Private Companies Are Driving China's Growth
In China, the conventional wisdom holds, state-owned enterprises dominate the economy, private companies are often starved for credit, and the central government exerts substantial influence.
But here's a quiz: What share of China's gross industrial output will come from state enterprises this year? I have tried this question on friends, even knowledgeable economists, and the responses I hear fall between 50 percent and 75 percent. The correct answer is only about 25 percent, a big drop from more than 75 percent in 1978.
In his important new book, "Markets over Mao: The Rise of Private Business in China," Nicholas Lardy of the Peterson Institute for International Economics assembles statistics like this to demonstrate that our image of state capitalism in China is dated and wrong. Lardy's central thesis is that "private firms have become the main source of economic growth, the sole source of increasing employment, and the major contributor to China's growing and now large role as a global trader." (Disclosure: I am on the board at the Peterson Institute.)
Lardy is a careful, soft-spoken scholar of China, not given to overstating his arguments in the hope that strength of conviction can make up for lack of evidence. But he pulls no punches in attacking prevailing assumptions about the Chinese economy.
Lardy uses the same classifications that China's national statistical agency uses to differentiate "state" and "private" companies. Normally, given the reputation of Chinese statistics, some skepticism about their accuracy would be warranted. But Lardy checked a sample of companies and verified the classifications. He also makes other good arguments against the possibility that the data are substantially biased.
Now, it's true that in some sectors state enterprises are still the major players in China. In tobacco manufacture, electric-power generation and oil extraction, for example, state companies' share of output exceeds 90 percent. But in many other industries, from general-purpose machinery to paper and plastics, the state share is less than 15 percent. As for services, state companies still dominate telecommunications, financial services and transportation, but more than four-fifths of retailers, accounting for about half of retail sales, are privately controlled.
But don't state firms enjoy substantial market power, even if they don't account for most of the output? Once again, Lardy suggests otherwise. For example, profit margins are no higher for state companies than for non-state ones, and the average return on assets of private companies is substantially higher than that of state ones -- roughly 13 percent and 5 percent respectively in 2012. Those facts are hard to square with the assertion that state companies enjoy extraordinary privileges and market power. Private companies use their retained earnings -- along with industrial bank loans, of which they receive roughly half -- to finance their own growth.
Finally, Lardy questions the notion that China's central government is omnipotent. Here's another quiz: Which country has more government officials per capita, the U.S. or China? China has 31 civil servants and party officials for every 1,000 people; the U.S. has 75. (France has 95.) Nor is the Chinese government always as successful as we may perceive. Its repeated efforts to consolidate the steel industry have failed, and its attempts to do the same with the auto industry have been only partially realized. Environmental protection has been uneven at best; one Chinese official complained that he couldn't conduct inspections because minimal funding meant he didn't have regular access to a car to visit factory sites.
Lardy's myth-busting informs a crucial question for the global economy over the next decade: Will Chinese growth decelerate noticeably?
One reason to expect slowing of growth is the middle-income trap that often afflicts countries with roughly China's per capita income. Those who are unconcerned about this dynamic in China invoke the state capitalism view: The government can sustain growth, even artificially, for a long time because it still controls most economic activity.
Lardy's thesis raises worrying questions about this assumption. He warns that the best hope for avoiding significant deceleration is to continue the process of structural reform, shifting further toward private enterprise. That is a harder path forward.
"Markets over Mao" should trigger a re-examination of how we view the Chinese economy. More urgently, it should rouse economic policy makers from complacency about the risks of a slowdown in Chinese growth.
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