When China built the world’ssecond-largest economy, it was not just an economic miracle but apolitical one. It did so by re-writing the rulebook on capitalismand placing the ruling Communist Party at the center of thisremarkable transformation. A unique model of state-capitalism was born with the Party at thehead of an elaborate apparatus of political control over vasttracts of the economy. While flagship state-ownedenterprises (SOEs) were listed in New York or London, its topexecutives were still appointed by and answerable to the Party inBeijing. But now as growth slows, this pivotal role in the economy is underincreasing scrutiny, as well as pressure to reform. China has builtsome truly giant corporations across sectors from bankingtotelecoms to energy, yet there is now growing unease at theunwelcome side effects of state-led growth; from industrialovercapacity, inefficiency and wealth inequality to environmentaldegradation. It is these issues that author Joe Zhang tackles in his timely newbook“PartyMan, Company Man: Is China’s State CapitalismDoomed?”With a colorful background thatincludes stints as an official at the People’s Bank of China, aninvestment analyst at Western banks, as well as managing a listedSOE, Zhang has a breadth of China experience to reflect on. We satdown with him to discuss how he sees the future of China’s statecapitalism. One of the big conclusions in your book is that the state is notdoomed but is actually going to become moredominant. Can you explain your fundamental thinking behindthis? The conventional view is that the private sector will inevitablybecome more dominant in China. But the reality isthe state sector has actually been getting stronger in the past 10years and regained prominence. I expect this to continue. People forget that China did have a capitalist system before from1911 – 1949. This was a period of continuous warand the bad memories remain. The public clearly rejected the feudalsystem based on capitalism because it wasunregulated. It even went to the point of revolution. While China’s economy has various problems today, there is still afeeling it has made great progress under the state-led system. Inthe 1970’s the economy collapsed as a result of rigid centralplanning and market reforms were introduced. Since then if youcompare China to India, Africa, South America or even somecountries in South East Asia, it has done well. My impartial observation is that in terms of public opinion, theChinese population seems to embrace or even want a bigger role forthe state sector.This also means they support strengtheningregulation, be it adding more bank regulators or centralplanners. There is also criticism that China’s protected and over-sized statesector is inefficient and generates low returns? I disagree that China’s state sector performs less well than theprivate sector. There have been arguments that data shows thereturn on assets is substantially less in China’s state sectorcompared to the private sector. But this falls down on two counts. First you haveto consider that China’s huge banks only appear in the state dataas they are all state-owned and make up about 50 percent of themarket capitalization of the domestic stock market. This willinevitably skew ROA measurement, as banks by definition are highlygeared businesses with a low return on assets. The correct way to get a fair measure of performance would bereturn on equity, which comes in at around 20 percent for Chinesebanks. The other issue with this measurement is the tens ofthousands of private companies that go bankrupt each year. Thisgives a survival bias to the numbers as they then exit from thedata. But what about the argument returns are only good because China’sSOE’s are operating in monopolies or protected markets? I would argue that there is still active competition even withinsectors where there is majority state ownership. For instance,China’s state owned banks compete fiercely with each other, as doits telecom companies. Another factor that effectively enhancescompetition is the power of social media in today’s economy, whichallows the public to hold companies to account and force them toadopt better behavior. My experience tells me SOEs are alreadyadapting to public pressure for greater efficiency andtransparency. One well-recognized problem in China’s state-led economy is thescale of corruption. As we witness ananti-corruption campaign led by Premier Xi Jinping, can this trulybe effective? I would commend Premier Xi for launching this campaign as it islong overdue and it is has a lot of publicsupport. But there is still the issue of how youroot out the fundamentally fertile soil that gives rise tocorruption in the first place, without a multi-party system. Thisis an entirely different game. You need anindependent third party with checks and balances Who will monitorthe monitors? Given your view on the state sector’s continuing dominance, do youexpect China to embark on meaningful reform? Last November therewas considerable enthusiasm over a reform blueprint announced atthe plenum meeting, as well as the Shanghai Free Trade Zonelaunch. I want to see genuine reform. My prediction is we will see verylittle. Too many analysts confuse wishfulthinking with cool-headed analysis. Human nature is if it isn’tbroken don’t fix it. Do not underestimate the Chinese ability forinaction and to muddle through. The only reasonwe saw big reforms in China during the 1970’s withDeng’s Xiaoping was because the economy waseffectively collapsing. While I’m no longer in the forecasting business, for full currencyconvertibility, I don’t expect anything meaningful in the next 5-10years. The inertia is simply too strong. There has been a lot of controversy over the spate of recentantitrust raids on foreign companies in China. Isthis aimed at detracting attention from the high profileanti-corruption campaign, or is it some sortof mercantilist clampdown to boost domesticfirms? I do not believe the government needs to use these antitrustactions as cover or is related to being populist. Overall,authorities do not feel under any great pressure. Growth isreasonably strong and the Party retains a very firm grip on theeconomy and society. My view is that these antitrust actions, inpart reflect we are witnessing a Chinese economy that is now moremature and developed. In the past authorities have shied away from enforcement as theyneeded investment and tended to bend over to accommodate foreigncompanies. There was also generally a feeling they had bettergovernance, so we will leave it to them. But it went too far in onedirection and now dealing with issues such as price fixing andtransfer pricing, is simply long overdue. In your book you warn that China’s economy needs to address itsproperty bubble and excessive money supplygrowth. Where are we now? I still see no slowdown in the rate of money supply growth, whichcontinues to expand at around 13-14 percent per month in the latestdata. Today’s money supply is already 372 percentof what it was at the beginning of 2006. This hasbeen far more aggressive than the quantitative easing in the U.S.or Europe. China has to deflate the credit bubble and propertybubble, but I cannot predict how it will end. |
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