Party Will Pay the Price for China’s Rebalancing

We need to keep the impact of financial repression in mind in understanding the Chinese growth model. It is a fundamental cause of China’s rapid expansion and its extraordinary imbalances. State-owned enterprises, like other large-scale investors, have benefited from artificially low interest rates, and it is quite easy to prove that over the past decade they have been value destroyers on a very significant scale.

Studies done by the mainland research organization Unirule Institute of Economics suggest that more than 100 percent, and perhaps much closer to 200 percent, of the aggregate profitability of state-owned enterprises in China over the past decade can be explained by monopoly pricing and direct subsidies. Without these subsidies, according to Unirule, state-owned enterprises earned a negative return on equity equal to 6 percent to 7 percent.