Employees package aluminum ingots at the China Hongqiao Group Ltd. aluminum smelting facility in Zouping, China, on Monday, Nov. 4, 2013. China Hongqiao Group is China's largest private aluminum maker. Photographer: Brent Lewin/Bloomberg
© Bloomberg

In 2001 Jiang Zemin, then general secretary of the Chinese Communist party, in effect invited private entrepreneurs to join the party. It was a significant step in what was to become an increasing embrace of those who opted out of the state enterprises that had once dominated the economy.

Five years later fully one-third of the mainland’s growing class of private entrepreneurs had chosen to join the party. Some observers referred to the way the party had co-opted the capitalists. To others the invitation represented a new reality – that China relied increasingly on such people to generate the growth that provided legitimacy to the party in turn.

“China’s economic rise in the reform era (which began in 1978) is largely the story of the expanding role of markets and private enterprise,” writes Nicholas Lardy of the Peterson Institute for International Economics in Washington. “The private sector is now the major driver of China’s economic growth, employment and exports and in recent years has even begun to contribute to the increase in China’s outbound direct foreign investment.”

This is both a counterintuitive and cautiously optimistic portrayal of the sources of growth in China today. Lardy is not given to overstatement, nor to ideology. He uses a careful study of large amounts of data to demolish the widespread impression that state-owned enterprises are more entrenched than ever, as a result of favourable policies including preferential access to credit. Many China-watchers believe the stimulus that followed the global financial crisis in 2008 solidified the hold of these entities over the economy. But Lardy reaches a very different conclusion. He notes that the output from the private sector exceeds that of state entities by a wide margin – in part precisely because of the former’s improved access to capital.

By 2012 only 30 per cent of all loans went to state enterprises from 60 per cent in 2012. Indeed, the SOEs were such a drag on the economy that their average return on assets was less than their cost of capital. Between 1978 and 2011, output from the state sector fell from 75 per cent of the total to a mere 25 per cent.

By contrast, in 2010, private enterprise accounted for two-thirds of the value of all output and 75 per cent of all jobs. They also made inroads into the equity markets, accounting for more than half of all listed companies the same year.

To anyone who has visited an ageing steel mill or chemical plant in the middle of the country, the figures behind Lardy’s compelling case will come as no surprise. But one then has to ask why the pervasive impression is so wrong. Part of the answer lies in the visibility of state-owned companies, which dominate certain sectors. Why, for example, would Beijing allow the private sector access to the tobacco industry when the product is so profitable? Similarly China’s government (like governments elsewhere) still controls the important oil and gas industry. But even within that sector, fortunes differ dramatically. China National Offshore Oil Corporation is vastly more profitable than either Sinopec or China National Petroleum Corporation because it is younger and less burdened by heavy obligations to present and past workers.

Markets over Mao appears optimistic because, since the trend is incomplete, it holds out hope for continued growth. Many parts of the service sector, including retail, finance and health, are still dominated by the heavy, inefficient hand of the state; if the grip is relaxed, potential growth and the quality of that growth will be enhanced. Lardy’s hopeful approach contrasts with widespread pessimism, if not alarm, about economic prospects on the part of many China-watchers.

He alludes to but does not devote much space to the most hopeful sign of all: the potential of the internet companies such as Alibaba and Tencent – which offer competition to SOEs and more choice to rural consumers who are not permitted to move to the cities – to make China a fairer, more prosperous place. Still, those who wish China well will find much to rejoice about in this thoughtful account of the rise of private business.

The writer is the FT’s chief correspondent, international finance

Markets Over Mao: The Rise of Private Business In China, by Nicholas Lardy, Institute for International Economics, RRP£17.50/$21.95

Copyright The Financial Times Limited 2024. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article

Comments