and subservient to it).

Is there any way to square the circle? SASAC’s experiments fall into two buckets. In the first are less-than-convincing initiatives, such as changing SOEs’ culture so that they allocate resources more like private firms. That is impossible to verify. It has promoted “mixed ownership” in which SOEs raise private capital. Last year China Unicom, a telecoms firm, raised $12bn from a consortium that included Tencent and Alibaba. But Unicom, like most SOEs, already had private minority investors so it is not clear what has really changed. SASAC has also pushed for mega-mergers, such as that between Shenhua Group, a coal firm, and China Guodian Group, a power company. It is likely that such combinations cut costs, improve profits and lower debt. But they might also create a new class of monster SOEs with even more clout.

In the other bucket are SASAC ideas that could make some difference. It says that in “competitive” industries (including coal, steel, pharmaceuticals and construction) it will let its stake drop well below 50%. That could signal a willingness on the part of the state to concede some ground. And SASAC wants SOEs to find ways to expand abroad while containing political tensions. An example is ChemChina, which in 2016 bought Syngenta, a Swiss chemicals firm, for $46bn. The deal was controversial and in order to convince customers and the Swiss that Syngenta is not run from the party’s leadership compound, Zhongnanhai, ChemChina gave its target an unusual degree of autonomy—it will keep its headquarters in Basel and is to have independent directors.

Show them the money

SASAC has a hard task to sway critics. At the very least it should press SOEs to boost returns as a way of showing that they are not underpricing products or being subsidised. Total operating profits for the top 60 listed SOEs (excluding banks) have risen by 17% since 2016, according to Bloomberg data, and leverage has stabilised. That is progress, yet returns on capital are still a dismal 5%, half the level expected of private firms. Mr Xi clearly sees business as an arm of state power. SASAC will therefore struggle to show the world that SOEs are free from interference. But demonstrating that they make commercial rates of return would help.