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China’s hybrid economy
Despite the rapid growth of the private capitalist
sector and the strengthening of centrifugal market forces, the state
still exercises considerable economic power. LYNN WALSH writes.
CHINA IS NO longer a planned economy, but it is not
yet a fully capitalist economy. The state still wields power through the
allocation of massive state resources and effective control of
large-scale SOEs (state-owned enterprises), which continue to dominate
key sectors of the economy. Despite formally being transformed into
joint-stock companies (selling shares to private investors), the major
banks are still effectively controlled by the state. Currently,
state-owned and state holding enterprises account for roughly half of
all (non-property) urban investment in fixed assets.
At the same time, the party-state, a powerful
apparatus with massive financial resources, continues to exercise
general political direction over the economy. Sweeping measures taken by
the regime to facilitate the recent Olympic games demonstrated the power
of the state to mobilise resources and sweep away obstacles to its
policy objectives. There was phenomenal public expenditure on the games,
the government ruthlessly cleared residents from large areas of Beijing,
and heavy industries were shut down in a desperate attempt to reduce air
pollution for the duration of the games.
How much of the economy remains under the direct
control of the state? While the class character of the state is not
determined mechanically by the percentage of state ownership, the
changing balance of ownership is an important indicator of the direction
of change. But it is not easy to determine the state/private balance of
ownership. Different studies give different figures. Will Hutton wrote
in his book, Writing On the Wall: "China’s approach to private ownership
means that attempting to assess how much of China is public and how much
private is a fool’s errand because it cannot capture how the party is
trying to develop Leninist [in reality, ruling party] corporatism".
(Hutton, p147) Like many other commentators, Hutton shows how, in
practice, the state has effectively retained control of former SOEs that
have become joint-stock companies. With many apparently privatised
companies, "the shareholder and accounting structure is such that at any
time the party can regain control if it is necessary". (Hutton, p148;
see Peter Taaffe’s review,
China’s Future? Socialism Today No.108, April 2007)
Recent figures are presented by Barry Naughton in
his comprehensive survey, The Chinese Economy: Transition and Growth
(2007). The economy is dominated by so-called ‘above scale’ firms (with
an annual output value above five million renminbi or $600,000).
Although there are literally millions of small businesses, only 23% of
industrial sales come from the small-scale sector.
SOEs and corporations controlled by the state
(including joint-stock companies) accounted for 49.6% of industrial
output in 1998. In 2004, this had declined to 38%. Central government
(as opposed to provincial and local government) accounted for 23.7% of
the workforce of all state-controlled firms, but 48% of their assets.
"… the decline in the state share of output has been
much more gradual than the decline in state employment. As state
ownership has become increasingly concentrated in large,
capital-intensive firms – and as demand for energy and raw materials has
pushed prices up for those firms – state-controlled companies have
sustained only a small decline in their share of total output… In 2004,
state-controlled firms accounted for roughly 29% of industrial sales,
since they accounted for 38% of above-scale output, which according to
the Economic Census was about 77% of total industrial sales". (Naughton,
p304)
Agencies of state control
IN 2003, THE government established the SASAC
(State-owned Assets Supervision and Administration Commission) to
exercise ownership rights of state SOEs on behalf of the government.
Subsequently, local SASACs were set up to exercise ownership of state
firms in every province. There are undoubtedly many tensions between the
SASACs and the bosses of the powerful SOE corporations under their
oversight. Nevertheless, the SASACs are powerful agencies of state
control.
