The Little Red Book of Inefficiency

Thomas Greenhalgh writes on the dangers of Chinese State-Capitalism.

The People’s Republic of China’s economic success since 1979, now the world’s fastest-growing major economy, largest manufacturer, second-largest consumer, largest saver, and second-largest military spender, must surely be indicative of China’s State Owned Enterprises’ (SOEs) success, must it not? 

This has been the conclusion of those particularly on the left, both in China and outside, with the “statist literature tending to stress the technical competence of bureaucratic elites” in their analyses of the roots of China’s post-Mao boom, praising the CCP for its political economic position of ‘socialism with Chinese characteristics’. So are these the enterprises of the future? Hardly.

Where contemporary China differs from western political economic realities is in respect to the large role played by SOEs in both supposedly spurring economic growth, and providing employment (along with public goods such as healthcare entitlements), making up about half of the country’s GDP. Up to now, the state’s rapid economic development, regardless of efficiency, has been due to the sheer abundance of cheap factors of production which have made many SOEs on-paper profitable. 

Broad social obligations, such as health care and workers pensions, along with legacy assets, including obsolete equipment and technology, have impacted heavily upon the profit margins of these enterprises, in many cases putting them far into the red (excuse the pun). As these enterprises serve a political purpose foremost, the state has many times backed off from carrying out privatisation measures of unprofitable aspects of SOEs, due to the threat of aggravating conflict (of particular concern to the CCP given their legitimacy is based upon guaranteed employment). In this kind of environment, it is unsurprising that SOEs have abysmally low productivity rates, something common to the old command economies of the Eastern Bloc.

Why are the vast majority of SOEs working at such large profits then? It’s very likely that it’s merely a confection colluded upon by state bureaucrats on all levels and industries. This kind of deception was also found in the old command economy, where it was necessary to overstate production levels in order to please party superiors. Rather than the brazen falsification of data which was once preferred, now the illusion of profits in many cases are maintained through the overly-favourable lending policies on the part of state banks, bankrolling these enterprise’s ventures regardless of whether it is profitable to do so. The link between government, banks, and SOEs, means that a potentially explosive fiscal deficit could result as China’s high-speed economic growth inevitably slows down.

Due to the noted poor performance of traditional state enterprises in the market economy, the CCP has embarked on a massive restructuring program of corporatisation. Under this scheme, the state still retains ownership and control of many enterprises, but the central government has little direct control over the operations of state-owned enterprises. The prospect of bureaucratic interference still remains at large despite this positive development, with Hu Jintao and Wen Jiabao as steadfast as Deng Xiaoping himself in 1985 when he stated that the government will forever control basic economic structures. The CCP has no other choice if it wishes to retain its legitimacy but to continue to devolve power to those who are capable of exercising it efficiently (culminating in privatisations despite their claims to the contrary above), but ironically in doing so, it fosters a middle class which may well one day bring democracy to the ‘Middle Kingdom’.

An eventual victory for free markets is assured, with China’s future marked by the devolution and privatisation of the central state’s economic organs in a bid to remain globally competitive and stave off a fiscal crisis bought on from subsidies to ailing enterprises. State Owned Enterprises aren’t looking so nice after all.

Thomas is a second year student at Sydney University doing a Bachelor of Economics and Social Sciences.

Comments

[Rog]

1.

A very nice insight Thomas, thanks! Very impressive for a second year, I'm sure if you keep this kind of thinking up you'll ace that economics degree.

[Thomas Greenhalgh]

2.

Just in case anyone was wondering (or more specifically, so statist apologists don't accuse me of conjecture), below is the bibliography:

Amsden A: Asia's Next Giant: South Korea and Late Industrialization, Oxford University Press, New York, 1989.

Chang K S: The Politics of Partial Marketisation: State and Class Relations in Post-Mao China, Asian Perspective, Hong Kong, January 2001.

Gittings J: The Changing Face of China: From Mao to Market, Oxford University Press, New York, 2005.

Huang Y: Reassessing China’s state-owned enterprises, McKinsey Quarterly, USA, February 2009.

Roberts D: China's New Capitalism, Business Week, Hong Kong, 1999.

So A Y: “The Communist Path of Developmental State: The Chinese Experience”, Paper presented at the annual meeting of the American Sociological Association, Atlanta, 2003.

Xiaoping, Deng (1985) Building Socialism with Chinese Characteristics, Peking: Foreign Language Press.

Zakaria F: The Post-American World, Columbia University Press, USA, 2008.

[Robbie]

3.

SOEs are notoriously crap at running anything in an efficient way. But China just has the population to support it at the moment and make them seem viable. If they do liberalise their economy though, it will become infinitely more efficient and their economic assent will become even greater.

[Chris M]

4.

No-one really has a clue how the Chinese economy is truly performing. It is experiencing growth, which is great, but if you believe the 8, 9, 10% annual growth figures trotted out each year I have some great central Australia waterfront property to sell you cheap.

Two other problems - they have very little natural resources which put them at the mercy of global commodities markets, unless they decide to invade a country or two. And having killed off so many baby girls they now face a massive gender imbalance amongst the young people which will likely lead to civil unrest in the future.