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Can State-Run Capitalism Absorb the Shocks of ‘Creative Destruction’?

A ChinaFile Conversation

The Editors: Following are ChinaFile Conversation participants’ reactions to “China: Superpower or Superbust?” in the November-December issue of The National Interest in which author Ian Bremmer says that China’s state-capitalism is ill-equipped to absorb the shocks to the system inherent in the reform widely deemed necessary to preserve continued growth.

Responses

There is little doubt that state capitalism has been a key part of China’s super-charged growth over the past decade, and I agree with Bremmer that, over the long term, “state capitalism is not equipped to create the lasting and broadly shared prosperity on which construction of an innovative economy depends.”  So what happens?  Experience tells us these companies don’t just blow up: instead they gradually exert increasing drag on the economy, sucking in resources and producing fewer benefits for society.

There’s evidence that this is already happening in China.  Although central state enterprises continue to grow, their profits as a share of GDP peaked in 2007.  The two most profitable state firms have been wracked by corruption scandals. China Mobile has been grappling with a long slow-bleed scandal, while also struggling to adapt to new types of competition in its core markets (China Mobile’s profits declined in the third quarter 2013 for the first time ever).  Even more critical is the explosive scandal at China National Petroleum Company that implicates former Standing Committee member Zhou Yongkang, and poses the question of how high Xi Jinping’s anti-corruption campaign will reach.

So what’s going to happen?  Nothing.  Right now, the state firms are too powerful, and too embedded in the Communist Party system to change.  But here’s the question:  Can a new round of economic reforms reduce the privileged position of state firms, and create a more level playing field?  Financial reforms, if successful, will create more equal opportunities and higher costs of capital for SOEs; resource pricing reforms would take away some of the windfall profits and opportunities for manipulation that central SOEs currently enjoy.  If these reforms are successful, state firm paper profits (still large) will begin to erode.  If, and only if, that happens, we might begin to see Chinese leaders rethinking the role of SOEs, and making some tough choices about the future.

Observers have been predicting the inevitable demise of China’s state-owned enterprise for decades. And yet, here we are again debating their ability to survive despite the clearly demonstrated fact that they have not only survived by thrived.

That’s impressive and depressing. Impressive, because it’s a demonstration of the amazing human resources machine that is the Communist Party. Lumbering, money-losing behemoths were able to shed millions of workers and cut back benefits to turn into relatively efficient and even profitable corporations. There was social unrest and worker protest but most were managed away with careful infusions of cash and selective knocking of heads.

Depressing because these strengthened state-owned enterprises do, as Bremmer suggests, suck the air out of the economy and make it tougher for more creative private corporations to blossom. In effect, it looks like China has decided it would rather plod along with slower growth and suppress the incredible talent and innovation of its people.

Why? Because the state-owned enterprises represent the Communists Party’s core constituency. To make a slightly poor comparison, the state-owned sector is the party’s biggest campaign donor. Why would they reduce them? And what happens when private enterprises get really large? They start asking all sorts of pesky questions about rule of law and level playing fields that chip away at party authority.

So, bottom line: don’t bet against the survival of the state sector. Just don’t expect it to be too interesting.

Basically, there is nothing in China that resembles capitalism, so the question itself makes no sense. China is a typical example of a socialist planned economy. The economists Mises and Hayek have already made it clear that the socialist planned economy cannot survive in the long run. China will no doubt be an example of that. If not, then we will have to reconsider all of our basic notions about how economic systems work. However, nothing going on in China today suggests that will be necessary.

Can China’s state-run capitalism survive “creative destruction”? No, because entrenched interests will defeat change. The No. 1 enemy of the Chinese economy is political paralysis. Apart from the “leftists,” just about everyone in China knows what to do, but the political system is not capable of implementing meaningful restructuring.

When the economy was growing at a double-digit pace, political stagnation was not a big deal. But now independent data—corporate results, private surveys, and employment-creation statistics, for instance—reveal growth only in the low single digits. And if it weren’t for state investment—think “ghost cities” and high-speed rail lines to nowhere— the economy would probably be contracting. So China needs a new path. Premier Li Keqiang has promised significant reforms reducing state involvement in the economy, but so far there has been disappointment with his initial moves, even the much-discussed free-trade zone in Shanghai, with its surprisingly restrictive rules.

