State capitalism in China

[ramu]

State capitalism in China : Of emperors and kings

China’s state-owned enterprises are on the march : Nov 12th 2011 | from the print edition

WHEN China joined the World Trade Organisation (WTO) in December 2001, many people hoped that this would curb the power of its state-owned enterprises. Ten years on, they seem stronger than ever. President Hu Jintao can expect to hear about this at the Asia Pacific Economic Co-operation summit this weekend. Hillary Clinton, America’s secretary of state, has warned stridently of the dangers of state capitalism. A Congressional report released on October 26th railed against the unfair advantages enjoyed by state-owned firms and lamented that China is giving them “a more prominent role”.

Indeed it is. In a new book called “China’s Regulatory State”, Roselyn Hsueh of Temple University documents how, in sectors ranging from telecommunications to textiles, the government has quietly obstructed market forces. It steers cheap credit to local champions. It enforces rules selectively, to keep private-sector rivals in their place. State firms such as China Telecom can dominate local markets without running afoul of antitrust authorities; but when foreigners such as Coca-Cola try to acquire local firms, they can be blocked (though this week China did approve Yum! Brands’ bid to acquire Little Sheep, a Chinese restaurant chain).

In the dozen or so industries it deems most strategic, the government has been forcing consolidation. The resulting behemoths are held by the State-owned Assets Supervision and Administration Commission (SASAC), which is the controlling shareholder of some 120 state-owned firms. In all, SASAC controls $3.7 trillion in assets (see chart). The Boston Consulting Group (BCG) calls it “the most powerful entity you never heard of”; though it does not always get its way. Some state-owned firms have powerful friends and are hard to push around.

In some ways, SASAC aims to modernise its enterprises. Peter Williamson of Cambridge’s Judge Business School points approvingly to the steel industry. China was once littered with small, uneconomic steel firms; SASAC has urged them to merge, creating three “emperors” and five “kings”. That, says Mr Williamson, means there are enough steel firms to foster competition at home; yet they are big enough to venture overseas. What the government’s plan lacks, however, is any idea that private steelmakers might compete, in China, with the emperors and kings.

According to the Congressional report, state-owned firms account for two-fifths of China’s non-agricultural GDP. If firms that benefit from state largesse (eg, subsidised credit) are included, that figure rises to half. Genuinely independent firms are starved of formal credit, so they rely on China’s shadow banking system. Fearing a credit bubble, the government is cracking down on this informal system, leaving China’s “bamboo capitalists” bereft.

Those who argue that state-owned firms are modernising point to rising profits and a push to establish boards of directors with independent advisers. Official figures show that profits at the firms controlled by SASAC have increased, to $129 billion last year. But that does not mean that many of these firms are efficient or well-managed. A handful with privileged market access—in telecoms and natural resources—generate more than half of all profits. A 2009 study by the Hong Kong Institute for Monetary Research found that if state-owned firms were to pay a market interest rate, their profits “would be entirely wiped out”.

One reason is that state firms must pursue the state’s aims, which include many things besides making profits. David Michael of BCG observes that the government forces state firms to shoulder all manner of extra costs. For example, when coal prices shot up recently, the country’s energy giants were not allowed to pass the hikes on to consumers. When the China Europe International Business School asked its senior alumni at state-owned firms about their biggest headaches, many grumbled about official meddling.

Still, Mr Michael, who served as one of the only foreigners on China Mobile’s advisory board, believes SASAC deserves some praise. The group runs management-training courses, benchmarks firms against international standards and establishes codes of conduct. Following recent scandals involving Chinese firms overseas, it issued an edict in July restricting the use of derivatives by the main state-owned firms. And SASAC is now pushing the biggest of its charges to appoint boards of directors.

Yet Curtis Milhaupt of Columbia Law School insists that such reforms are “not where the action is”. In a new paper, he examines how exactly China’s big state firms are controlled, and reaches troubling conclusions. Regardless of whether a state-owned firm is listed in New York, has an “independent” board or boasts a market-minded chairman with a Harvard MBA, he finds that the strings always lead back to a core company that is in the tight clutches of SASAC. He thinks genuine market reform will come only when state firms venture abroad en masse and have to adapt to global norms.

