6/16/2015

Private Companies Are Driving China's Growth - Bloomberg View

C H IN A

PrivateCompaniesAreDriving
China'sGrowth

OCT14,201410:15AMEDT

ByPeterR.Orszag

aA

InChina,theconventionalwisdomholds,stateownedenterprisesdominatetheeconomy,private
companiesareoftenstarvedforcredit,andthecentralgovernmentexertssubstantialinfluence.
Butheresaquiz:WhatshareofChinasgrossindustrialoutputwillcomefromstateenterprises
thisyear?Ihavetriedthisquestiononfriends,evenknowledgeableeconomists,andtheresponses
Ihearfallbetween50percentand75percent.Thecorrectanswerisonlyabout25percent,abig
dropfrommorethan75percentin1978.
Inhisimportantnewbook,"MarketsoverMao:TheRiseofPrivateBusinessinChina,"Nicholas
LardyofthePetersonInstituteforInternationalEconomicsassemblesstatisticslikethisto
demonstratethatourimageofstatecapitalisminChinaisdatedandwrong.Lardyscentralthesis
isthatprivatefirmshavebecomethemainsourceofeconomicgrowth,thesolesourceof
increasingemployment,andthemajorcontributortoChinasgrowingandnowlargeroleasa
globaltrader.(Disclosure:IamontheboardatthePetersonInstitute.)
Lardyisacareful,softspokenscholarofChina,notgiventooverstatinghisargumentsinthehope
thatstrengthofconvictioncanmakeupforlackofevidence.Buthepullsnopunchesinattacking
prevailingassumptionsabouttheChineseeconomy.
LardyusesthesameclassificationsthatChina'snationalstatisticalagencyusestodifferentiate
"state"and"private"companies.Normally,giventhereputationofChinesestatistics,some
skepticismabouttheiraccuracywouldbewarranted.ButLardycheckedasampleofcompanies
andverifiedtheclassifications.Healsomakesothergoodargumentsagainstthepossibilitythatthe
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Private Companies Are Driving China's Growth - Bloomberg View

dataaresubstantiallybiased.
Now,it'struethatinsomesectorsstateenterprisesarestillthemajorplayersinChina.Intobacco
manufacture,electricpowergenerationandoilextraction,forexample,statecompanies'shareof
outputexceeds90percent.Butinmanyotherindustries,fromgeneralpurposemachinerytopaper
andplastics,thestateshareislessthan15percent.Asforservices,statecompaniesstilldominate
telecommunications,financialservicesandtransportation,butmorethanfourfifthsofretailers,
accountingforabouthalfofretailsales,areprivatelycontrolled.
Butdontstatefirmsenjoysubstantialmarketpower,eveniftheydontaccountformostofthe
output?Onceagain,Lardysuggestsotherwise.Forexample,profitmarginsarenohigherforstate
companiesthanfornonstateones,andtheaveragereturnonassetsofprivatecompaniesis
substantiallyhigherthanthatofstateonesroughly13percentand5percentrespectivelyin
2012.Thosefactsarehardtosquarewiththeassertionthatstatecompaniesenjoyextraordinary
privilegesandmarketpower.Privatecompaniesusetheirretainedearningsalongwithindustrial
bankloans,ofwhichtheyreceiveroughlyhalftofinancetheirowngrowth.
Finally,LardyquestionsthenotionthatChina'scentralgovernmentisomnipotent.Heresanother
quiz:Whichcountryhasmoregovernmentofficialspercapita,theU.S.orChina?Chinahas31
civilservantsandpartyofficialsforevery1,000peopletheU.S.has75.(Francehas95.)Noris
theChinesegovernmentalwaysassuccessfulaswemayperceive.Itsrepeatedeffortsto
consolidatethesteelindustryhavefailed,anditsattemptstodothesamewiththeautoindustry
havebeenonlypartiallyrealized.EnvironmentalprotectionhasbeenunevenatbestoneChinese
officialcomplainedthathecouldn'tconductinspectionsbecauseminimalfundingmeanthedidnt
haveregularaccesstoacartovisitfactorysites.
Lardysmythbustinginformsacrucialquestionfortheglobaleconomyoverthenextdecade:Will
Chinesegrowthdeceleratenoticeably?
Onereasontoexpectslowingofgrowthisthemiddleincometrapthatoftenafflictscountrieswith
roughlyChinaspercapitaincome.ThosewhoareunconcernedaboutthisdynamicinChina
invokethestatecapitalismview:Thegovernmentcansustaingrowth,evenartificially,foralong
timebecauseitstillcontrolsmosteconomicactivity.
Lardysthesisraisesworryingquestionsaboutthisassumption.Hewarnsthatthebesthopefor
avoidingsignificantdecelerationistocontinuetheprocessofstructuralreform,shiftingfurther
towardprivateenterprise.Thatisaharderpathforward.
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Private Companies Are Driving China's Growth - Bloomberg View

"MarketsoverMao"shouldtriggerareexaminationofhowweviewtheChineseeconomy.More
urgently,itshouldrouseeconomicpolicymakersfromcomplacencyabouttherisksofaslowdown
inChinesegrowth.
Tocontacttheauthoronthisstory:
PeterROrszagatporszag3@bloomberg.net
Tocontacttheeditoronthisstory:
MaryDuenwaldatmduenwald@bloomberg.net

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