Li means what he says, but he works inside a collective political system and, for all his power, does not make decisions on his own. Everyone hopes there will be announcements of reform at the Third Plenum next month. Promises of change then may sound ambitious, but it’s unlikely they’ll be implemented in the foreseeable future. The entrenched interests that both Ian Bremmer and Barry Naughton refer to have captured the Chinese political system and will block urgently needed reforms.

Yet the entrenched interests are not the only roadblocks to change. China has progressed about as far as it can within its existing political framework. Further reform would threaten the Communist Party’s hold on power, so it will not sponsor change of that sort. A market economy, for instance, requires the rule of law, which in turn requires “institutional curbs” on government. Because these two limitations on power are incompatible with the Party’s ambitions to continue to dominate society, China cannot make much progress toward them within the current system.

Today, there is a growing recognition that fundamental economic restructuring in China cannot occur unless there is far-reaching political reform, reform certainly more ambitious than the “inner Party democracy” that leaders like to talk about. Yet meaningful political reform is completely off the table, as new supremo Xi Jinping has made clear.

China, for the moment, is trapped in various self-reinforcing—and self-defeating—feedback loops. In one of these loops, a slumping economy is creating a crisis of legitimacy, the legitimacy crisis, in turn, is causing a wide-ranging political crackdown, the crackdown makes reform unlikely, and the lack of reform prevents long-term economic growth. Just when China needs fundamental reform the most, its political system is least able to deliver it.

And one more thing. Xi Jinping is talking like a Maoist and Marxist these days. He may not actually believe his ludicrous-sounding ideologically tinged statements, but his words are nonetheless energizing leftists and disheartening reformers.

Reform in China, unfortunately, is dead in the water.

ChinaFile is a new not-for-profit, English-language, online magazine published by the Center on U.S.-China Relations at the Asia Society. We hope to help facilitate a broad, well-informed,...
Barry Naughton is the So Kwanlok Chair of Chinese International Affairs at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego. Naughton is...
Shai Oster is an award-winning Hong Kong-based Reporter-at-Large for Bloomberg News. Over nearly two decades as a journalist in China, Europe, and the U.S., he has covered a broad range of economic,...
Steve Dickinson is an Attorney with Harris & Moure, a boutique international law firm. The bulk of his practice is with foreign companies that do business with China. He works primarily with...
Gordon G. Chang is the author The Coming Collapse of China and Nuclear Showdown: North Korea Takes On the World, both from Random House. His writings have appeared in The New York Times, The Wall...

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JONATHAN LANDRETH, YING ZHU & others

Last week, DreamWorks Animation (DWA), the Hollywood studio behind the worldwide blockbuster Kung Fu Panda films, announced that it will cooperate with the China Film Group (CFG) on an animated feature called Tibet Code, an adventure story based on a series of recent Chinese...

Blog

04.23.13

How Would You Spend (the Next) $300 Million on U.S.-...

ORVILLE SCHELL & MICHAEL KULMA

Orville Schell:When Stephen A. Schwarzman announced his new $300 million program aimed at sending foreign scholars to Tsinghua University in Beijing the way Rhodes Scholarship, set up by the businessman and statesman Cecil Rhodes in 1902 began sending American scholars to Oxford...

Blog

04.18.13

How Fast Is China’s Slowdown Coming, and What Should...

PATRICK CHOVANEC, BARRY NAUGHTON & others

Slower Chinese GDP growth is not a bad thing if it’s happening for the right reasons. But it’s not happening for the right reasons.Instead of reining in credit to try to curb over-investment, Chinese authorities have allowed a renewed explosion in credit in an effort to fuel...

Blog

04.16.13

Why is China Still Messing with the Foreign Press?

ANDREW J. NATHAN, ISABEL HILTON & others

To those raised in the Marxist tradition, nothing in the media happens by accident.  In China, the flagship newspapers are still the “throat and tongue” of the ruling party, and their work is directed by the Party’s Propaganda Department.  That’s the first...

Blog

04.11.13

Why Is Chinese Soft Power Such a Hard Sell?