A recent ruling in Europe may prove a straw in the wind. Earlier this year, an attempt by Sinochem, a state-owned chemicals firm, to enter into a joint venture to make antibiotics with DSM, a Dutch firm, attracted the attention of the European Commission’s antitrust authorities. They decided to scrutinise not just Sinochem itself but all of SASAC’s empire. The deal was approved anyway, but this may have set an important precedent.

State capitalism in China: Of emperors and kings | The Economist

 

[Tshering22]

I actually admire that, bhai. Look at their government companies and look at ours. ALL Chinese defense manufacturers are government owned and still they come up with lightning fast manufacturing while our sarkari dodos always delay, deliver shoddy product barring 5-10 things in its entire history.

In fact we should learn from them. Chanakya said that if there is something valuable to learn even from the enemy, one must not hesitate to learn it.

India has two options for Defense industry:

- Adopt State Capitalism

OR

- Totally corporatize it in and out.

 

[Chinese-Dragon]

Damn, we have been growing at double-digits for several decades... that must mean we are doing something wrong!

Do you think they would be complaining about this if we weren't rising so fast?

The 2008 Credit crunch was caused in part, by a lack of regulations in the financial sector. Now they are complaining that our Socialist Market Economy has too many regulations!

But then again, "the Economist" have always been economic right-wingers. So their stance is somewhat understandable.

 

[ramu]

I actually admire that, bhai. Look at their government companies and look at ours. ALL Chinese defense manufacturers are government owned and still they come up with lightning fast manufacturing while our sarkari dodos always delay, deliver shoddy product barring 5-10 things in its entire history.

In fact we should learn from them. Chanakya said that if there is something valuable to learn even from the enemy, one must not hesitate to learn it.

India has two options for Defense industry:

- Adopt State Capitalism

OR

- Totally corporatize it in and out.

Well may be may be not.

Those who argue that state-owned firms are modernising point to rising profits and a push to establish boards of directors with independent advisers. Official figures show that profits at the firms controlled by SASAC have increased, to $129 billion last year. But that does not mean that many of these firms are efficient or well-managed. A handful with privileged market access—in telecoms and natural resources—generate more than half of all profits. A 2009 study by the Hong Kong Institute for Monetary Research found that if state-owned firms were to pay a market interest rate, their profits “would be entirely wiped out”.

I agree about the defence industry in China. They deliver far more in a year that DRDO has ever done for a decade.

 

[twocents]

Here are soome interesting comments on the article

SunT
Nov 10th 2011 17:02 GMT Deception has a central place in the Chinese way of looking at the world. It's deeply ingrained, institutionally and culturally. Expecting the Chinese to do what they promised to do when they joined the WTO (or at least what foreigners think they promised) exhibits a profound misunderstanding of Chinese thinking. Fair play, honesty, rule of law? Ain't happening any time soon.

Nov 10th 2011 17:35 GMT "A Congressional report released on October 26th railed against the unfair advantages enjoyed by state-owned firms and lamented that China is giving them “a more prominent role”.

So China is growing at 10% per year because the government is involved in supporting businesses and directing capital. ( Just as in the developmental states of Japan, Korea, Taiwan, Singapore and others. Just as the US, UK and Germany did years ago when those countries industrialised. Just as the US government has done with aerospace, defense and information tech sector over the last 50 years.

But China is being more successful than the "get the government out of the market" muppets and therefore it is cheating? If the Right in the US want to get the state out of the market let them!! But what right do they have to tell others to take a losing strategy just because they are doing so dismally.

Nov 10th 2011 18:03 GMT Isn't "one of the only" an oxymoron? How about using "one of the few" instead? A lot of us read The Economist as one of the few publications where attention to writing is combined with high-quality information.

Nov 10th 2011 23:31 GMT "State firms such as China Telecom can dominate local markets without running afoul of antitrust authorities."

