State Capitalism in China

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    “State capitalism” is a term frequently used by foreign observers to describe modern China’s economic system, after its contemporary usage was first popularised by political scientist Ian Bremmer in 2010.

    Political scientist Ian Bremmer first popularised the use of the term “state capitalism” with reference to the Chinese economy in his 2010 book The End of the Free Market: Who Wins the War Between States and Corporations.

    Bremmer defines state capitalism as follows:

    “In this system, governments use various kinds of state-owned companies to manage the exploitation of resources that they consider the state’s crown jewels and to create and maintain large numbers of jobs. They use select privately owned companies to dominate certain economic sectors.

    They use so-called sovereign wealth funds to invest their extra cash in ways that maximize the state’s profits. In all three cases, the state is using markets to create wealth that can be directed as political officials see fit. And in all three cases, the ultimate motive is not economic (maximizing growth) but political (maximizing the state’s power and the leadership’s chances of survival). This is a form of capitalism but one in which the state acts as the dominant economic player and uses markets primarily for political gain.”

    Bremmer cites Premier Wen Jiabao as providing a succinct definition of Chinese state capitalism in a September 2008 interview with Fareed Zakaria on CNN, during which the Premier said:

    “The complete formulation of our economic policy is to give full play to the basic role of market forces in allocating resources under the macroeconomic guidance and regulation of the government. We have one important piece of experience of the past thirty years, that is to ensure that both the visible hand and invisible hand are given full play in regulating the market forces.”

    Huang Yasheng (黄亚生), professor at the MIT Sloan School of Management, argues that state capitalism in China first rose to prominence in the 1990’s under the administration of Jiang Zemin.

    During this period the Chinese government began to assume a more active role in the economy, replacing the grassroots entrepreneurialism of the 1980’s with an “industrial-policy” view of the world.

    The first decade of the Reform and Opening period saw an explosion of private businesses at the township and village levels, which served to create over 100 million jobs during the 1980’s.

    In the 1990’s the Chinese government gave greater financial support to large state-owned enterprises, depriving private enterprises of credit while it also giving greater incentives to foreign investment.

    Nicholas Lardy from the Peterson Institute for International Economics argues that state capitalism has become more prominent in China since President Xi Jinping took office in 2012.

    In his book The State Strikes Back: The End of Economic Reform in China?, Lardy says that Beijing’s increasing preference for state-owned enterprises (SOE) under Xi is evidenced by data on lending to businesses by the country’s heavily bank-dominated financial system.

    While 57% of loans went to private enterprises and 35% to state-controlled companies in 2013, by 2016 state companies accounted for 83% of loans, and their private sector counterparts just 11%.

    Lardy argues that this bodes poorly for China’s future economic performance, given that the profitability of private enterprises is over twice that of SOE’s.

    Lardy writes that:

    “The real [reason for] the underperformance of state firms vis-a-vis their private counterparts [is] insufficient profit-maximising behaviour, including corruption, on the part of the senior management of state firms and a large misallocation of capital [investment funds] by Chinese financial institutions, especially banks.”