JEREMY GOLDKORN, DONALD CLARKE & others

Jeremy Goldkorn:Chairman Mao Zedong said that power comes out of the barrel of a gun, and he knew a thing or two about power, both hard and soft. If you have enough guns, you have respect. Money is the same: if you have enough cash, you can buy guns, and respect.Israel and Saudi...

Blog

04.03.13

Bird Flu Fears: Should We Trust Beijing This Time?

DAVID WERTIME, YANZHONG HUANG & others

David Wertime:A new strain of avian flu called H7N9 has infected at least seven humans and killed three in provinces near the Chinese metropolis of Shanghai, with the first death occurring on March 4. Meanwhile, in the last month, about 16,000 pigs, 1,000 ducks, and a few swans...

Blog

04.02.13

Why Did Apple Apologize to Chinese Consumers and What...

JEREMY GOLDKORN, ISABEL HILTON & others

Jeremy Goldkorn:On March 22, before the foreign media or Apple themselves seemed to have grasped the seriousness of the CCTV attacks on the Californian behemoth, I wrote a post on Danwei.com that concluded:“The signs are clear that regulators and establishment media would both...

Blog

03.28.13

Will China’s Renminbi Replace the Dollar as the World...

PATRICK CHOVANEC, DAMIEN MA & others

Patrick Chovanec:This week’s news that Brazil and China have signed a $30 billion currency swap agreement gave a renewed boost to excited chatter over the rising influence of China’s currency, the renminbi (RMB). The belief, in many quarters, is that the renminbi is well on...

Blog

03.26.13

Can China Transform Africa?

JEREMY GOLDKORN, ISABEL HILTON & others

Jeremy Goldkorn:The question is all wrong. China is already transforming Africa, the question is how China is transforming Africa, not whether it can. From the “China shops”—small stores selling cheap clothing, bags, and kitchenware—that have become ubiquitous in Southern...

Blog

03.19.13

China’s New Leaders Say They Want to Fight Corruption...

ANDREW J. NATHAN & OUYANG BIN

In his first press conference after taking office as China's new premier, Li Keqiang declared that one of his top priorities would be to fight corruption, because “Corruption and the reputation of our government are as incompatible as fire and water.” This put Li on message...

Blog

03.15.13

Is the One Child Policy Finished—And Was It a Failure...

DORINDA ELLIOTT, ALEXA OLESEN & others

Dorinda Elliott:China’s recent decision to phase out the agency that oversees the one-child policy has raised questions about whether the policy itself will be dropped—and whether it was a success or a failure.Aside from the burdens only children feel when it comes...

Blog

03.13.13

China’s Post 1980’s Generation—Are the Kids All...

SUN YUNFAN, ORVILLE SCHELL & others

This week, the ChinaFile Conversation is a call for reactions to an article about China's current generation gap, written by James Palmer, a Beijing-based historian, author, and Global Times editor. The article, first published by Aeon in the U.K., “The Balinghou: Chinese...

Blog

03.08.13

Will China’s Property Market Crash, and So What If It...

DORINDA ELLIOTT & BILL BISHOP

Dorinda Elliott:At this week’s National People’s Congress, outgoing Premier Wen Jiabao proclaimed that the government kept housing prices from rising too fast. Really? I wonder what my 28-year-old Shanghainese friend Robert thinks about that. He and his fiancée could never...

Blog

03.06.13

Are Proposed Sanctions on North Korea a Hopeful Sign...

ORVILLE SCHELL, SUSAN SHIRK & others

Orville Schell:What may end up being most significant about the new draft resolution in the U.N. Security Council to impose stricter sanctions on North Korea, which China seems willing to sign, may not be what it amounts to in terms of denuclearizing the DPRK, but what it...

Blog

03.01.13

Is America’s Door Really Open to China’s Investment...

DANIEL H. ROSEN, ORVILLE SCHELL & others

Daniel Rosen:There have not been many new topics in U.S.-China economic relations over the past decade: the trade balance, offshoring of jobs, Chinese holding of U.S. government debt, whether China’s currency is undervalued and intellectual property protection problems have...

Blog

02.27.13

How Long Can China Keep Pollution Data a State Secret?