The central government SASAC has authority over 196
key firms. "Many of the 196 ‘enterprises’ governed by central SASAC
[writes Naughton] are in fact large holding corporations that evolved
from the former government ministries. These corporations have hundreds
of subordinate firms, control large sums of money, and exercise
strategic control over decision-making. Moreover, these corporations
typically retain their own revenues and remit only taxes (not profits)
to the government. For example, SASAC exercises nominal ownership rights
over the five large electricity conglomerates that produce virtually all
of China’s electricity, as well as the two primary electricity grid
operators. These conglomerates in turn control hundreds of firms,
including at least ten listed corporations. These conglomerates are
highly opaque, and in practice officials with political ties and little
accountability exercise government ownership rights within the
organisation. There are numerous similar cases in the sprawling
industrial empire overseen by SASAC. Thus SASAC has a long way to go
before it can serve as a government holding company, exercising
ownership rights in an unambiguous fashion, governed by law". (p317)
In theory, the SASAC should be operating at an
arms-length distance from the party-state, overseeing state-run firms on
the basis of a clear legal and regulatory framework. However, "the
demarcation of SASAC’s authority is plagued with a number of
difficulties. By far the most important is the inherent conflict with
the Communist Party over appointment power. Arguably the most
fundamental characteristic of the Chinese political system is that the
Communist Party retains its traditional nomenklatura role, in which
party committees make all the key personnel appointments in the state
sector". (Naughton, p317)
There is no question of the Communist Party pursuing
‘socialist’ aims (even in the Maoist sense of defending a state-planned
economy and the social gains of 1949). However, nor do Communist Party
appointees act on the basis of purely capitalist, profit-maximisation
aims. The maximisation of investment and growth, the undertaking of
prestige development projects, and the augmentation of the personal
wealth and privileges of the nomenklatura are equally important motives.
"The Communist Party explicitly retained the direct
appointment powers for the top jobs of 53 of the 196 enterprises managed
by central government SASAC and has delegated appointment powers for the
other top jobs to the Communist Party committees within SASAC. The
Communist Party holds onto its appointment power and thereby continues
to shape the career paths and incentives of enterprise managers.
Politicians and bureaucrats struggle to refine these relationships in an
economically rational way". (Naughton, p317)
"… SASAC consistently argues for a large and ongoing
role for government ownership at the central level. According to Li
Rongrong, the head of SASAC, state ownership is appropriate in four
sectors: national security, natural monopoly, important public goods or
services, and important national resources. In addition, a few key
enterprises in ‘pillar’ (priority) industries, and hi-tech sectors,
should be maintained under state ownership. This rationale is consistent
with the trends in the Chinese economy discussed earlier because central
government ownership is in fact concentrated in these sectors. The
articulation of an explicit rationale for government ownership suggests
a continuing gradual state withdrawal from competitive sectors where
there is no compelling argument for a direct government role, but it
also implies the persistence of a large central government-run
industrial sector for the foreseeable future". (Naughton, p318)
"… While the scale of change has been enormous,
there has also been continuity, most strikingly in the continued role of
SOEs". (Naughton, p298) Naughton, a specialist in the Chinese economy,
is an advocate of the strengthening of the market in China, the
transformation of China into a fully capitalist economy. But he
recognises that currently the transition is far from complete.
"The persistence of the large-scale, heavily
capitalised and concentrated, centrally controlled state sector provides
a significant element of continuity in the Chinese industrial ownership
structure". (Naughton, p303)
"Ultimately, China’s diversity can be traced to two
incomplete transitions. First, China is still completing its transition
away from bureaucratic socialism [Maoism-Stalinism] and toward a market
economy. Second, China is in the middle of the industrialisation
process, the protracted transformation from a rural to an urban society.
China is in the midst of ‘economic development’, the process that
transforms every aspect of an economy, society, and culture. These two
transitions are both far from complete, and so China today carries with
it parts of the traditional, the socialist, the modern, and the market,
all mixed up in a jumble of mind-boggling complexity". (Naughton, p4)
Naughton’s analysis confirms the analysis of Hutton
(referred to earlier), that China is a ‘mixed’ or ‘hybrid’ society,
"neither a communist [in reality, Stalinist] nor a capitalist economy":
"The Chinese economy and the Chinese Communist Party are in an unstable
halfway house – an economy that is neither socialist nor properly
capitalist, run by a party that is neither revolutionary nor subject to
the normal constitutional checks and balances of even China’s own
Confucian past, let alone the Asian or western present". (Hutton, p117)
No ‘big bang’
THE CONTINUED ROLE of the state sector reflects the
character of the transition from Stalinism in China. In contrast to the
former Soviet Union, there was no ‘big bang’ implosion of the centrally
planned economy or shattering of the old state apparatus (which under
Stalinism was intimately linked with the economic planning apparatus).
The leadership of the Chinese party-state has done its utmost to avoid
an economic meltdown, and this is reflected in the relatively limited
extent of privatisation of state firms – as opposed to
‘corporatisation’, that is, running SOEs according to market criteria.
