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.