The common belief is that China's economic success is an object lesson in state capitalism. The government owns the biggest companies: as the economy grows at double-digit rates year after year, vast state-owned enterprises are climbing the world's league tables in every industry from oil to banking. Yet alongside the mighty state engine myriad smaller ones are whirring-and probably more efficiently.

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 percent, despite the benefit of cheap leverage provided by government-controlled banks. According to a recently published paper by Liu and a colleague, Alan Siu, the returns of unlisted private firms are no less than 10 percentage points higher.

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