In the first phase of economic reform from 1978-93,
privatisation, in fact, played almost no role. Changes in the rural
sector, based on the ‘family responsibility’ system (in effect, small
family businesses), produced a mushrooming of private firms, dominated
in that period by the TVEs (township and village enterprises), which
have since declined in importance. At the same time, the regime
encouraged the development of foreign firms, especially in the special
economic zones on the coast. In other words, the private capitalist
sector developed alongside and around the state sector – it did not
involve a destruction and replacement of the state-owned firms.
In the second phase of economic reform from 1996,
there was a massive downsizing of the SOEs (with a 40% reduction of the
workforce) and the corporatisation of SOEs (under which they were
supposedly run according to purely profit-seeking market criteria).
There are literally millions of small businesses,
employing over 59 million workers. But many of them are very small and
poorly capitalised, and only account for about 23% of industrial sales.
There is evidence now of a process of differentiation within the
small-scale private sector, with the growth of the most successful, more
technologically advanced firms, but the failure and disappearance of
many unsuccessful businesses.
An advocate of capitalist development in China,
Zhiwu Chen (a Yale professor), recently wrote an article in the
Financial Times demanding the acceleration of privatisation and a
reduction in the role of the state sector. "When reforms started in
1978, almost all productive assets were state-owned in China. But
reforms since then have not included privatisation. Today the government
owns more than 70% of China’s productive wealth". (Privatisation Would
Enrich China, 7 August 2008)
By ‘productive wealth’, Chen means state-owned
assets, including enterprises, resources and land. Chen approves of the
concentration of assets in government hands during the first phase of
economic reform. It "served a good development purpose, allowing the
creation of infrastructure and expansion of industrial capacity".
Chen points to the growing share of the government
in China’s economy, which in his view is one of the main reasons for the
relatively weak growth of domestic demand. "The government’s share in
China’s income has been rising at the expense of private citizens. From
1995 to 2007, the inflation-adjusted annual growth rate was 16% for
government tax revenues (not including state enterprise profit or
proceeds from selling land usage rights), and 8% and 6.2%, respectively,
for urban and rural household disposable income. In 2007, government tax
revenues increased by 31% but urban and rural disposable income went up
by just 12.2% and 9.5% respectively. As private household share in
China’s income pool is shrinking fast, consumption growth can only be
slow".
Chen, with some justification, points to
‘over-investment’ in industrial capacity and infrastructure, which
limits the growth of private consumption. His answer is a sweeping
privatisation of state assets which, he claims, would become a source of
disposable income for Chinese consumers (who currently rely
overwhelmingly on their income from wages, which are notoriously low).
"It is fundamental", claims Chen, "for China to
distribute ownership rights of the remaining state assets equally among
its citizens. This private ownership would return the missing wealth
effect to millions of families".
In reality, as the experience of privatisation in
the former Soviet Union and Eastern Europe has demonstrated, most of the
privatised assets would end up in the hands of a small minority of
wealthy business-people or would-be entrepreneurs. At the same time, the
Chinese leadership fears that sweeping privatisation would undermine its
strategic control of the economy and, through the growth of the already
huge inequalities in income and wealth, would further fan the flames of
social protest.
Nevertheless, Zhiwu Chen’s argument underlines, for
the purpose of our debate, the continued weight of the state sector in
China. The majority of state-owned or state-controlled firms are no
longer operating under a plan. Most of them "grew out of the plan" (as
Naughton puts it) when the regime directed them to operate as individual
corporations according to market criteria. However, such ‘corporatized’
or ‘marketised’ state firms are not identical with private capitalist
forms. Undoubtedly, they exploit their workers just as ruthlessly as
private capitalists. Many state-owned firms (and private firms),
however, have pursued a ‘profit zero’ strategy.
In an article in the Far Eastern Economic Review
(Issue 171, March 2008), Paul Midler explains that manufacturers can
successfully "enter into business arrangements in which they [earn] zero
profit – and that somehow this strategy [proves] economically
efficient". By increasing capacity and raising output rates (often on
the basis of soft – in reality, non-repayable – loans from the state
banks), businesses win government approval. In many cases, they sell
their goods on the official market (for example to overseas corporate
customers) at a loss but, at the same time, sell similar or identical
(often branded) goods on the unofficial market at a handsome profit to
their directors.
