The Chinese economic model is nothing for Westerners to envy— or emulate. Its successes have come from emulating the West.
Feb 20, 2012, Vol. 17, No. 22 • By YING MA
The prominence of the state reflects Chinese leaders’ keen interest in pursuing economic growth without relinquishing the levers of economic control. In particular, although Beijing allowed most of the country’s small and medium SOEs to privatize or close, it has retained the large companies, especially in industries it considers vital. These include the “strategic” industries that the state seeks to own or wholly control, such as national defense, electric power generation and grids, petroleum and petrochemicals, telecommunications, coal, civil aviation, and shipping; “pillar” industries in which the state must maintain a strong position, such as equipment manufacturing, autos, information technology, construction, iron and steel, nonferrous metals, chemicals, and surveying and design; and other industries such as banking and insurance.
As a result of the consolidation process, China is now home to mammoth state firms that exert breathtaking market power and boast staggering wealth. In 2011, 57 Chinese mainland companies made the Fortune Global 500 list, and of those, only 6 were less than 50 percent state-owned. As of June 2011, state-owned firms made up 80 percent of China’s domestic stock market capitalization. To date, the state-owned Agricultural Bank of China holds the world title for the largest initial public offering in history with its $22.1 billion dual listing in Hong Kong and Shanghai in 2010. The Industrial & Commercial Bank of China, another state bank, comes in a close second with a $21.9 billion IPO in 2006.
Not surprisingly, corporate wealth and state power are closely intertwined in this story. China’s largest SOEs benefit from a wide range of government preferences, including preferred access to bank capital, heavy tax subsidies, cash injections in times of financial trouble, and more favorable treatment by regulators than their nonstate competitors. Although many of China’s largest SOEs have been converted into corporations, can respond readily to market forces, and are publicly listed on domestic and foreign stock exchanges, they remain political entities subject to political control. In this context, SOEs are given political ranks reflecting their size and importance. For instance, the largest and most powerful central SOEs carry the rank of ministries and do not need to take orders from political entities of lesser rank, such as city governments. In addition, though top executives of state conglomerates jockey for power by demonstrating corporate success, they owe their appointments and promotions to the Communist party apparatus.
State backing, however, is not necessarily an indication of success. Over the past three decades, the private sector has emerged as the most vibrant part of China’s economy, and serves as the largest source of growth for the country’s export sector. The state sector is far less efficient. According to a report issued by the Congressional Research Service in December 2009, by some estimates, over half of China’s SOEs lose money and must be propped up by subsidies that flow mainly from state banks. Though various centrally owned SOE behemoths rake in impressive profits, in part because of the monopoly status and handouts granted to them by the state, thousands of smaller SOEs that are locally or provincially owned are plagued by poor performance, bad management, cronyism, and corruption enabled by unseemly ties to government officials in their respective regions.
When the global financial crisis hit in 2008, the state roared back into the Chinese economy. The government aggressively intervened in economic activities, favored state firms over private companies, and expanded into the private sector.
To battle the financial crisis, China pushed out a massive $586 billion stimulus package (12.5 percent of China’s 2008 GDP) that was heavily dedicated to infrastructure projects, and unleashed a torrent of $2.7 trillion in new loans through its state banks in 2009 and 2010. Many Westerners were impressed by how quickly China acted to confront a worldwide crisis. The noted economist Andy Xie has written, however, that the “growth in the past three years has packed too much fat, dependent as it was on a property bubble and excessively expensive government projects. Throwing money around to create GDP is just not sustainable.”
Additionally, the government’s stimulus funds and bank loans significantly benefited SOEs over the private sector. According to the Chinese state media, of the $1.4 trillion in bank loans issued in 2009 alone, 85 percent went to SOEs.