Many commentators claim that the private sector dominates the Chinese economy. They see this as portending solutions to problems in the US’ business and political relationship with China.
Unfortunately, the private sector doesn’t dominate China’s economy. If anything does, it’s the state (again).
There have been changes in the state sector. It has shrunk and operates very differently than it did just 15 years ago. During the 1990s, state assets were sold off and sometimes replaced by genuinely private firms.
However, this met serious political opposition. In response, during the 2000s, state-owned enterprises (SOE) were instead converted into shareholding entities, many of which sold stock in Shanghai, Hong Kong or elsewhere. These shareholding firms took on some characteristics of true commercial businesses.
Those seeing a dominant private sector often mix up such shareholding firms with private firms. Neither specifying shareholders nor selling stock necessarily alters the fact of state control. The large majority of firms listed on domestic stock markets are state-owned.
In fact, restructuring was specifically crafted to change SOEs while steering far clear of privatization. This goal was driven home earlier this year by Wu Bangguo (吳邦國), second in the Chinese Communist Party hierarchy, who scorned privatization as almost as unacceptable as another party holding office.
Using official Chinese data, the state share of investment last year was 38 percent, suggesting to some that the private share was 62 percent.
False. What China calls the private sector, plus wholly foreign-owned firms, generated only 24 percent of investment. The remainder is attributable to mixed ownership.
The vast majority of these mixed firms are designated as “limited liability corporations.” The term implies privatization, but the subcategories — “wholly state-owned” and “non-wholly state-owned” — indicate the incorporation has not automatically ended state ownership.
SOEs enjoy some amazing advantages over truly private firms. In 2006, the Chinese State Council identified sectors where the state must lead. Included were power, telecommunications and aviation, and in practice, the state dominates many other sectors, including banking, railways and media.
Further, SOEs have an immediate call on land, while some private firms cannot buy at any price. SOEs receive state bank loans with no borrowing costs (and possibly voluntary repayment). Party cadres routinely shuttle between government posts and SOEs, ensuring top-level political access.
As it turns out, the largest firms receiving these benefits — including Sinopec and Bank of China — are limited liability corporations. However, they are far better classified as state-owned than as private.
Profit data reported by SOEs is unreliable, but the money seems to be rolling in. China National Petroleum and China Mobile together claim 2009 profits greater than those of the top 500 private firms combined.
The Heritage Foundation’s China Global Investment Tracker follows large Chinese investments in outside bonds. From 2005 to last year, state entities made about 95 percent of all those investments.
Some SOEs become gigantic. Top banks, telecoms and oil companies rank among the world’s largest. They provide the government with much of its revenue and generate massive employment — the state share of urban employment is well over half.
No wonder the foreign share of investment in China has fallen.
In most sectors, the Chinese market is only what’s left after the SOEs take the bulk. Subsidies for SOEs are far larger barriers to US goods than the currency peg.
The policy challenge facing Washington is that China’s overinvestment and underconsumption help cause bilateral imbalances. Beijing touts rebalancing in the new Five-Year Plan, just as it has done since 2004. However, matters have only worsened and for a reason: Rebalancing would undermine SOEs.
China overinvests to ensure SOEs stay dominant, despite their inefficiency. To pay for that overinvestment, consumption is taxed through controlled interest rates and by suppressing competition.
To rebalance, Beijing will have to curb SOEs. That would be in the US’ interests and those of foreign investors, but stridently opposed among China’s ruling elite. For now, private-sector dominance of China’s economy is a fiction.
Derek Scissors is a research fellow in the Heritage Foundation’s Asian Studies Center. This article has been published as an opinion piece in Investors Business Daily.
Saudi Arabian largesse is flooding Egypt’s cultural scene, but the reception is mixed. Some welcome new “cooperation” between two regional powerhouses, while others fear a hostile takeover by Riyadh. In Cairo, historically the cultural capital of the Arab world, Egyptian Minister of Culture Nevine al-Kilany recently hosted Saudi Arabian General Entertainment Authority chairman Turki al-Sheikh. The deep-pocketed al-Sheikh has emerged as a Medici-like patron for Egypt’s cultural elite, courted by Cairo’s top talent to produce a slew of forthcoming films. A new three-way agreement between al-Sheikh, Kilany and United Media Services — a multi-media conglomerate linked to state intelligence that owns much of
The US and other countries should take concrete steps to confront the threats from Beijing to avoid war, US Representative Mario Diaz-Balart said in an interview with Voice of America on March 13. The US should use “every diplomatic economic tool at our disposal to treat China as what it is... to avoid war,” Diaz-Balart said. Giving an example of what the US could do, he said that it has to be more aggressive in its military sales to Taiwan. Actions by cross-party US lawmakers in the past few years such as meeting with Taiwanese officials in Washington and Taipei, and
Denmark’s “one China” policy more and more resembles Beijing’s “one China” principle. At least, this is how things appear. In recent interactions with the Danish state, such as applying for residency permits, a Taiwanese’s nationality would be listed as “China.” That designation occurs for a Taiwanese student coming to Denmark or a Danish citizen arriving in Denmark with, for example, their Taiwanese partner. Details of this were published on Sunday in an article in the Danish daily Berlingske written by Alexander Sjoberg and Tobias Reinwald. The pretext for this new practice is that Denmark does not recognize Taiwan as a state under
The Republic of China (ROC) on Taiwan has no official diplomatic allies in the EU. With the exception of the Vatican, it has no official allies in Europe at all. This does not prevent the ROC — Taiwan — from having close relations with EU member states and other European countries. The exact nature of the relationship does bear revisiting, if only to clarify what is a very complicated and sensitive idea, the details of which leave considerable room for misunderstanding, misrepresentation and disagreement. Only this week, President Tsai Ing-wen (蔡英文) received members of the European Parliament’s Delegation for Relations