Regional variations
THE BALANCE OF state and private firms varies from
region to region. For instance, in regions like Wenzhou (in the southern
coastal province of Zhejiang) the local authorities have a record of
encouraging private firms. In contrast, in areas inheriting big
concentrations of SOEs from the Maoist era, the authorities have tended
to discriminate against private firms. Again, in regions with a large
presence of foreign firms, the local authorities have encouraged those
foreign-owned businesses, discriminating against local firms.
In a recent article, Niall Ferguson points to the
role of the state in facilitating the development of private companies
(such as Ford, BP, Ericsson, Carrefour, Isuzu, and Suzuki) in the
rapidly growing industrial city of Chongquing, in the Three Gorges Dam
area of the Yangtze river. They have been attracted by a combination of
generous tax incentives and labour costs that are about 40% lower than
in the coastal regions of eastern China. At the same time, Chinese
companies like the Lifan industrial group are transforming Chongquing
into the motorcycle manufacturing capital of Asia.
"Yet [comments Ferguson] the explosive growth of
Chongquing’s industry would not be happening without a very large dose
of central planning. Since 1997, Chongquing has been a municipality
under the direct control of the government in Beijing. Its
transformation from sleepy backwater into the economic hub of western
China has been an objective of national policy. That has meant a
state-led bonanza of fixed investment, which has grown at an average
rate of 20% over the past decade. Local officials beam as they reel off
the statistics: there will be 30 new bridges over the river, ten new
light railway lines, 2,000km of new highway, and millions of square
metres of new office space. On the long drive from the airport to the
city centre, it is impossible to keep count of the number of new tower
blocks under construction or the number of cranes perched on the city’s
hills". (China’s War on Nature, Financial Times, 14 July 2008)
Ferguson points to the problems of "a semi-planned
economy". There are no legal or political limits on the "negative
externalities" of economic development, particularly in the form of
pollution and environmental destruction. Moreover, "the semi-planned
economy allocates resources to infrastructure investment but does
nothing to mitigate social inequality. The economic gulf between
insiders (officials and entrepreneurs) and outsiders (construction
workers and the rest) is now huge. If this is the ‘harmonious society’
of which China’s leaders boast, then São Paulo is an egalitarian
paradise".
Central government’s policy
THE ROLE OF the state sector has undoubtedly been
reduced and the growth of private capitalist businesses, as well as the
ambitions of local government bureaucrats, has set in motion powerful
centrifugal forces in the Chinese economy. Nevertheless, in recent
years, the regime has attempted to strengthen its levers of control
through macroeconomic policy and strategic objectives.
During the first period of economic reforms from
1978-93, the trend was overwhelmingly towards decentralisation, as both
central and regional governments encouraged the mushrooming of private
businesses and the growth of foreign-owned firms. After 1993, there was
a policy of the recentralisation of policy making.
"Zhu Rongji’s policies were consistently associated
with stronger, more authoritative government institutions and more
decisive policy-making". (Naughton, p100)
"During the second period [of reform], management
responsibilities were more clearly divided between centre and local, but
in a way that tended on balance to be recentralising in terms of the
ultimate control of resources. The central government needed to
strengthen its regulatory and macroeconomic management functions". (Naughton,
p101)
Referring to the rapidly growing Chinese car
industry (mainly based on joint ventures between Chinese and foreign car
makers), another writer comments on the role of macroeconomic policy:
"All of the manufacturers are to some extent dependent on the
macroeconomic strategy of the government, which is unknown in the west".
Moreover, "No large foreign enterprise – be it in the steel, chemical or
pharmaceutical, banking or insurance industry – can take a direction in
China with which the government is not in agreement". (Frank Sieren, The
China Code, 2007, pp220-21)
Moreover, the crisis in the US and the global
capitalist economy is now causing China’s leaders to reassess their
policy approach. "At a bilateral economic summit earlier in June, Zhou
Xiaochuan, governor of the People’s Bank of China, the central bank,
said China, which in the past had looked to learn from the US’s
management of its economy, is also looking to learn from America’s
mistakes". (Troubles and Fannie and Freddie Could Deepen Asia’s Credit
Problems, Wall Street Journal, 14 July 2008)
With the deepening of the world financial crisis and
the slide into a global economic recession, we are likely to see further
shifts in the economic policies of the regime, both at home and
internationally. The continuing economic power of the Chinese state will
be a key factor in the situation.
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