Not true. China Telecom and China Unicom are currently under antitrust probe. See WSJ article:
http://online.wsj.com/article/SB1000142405297020435800457702728390097220...

Nov 11th 2011 0:41 GMT You can't blame Asian governments when they see how the Finance industry has taken over the US govt. Why go through the entire process when you can control these companies from the start?

Nov 11th 2011 4:04 GMT This article should be rewritten and categorized under Finance and Economics. SOEs and state banks are Beijing's primary instruments macromanaging the economy. SOEs, when coordinated, can greatly influence production and consumption, while the four state banks control the money supply.

Nov 11th 2011 8:44 GMT One got to love how the debt laden Westerners try to show the "right way" for the Chinese, while asking for a bailout.

If I were I Chinese, I would also block any takeover attempt by Coca-Cola.

Nov 11th 2011 8:44 GMT "They decided to scrutinise not just Sinochem itself but all of SASAC’s empire."

That is a very hostile manner to challenge the entire China's pricing system. The Dutch simply dont want trade but trade war. China should call off the talk.

Nov 11th 2011 8:55 GMT Some commentators on RT have described US as a Military University Industrial state with many state subsidies and grants given to many SOEs and Universities such as University of Calfornia to produce the ultimate Weapons of Mass destruction.

Nov 11th 2011 9:03 GMT Chinese state owned enterprises (SOEs) are the main instruments of employment there. It is a mistake to see them as for-profit and competitive entities. Their main task is to provide more or less acceptable employment for hundreds of millions.
Economic growth and one child policy will make their share to ease the pressure on the job market in the long run. Currently, however China needs exactly that type of SOEs what it has.
The other option would be to let SOEs collapse and dereguate economy. Competition, transpareny, rule of law would surely be strengthened, but wo would pay for the 300m unemployed?

Nov 11th 2011 9:32 GMT At a time when major corporations in the west are robbing the middle class of their future, at a time when Occupy protests are spreading across the globe, at a time of great economic uncertainty in US and Euroupe, The Economist has once again put ideology in front of reality. China, by supporting domestic firms and putting growth in front of profit China has been able to create employment. While the western model of profit above all else has enrich the select few at the expanse of the many.

Nov 11th 2011 10:50 GMT I agree with your ending statement, but I have to ask what happens to all the non state employers and employees? Are those running the state owned enterprises winning/running on merit?

Lacking funds small outfits are driven to underground financing,

Lastly, I think the major lesson is that Western financial institutions create problems precisely because they are so huge and so indulged by government laxity and the Fed supplying cheap credit. Indulgence breeds contempt, yes?

Nov 11th 2011 11:15 GMT There will always be some state involvment in industry, but China takes it to a whole new level. Capitalism with Chinese characteristics...
Biggest problem I see is the lack of a level playing field, as this involvment often acts as an indirect barrier to trade. Seen the same thing in Japan for decades, but to a lesser degree.

Seems to me, and correct me with evidence if you think differently, but the Chinese State Capitalist only look after themselves. With the distinctive exception of Western financial speculators, most Capitalist try to take care of their customers, to stay in business long term.

Nov 11th 2011 12:15 GMT "David Michael of BCG observes that the government forces state firms to shoulder all manner of extra costs. For example, when coal prices shot up recently, the country’s energy giants were not allowed to pass the hikes on to consumers."

Sounds like a good idea.

Nov 11th 2011 13:08 GMT @RaptorNXT - The Economist consistently offers stimulating pieces written in beautiful and clever English to provide a very enjoyable read. This article is indeed well-written and, appealing to widespread, one-dimensional assumptions about China, it seems persuasive. Well-researched, I would argue, it is not.

Banyan writes:

"The Chinese government could do better than merely to suppress these tensions. Political or legal reforms are desperately needed in order to resolve them, but they appear not to be on the table at all."

There are number of very clear and tangible indicators that substantial political and legal reforms are indeed on the table, and underway. The tensions that Banyan refers to are themselves, along with their popular expression and domestic media coverage, products of this reform.

