April 19, 2011
By Derek Scissors, Ph.D.
Many commentators claim that the private sector dominates the Chinese economy. They see this as portending solutions to problems in America's business and political relationship with the PRC.
Unfortunately, the private sector hardly dominates the Chinese economy. If anything does, it's the state (again).
There have been important 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, sometimes replaced by genuinely private firms.
But this met serious political opposition. In response, during the 2000s, state-owned enterprises (SOEs) 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, second in the Communist Party hierarchy, who scorned privatization as almost as unacceptable as another party holding office.
Using official Chinese data, the state share of investment in 2010 was 38%, suggesting to some that the private share was 62%.
False. What the PRC calls the private sector, plus wholly foreign-owned firms, generated only 24% 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 that the incorporation has not automatically ended state ownership.
SOEs enjoy some amazing advantages over truly private firms. In 2006, China's Cabinet identified sectors where the state must lead, a powerful guarantee.
Included were power, telecom and aviation. And in practice, the state dominates many other sectors, including banking, railways and media.
There are other perks as well. SOEs have 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 — e.g., Sinopec and Bank of China — are limited liability corporations.
These are far better classified as state-owned than as private.
Profit data reported by SOEs are 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 2010, state entities made almost 95% of all those investments.
SOEs were pruned back before, and it could happen again. But it wouldn't be easy, because SOEs can now strongly oppose such a move.
Some have 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 explicit state share of urban employment is well over half. They are also run by high-level party cadres (or their children).
No wonder the foreign share of investment in China has plummeted.
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 American goods than the notorious currency peg.
The policy challenge facing Washington is that China's overinvestment and underconsumption help cause bilateral imbalances. The PRC touts rebalancing in the new five-year plan, just as it has done since 2004.
But matters have only worsened, and for a reason: rebalancing would undermine SOEs.
The PRC overinvests to ensure that SOEs remain 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 America's interests and in the interests of foreign investors.
But it would be 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.
First appeared in Investor's Business Daily
American Leadership Initiative of the Leadership for America Campaign
Derek Scissors, Ph.D.
Senior Research Fellow
Read More >>
Request an interview >>
Please complete the following form to request an interview with a Heritage expert.
Please note that all fields must be completed.
Heritage's daily Morning Bell e-mail keeps you updated on the ongoing policy battles in Washington and around the country.
The subscription is free and delivers you the latest conservative policy perspectives on the news each weekday--straight from Heritage experts.
The Morning Bell is your daily wake-up call offering a fresh, conservative analysis of the news.
More than 200,000 Americans rely on Heritage's Morning Bell to stay up to date on the policy battles that affect them.
Rush Limbaugh says "The Heritage Foundation's Morning Bell is just terrific!"
Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."
Sign up to start your free subscription today!
The Heritage Foundation is the nation’s most broadly supported public policy research institute, with hundreds of thousands of individual, foundation and corporate donors. Heritage, founded in February 1973, has a staff of 275 and an annual expense budget of $82.4 million.
Our mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense. Read More
© 2013, The Heritage Foundation Conservative policy research since 1973