Gone to plan

State capitalism goes back a long way in China. In WiC30, we suggested that the kilns of Jingdezhen provided one early example. The Yuan Dynasty (1279-1368) established an official agency, the Fouliang Porcelain Bureau, to control pottery production. Export policy was designed to profit the state.

By the 1990s Chinese state capitalism looked moribund. In early 1999 the editor of this publication visited state-owned enterprises (SOEs) in Sichuan. One was located in Deyang, where it employed 15,000 of the town’s 50,000 people – and another 5,000 in the town’s hospitals and schools too. The Second Heavy Machinery Plant sprawled over 2.4 million square metres. But it was in a financially parlous state.

Back then, when most state firms looked like basket cases and the private sector was growing rapidly, it would have been hard to predict a resurgence of state-owned busineses.

But the reform of the SOEs has confounded the sceptics. National champions such as PetroChina and China Mobile have emerged as well- managed entities. Those who predicted trouble in a banking sector loaded with bad loans have also been wrong-footed by events. The major banks successfully listed and by the time the financial crisis rocked Wall Street, they’d become the world’s biggest and most profitable financial institutions.

In fact, that very crisis would see Chinese state capitalism’s finest hour. While Republicans and Democrats bickered – actually derailing the first vote on TARP – the Chinese announced a $586 billion stimulus package. All of a sudden the Beijing system looked to have decided advantages. The nation’s banks then responded to instructions to lend (policymakers in the West have spent two years trying to achieve the same result).

China grew 8.7% in 2009: the kind of performance that saw Financial Times columnist Martin Wolf conclude that it was having “a good crisis.” It also focused on much-needed infrastructure investment. HSBC estimates that 60,000 projects have been launched. Among the more high profile were a revolutionary new ultra-high voltage power grid spanning 4,200km (see WiC3) and a network of high speed trains that claim to be the world’s fastest and cover 18,000km (see WiC1 and 37).

In the wake of its handling of the crisis, Beijing’s style of economic management won plaudits. Many African leaders became admirers. Chinese state capitalism, they opined, gets things done. Rwandan President Paul Kagame gave an interview to German newspaper Handelsblatt in which he said: “The Chinese bring Africa what it needs: investment and money for governments and companies. China invests in infrastructure, and builds streets.”

Admiration for Chinese state capitalism goes beyond Africa. Author of The World is Flat and New York Times columnist, Thomas Friedman can also see its advantages. He returned from a trip to Tianjin enthused by China’s ability to make “big, multibillion-dollar, 25-year-horizon, game-changing investments”.

By contrast, American decision-making looked sclerotic. As Friedman put it: “One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy-efficiency, batteries, nuclear power and wind power.”

Any caveats? State capitalism has had a “good crisis”, but the increasing clout of state firms may now be crowding-out the private sector. Paradoxically, it is not always exercised in the monolithic manner that many suppose. In spite of the image of tight and effective management, central government directives are often ignored by local officials and SOEs (see WiC54). Likewise SOEs often bid for the same foreign assets, driving up the price and costing China Inc more (see WiC86).

Whether state capitalism can continue to deliver on such a scale remains to be seen. But the report card for the last two years, at least, makes for positive reading.

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