Political and economic reform have been explicitly on the table and emerging in China over the past 30 years. Transforming a planned economy into a market economy after 30 years of Marxist-Maoist ideological extremism, is an unprecedented challenge. And China is doing so with, 1.3 billion citizens to feed, educate, provide healthcare for and employ.

Since the reform period in China began (circa 1978) the number of SOE's has been reduced from perhaps 10,000 to 150. They do indeed enjoy favored status, particularly those in 'strategic' industries. One does not need to search long in 'free market' western economies to identify a number of corporations or organizations that enjoy similar patronage and support.

Chinese senior leaders are also serious about bringing about political reform - it has been real and continual, though cautious. Rural areas have begun to have free direct elections, the powers of the legislative assembly (the National Peoples Congress) are increasing, as well as those for provincial people's congresses. Mandatory retirement ages and term limits have been set on senior leaders. In his report to the 17th peoples congress (2007) President Hu Jintao used the word "democracy" positively 61 times. Cynics may argue that the rhetoric is empty and that all senior leaders are simply trying to protect their power and are too heavily invested in the status quo. But it is more likely that many senior leaders in the Party believe in the universal values of freedom, democracy and human rights. Their is an abundance of literature to suggest this is the case. It is true, however, that senior party members have different ideas and timetables regarding how to apply these values. This is to be expected in a highly diverse country with a huge population, undergoing rapid industrialization and urbanization in a turbulent environment.

The speed and nature of economic and political reforms in China may not satisfy western observers. But, for the Party - and the Chinese people - satisfying western observers or one-dimensional concepts of 'democracy' are not of significant concern. Maintaining stability and enabling the majority of Chinese citizens to achieve a "well-off" life are the absolute priorities of the Party.

Much more reform is still needed. Senior Chinese leaders recognize the urgency, but achieving reforms with stability requires a methodical, well-managed process and a strong central government - and time.

Nov 11th 2011 14:03 GMT Some China’s state-owned enterprises seem like so huge only because China is the second largest economy and give some people misconception.In fact,China has become a more capitalistic country than most European countries.from the Chinese point of view,most European countries will been looked on as real socialist or communist states. Many people including CCP agree that a real communistic society should look like Nordic countries at least.

There is an unique historical background for China's private enterprises.It takes only 30 years that private enterprises are accounted for over 60% of GDP in China.No private enterprises before 1977 in China,so only state-owned enterprises had money to invest in somethings at the first. The history of oldest China's private enterprise can't be more than 30 years.If a private enterprise is found in 1980's,most people will look on it as one of "oldest enterprise" and have a "very long" enterprise history.

The statistics data the last half year in China shows that 57.7% of investment capital in China come from private enterprises, 35.1% of investment capital from China’s state-owned enterprises.

I don't oppose state-owned enterprises or so-called state capitalism,but they need reform in order to improve the whole economic benefits and share more wealth for people in China.

Nov 11th 2011 14:29 GMT According to the Congressional report, state-owned firms account for two-fifths of China’s non-agricultural GDP.

------ too exaggerated! The report could have been written by the people,not being to China.Even many so-called state-owned firms(集体企业collective enterprises) are owned by private investors.In the past,a village's or a street's people often opened firms in the name of state-owned firm.In fact,by western standards,they should been on as partnership enterprises only owned by some partners who ofen are some families or many people from a same village or street.

Nov 11th 2011 14:36 GMT China does what China does. Nothing can stop her now unless she makes blunders the magnitude the US and her ideological allies have done. She is not about to take lessons from once rich western countries who have damaged themselves irretrievably. China is on a development path that delivered around ten percent annual GDP growth over the last thirty years. This has another 10 to 30 years to run. Maybe then at a lower six to seven percent which is considered a recession for China but is a rate any other country will kill for. Or maybe at a higher rate that the government will have to cool down to dampen inflation and mitigate the cost of living until there is time for other factors to work into the pricing. Aka no panicked markets. There will be many as yet unknown economic disaster that loom ahead. But having control of strategic resources such as fuel, banking finance, telecommunications, shipping, etc. the State therefore enjoys significant state revenues outside the personal and corporate tax base. There is much less need to raise these taxes to cover budget shortfalls (none yet). Again having independent State revenues allows China to think big in infrastructure building and can guarantee the loans required to execute those projects. Each mega-project has its own corporate entity. They are for profit projects that must have a credible cost structure and financing, usually from other SOEs, already in place. Fiascos like SOLYNDRA don't happen.