ELIZABETH ECONOMY, ORVILLE SCHELL & others

Elizabeth Economy:The environment is center stage once again in China. A Chinese lawyer has requested the findings of a national survey on soil pollution from the Ministry of Environmental Protection and been denied on the grounds that the information is a state secret. (The...

Blog

02.22.13

Will Investment in China Grow or Shrink?

DONALD CLARKE & DAVID SCHLESINGER

Donald Clarke:I don’t have the answer as to whether investment in China will grow or shrink, but I do have a few suggestions for how to think about the question. First, we have to clarify why we want to know the answer to this question: what do we think it will tell us? This...

Blog

02.20.13

Cyber Attacks—What’s the Best Response?

JONATHAN LANDRETH, JAMES FALLOWS & others

Jonathan Landreth:With regular ChinaFile Conversation contributor Elizabeth Economy on the road, I turned to her colleague Adam Segal, Maurice R. Greenberg Senior Fellow for China Studies at the Council on Foreign Relations in New York. Segal said that “the time for naming and...

Blog

02.15.13

U.S.-China Tensions: What Must Kerry Do?

DORINDA ELLIOTT, ELIZABETH ECONOMY & others

Dorinda Elliott:On a recent trip to China, I heard a lot of scary talk of potential war over the disputed Diaoyu Islands—this from both senior intellectual types and also just regular people, from an elderly calligraphy expert to a middle-aged history professor. People seemed...

Blog

02.13.13

North Korea: How Much More Will China Take and How...

WINSTON LORD, TAI MING CHEUNG & others

China is increasingly frustrated with North Korea and may even see more clearly that its actions only serve to increase allied unity, stimulate Japanese militarism and accelerate missile defense. For all these reasons the U.S. should lean on Beijing to—at last—not only help...

Blog

02.08.13

Rich, Poor and Chinese—Does Anyone Trust Beijing to...

ANDREW J. NATHAN, SUSAN SHIRK & others

Andrew Nathan:The new Chinese leadership under Xi Jinping seems to be making some bold opening moves with its attacks on corruption and the announcement on February 5 of plans to reduce the polarization of incomes.  Does this mean Xi is leading China in new directions? ...

Blog

02.06.13

Airpocalypse Now: China’s Tipping Point?

ALEX WANG, ORVILLE SCHELL & others

The recent run of air pollution in China, we now know, has been worse than the air quality in airport smoking lounges. At its worst, Beijing air quality has approached levels only seen in the United States during wildfires.All of the comparisons to London, Los Angeles, and New...

Blog

02.01.13

China’s Cyberattacks — At What Cost?

JAMES FALLOWS, DONALD CLARKE & others

James Fallows: Here are some initial reactions on the latest hacking news.We call this the “latest” news because I don’t think anyone, in China or outside, is actually surprised. In my own experience in China, which is limited compared with many of yours, I’ve seen the...

Blog

01.30.13

China, Japan and the Islands: What Do the Tensions Mean...

ORVILLE SCHELL, JOHN DELURY & others

How did the Diaoyu, Spratly, and Paracel islands come to replace Taiwan as the main source of tension for maritime Asia? And how are we to explain the fact that China’s foreign policy toward its Asian neighbors has now morphed from such slogans as: “Keep our heads down, and...

DISCUSSION

Media

01.21.96

Jackie Chan, American Action Hero?

JAIME WOLF

Whenever Jackie Chan leaves Hong Kong to make a public appearance in Shanghai, Taipei or Tokyo, or in Kuala Lumpur, Singapore or Seoul, hundreds—sometimes thousands—of his fans gather in a frenzy of adoration. Last June, Chan, the martial artist, comic actor and stunt man who...

Sinica Podcast

06.04.10

Suicides, Strikes, and Labor Unrest in China

KAISER KUO, JEREMY GOLDKORN & others

A spate of suicides leaves ten dead at the Shenzhen campus of Foxconn, the giant electronics manufacturer that makes many of the world’s most popular consumer electronics. A rare strike paralyzes production at Honda Motors, shutting down all of the company’s manufacturing...

Making It Big in China

JONATHAN MIRSKY

Jianying Zha describes China as “way too big a cow for anyone to tackle in full.” Therefore, Ms. Zha says, she omits “the rural life, the small-town stories, the migrants working in huge manufacturing plants…continued poverty in parts of interior rural China, surging...