The title of Ian Bremmer’s new book, The End of the Free Market, seems to make the point clearly enough. His prediction: that companies from free market economies will face increasing competition in developing markets from the “state capitalism” of government-backed rivals.
Bremmer puts a number of energy-rich states into the “state capitalist” category, as well as some commodity producers with limited commitments to free market principles. However, Russia and – especially – China seem to fit the label best. But as Bremmer told NPR, a public radio programmer in the US, the message doesn’t seem to have got through to some of the multinationals trying to do business in these markets. “It’s not a fair playing field and there is no rule of law,” Bremner explains, “They are going to get ‘Googled’ out.”
But while it’s true that private sector companies in China often operate in the shadow of their state-owned counterparts, a State Council circular released last week suggests that Beijing does not want to see guojinmintui trends (‘the state advances as the private sector retreats’, see WiC30) overwhelm the private sector completely.
In fact, the circular was aimed at “encouraging and guiding the healthy development of private investment” in industries not specifically barred to the private sector.
The State Council says it will do this by fostering a greater level of competition in the market, removing laws that hinder private investment, and increasing transparency of market access.
The government is especially keen on private companies putting money into infrastructure. It’s an area where the state is currently dominant: in 2008 private companies had a market share of less than 10% in telecommunications, transportation and water, according to the China Daily. Other industries where private money will be welcomed include healthcare, financial services and education.
Market observers applauded the government’s efforts. HSBC’s chief economist Qu Hongbin says that the measures will increase private investment, create jobs, boost private consumption and facilitate long-term sustainable growth. Another positive: they will take some of the load off government fiscal spending, Qu says.
The China Daily concurred in an editorial on Tuesday: “Chinese policymakers are increasingly realising that the ongoing recovery can hardly last if private investment is not properly boosted on time.”
This is especially true for infrastructure investment, which is decelerating as the government starts to roll back its stimulus package. Commenting on the State Council’s new measures, China’s top economic planning agency, the NDRC, said that “it’s not enough to rely on stimulus policies such as government investment and credit growth,” Bloomberg reports.
This is not the first time that the government has made overtures to the private sector. In 2005, it also made friendly noises. But the proposed policy measures were not properly implemented.
This time will be different, the NDRC insists. The new measures are the most comprehensive set of policies targeting private investment since China started its economic reforms in 1978, it claims. But the failure of the 2005 efforts means there is room for some scepticism. Experts like Li Xiaogang of the Shanghai Academy of Social Sciences want to see the details. “I really hope the guidelines are not merely empty words,” Li says.
Others are readier to take the State Council at its word. Citic economist Zhu Jianfang told Bloomberg that he sees the proposed changes in a wider historical sweep, as the “third major regulatory reform” since 1949. He compares it to the agricultural reforms of the eighties and the restructuring of state-owned enterprises in the nineties.
Bremmer’s own view is that state capitalism works best in smaller, wealthier countries and that China’s own economy will be too large and too complex to “micro-manage” for an extended period. Perhaps some in the Chinese leadership agree with him, although few doubt that the more immediate rationale for the current policy shift is to ensure the private sector does its bit to keep economic growth on track.
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