China’s Economy Is Mostly Unfree and Likely to Stay That Way

COMMENTARY International Economies

China’s Economy Is Mostly Unfree and Likely to Stay That Way

Jan 22nd, 2021 3 min read

Commentary By

Anthony B. Kim @akfreedom

Research Manager and Editor of the Index of Economic Freedom

Patrick Tyrrell

Research Coordinator

A Chinese man wears a protective mask as he passes near the CCTV building in fog and pollution during rush hour in the central business district on February 13, 2020 in Beijing. Kevin Frayer / Stringer / Getty Images

Key Takeaways

The People’s Republic of China often pays lip service to reforming its bloated, inefficient state-owned enterprises. Unfortunately, reforms rarely pan out.

China has not fared well in Heritage’s Index of Economic Freedom, which measures economic governance in key areas related to economic growth and prosperity.

Rated “mostly unfree,” the Chinese economy lags behind the majority of other countries in maximizing opportunities for growth.

The People’s Republic of China often pays lip service to reforming its bloated, inefficient state-owned enterprises. Unfortunately, reforms rarely pan out.

When China began to emerge from the dark ages of the Cultural Revolution in the late 1970s, progress in reforming state-owned enterprises, particularly in the form of consolidating state control of large state-owned enterprises and withdrawing control from small ones, led to an economic boom.

In recent years, however, that progress has come to a screeching halt, with pro-market reforms slowed and even derailed in some sectors.

In the 2000s, the one-party government in Beijing began redefining state-owned enterprise “reform,” using the phrase to refer to centralizing state control over key industries, the opposite of what it means in the rest of the world. The Chinese Communist Party’s third plenum, in 2013, outlined how the state would reduce control of commercial  state-owned enterprises, while pushing them in key industries that contribute the most to China’s economic development and national security to focus on “core” areas of their businesses.

In practice, that has meant ever-increasing deference by state-owned enterprises to party official’s top-down control of their activities.

recent report by the Asia Society Policy Institute takes a closer look at how China has done in its stated goal of reducing state control of commercial state-owned enterprises in the non-key industries. Unfortunately, in the second quarter of 2020, as in previous quarters, there was no progress.

The study highlights that state-owned enterprises in China have “maintained their presence in commercial sectors where Beijing had committed to letting the market play a bigger role.”

Not surprisingly, these state-owned enterprises underperform China’s private companies when measured by growth of revenues. According to the Asia Society Policy Institute report, revenues barely budged in the industrial sector among state-owned enterprises in the second quarter of 2020, but 6% growth (over 2019) was achieved by private companies in the sector even though they lacked the government backstop enjoyed by the state-owned enterprises.

Achieving economic growth is not, of course, the primary goal of any communist dictatorship—that goal is always the party’s retention of full control of the country’s people, usually by any means necessary. The Chinese Communist Party does seem to understand, however, that spurring continued economic growth is a key factor in maintaining popular support. 

That makes their continued affinity for relying on inefficient state-owned enterprises and other government-directed solutions are particularly misguided. This is bad for China in the end, but it certainly causes distortions in markets beyond China’s borders as well.

China has not fared well in The Heritage Foundation’s Index of Economic Freedom, which measures economic governance in key areas related to economic growth and prosperity. Rated “mostly unfree,” the Chinese economy lags behind the majority of other countries in maximizing opportunities for growth.

In a recent commentary, Kevin Rudd, Australia‘s former prime minister, shared a timely observation that “the objective lesson from history is that China’s economy does well when it is opened up, private business is allowed to flourish, and the state loosens its grip.”

Unfortunately, as Rudd pointed out, the Chinese Communist Party remains more “attached to maximizing political control even at a cost to economic, employment and productivity growth.”

That control, which stifles the intellectual, social, cultural, and economic vigor of the Chinese people, is at the core of all the issues that Washington’s new administration must deal with in charting its course towards the communist regime. 

This piece originally appeared in The Daily Signal