"sjr8V9jDZX" beat me to using the same points of argument about the Chinese Government. Their fundamental concern is to establish peace and stability in which society can thrive and prosper. It is not about maximizing profits for the elite 1 percent who control most of the wealth in the US. Or forever running a multimillion political popularity contest to be elected and re-elected. You cannot run a country that way.

Which system wins in the end is not a contest between the US and China for both these countries have to live with the institutions they have chosen. Who wins will be the development path the remaining developing countries in the world will adopt. The US is not winning.

Nov 11th 2011 14:37 GMT China's companies may not be held to the same standard as private companies, but when chinese firms go overseas as mentioned in the last paragraph the free market cannot let offenses slide if private enterprise is to stay competitive. State run firms are supported and controlled by the government, which eliminates many of the market forces that are used to tell a company if it is making a useful product or providing a good service. No matter how much a state run company says it is focused on profits, it will never do that in the similar fashion as a private corporation,thus leading to a negative result that the consumer will have to bear. Equalize the playing field otherwise terms like craftsman ship and efficiency will be a thing of the past.

 

[somebozo]

After seeing the fall of crony american capitalism driven out of greed and milking the consumer, I think the writer has little right to point fingers at China which prioritizes affordability at all cost and the author has accepted this fact in his article.

 

[patna_ke_presley]

After seeing the fall of crony american capitalism driven out of greed and milking the consumer, I think the writer has little right to point fingers at China which prioritizes affordability at all cost and the author has accepted this fact in his article.

China's export Oriented economy is based on market in Europe and America. Only US constitutes 1/4 of their export, if America or Europe has crisis China's economy will surely be hit by that.

 

[Chinese-Dragon]

China's export Oriented economy is based on market in Europe and America. Only US constitutes 1/4 of their export, if America or Europe has crisis China's economy will surely be hit by that.

Exports make up only 27% of Chinese GDP, according to the World Bank.

And we already suffered a much larger collapse in exports, during the 2008 Credit crunch. And even back then, we still managed to grow at near double-digit rates.

 

[patna_ke_presley]

Exports make up only 27% of Chinese GDP, according to the World Bank.

And we already suffered a much larger collapse in exports, during the 2008 Credit crunch. And even back then, we still managed to grow at near double-digit rates.

Chinese Economy is strong no doubt but right now it is the fact that whenever US or Europe gets fever, whole world shivers with that illness.

 

[gpit]

I’d like to comment on this graph.

For pure capitalism, it is intolerable that profit stays near constant. If it were in USA, board is to dismissed, CEOs to be changed, employees to be laid off, mortgaged houses to be fore-closed. It seems that in China’s “state capitalism”, state owned corporate (SOC) is not purely profit oriented.

1) In pure for-profit corporate culture, such as that in US Wall Street, 1% get the benefit of the profits and 99% does not. 1% messes up the financial industry and 99% bear the blunt, yet the 1% got fatter bonus.

2) Chinese SOC encompass the industries that are vital to China’s core interest, such as military, telecommunications, energy, rail road, etc. If those sectors are privatized completely, foreigner can use money to buy them. That’s detrimental to China’s very existence.

3) Chinese SOC employ vast amount of educated (and less educated) mass. It is vital to keep talents within China, keep Chinese people hired and keep the Chinese society happy for its long term development.

All above 3 points will lower the profit. In fact, the existance of SOC is not primarily for share holders but for the employees and the country. Thus not turning SOC into blood sucking machines is a wise action of the Chinese government.

Hails to China’s SOC policy!

Of course it would be better if private firms could have some more chances in faire competition.