The Jingdezhen model

How state capitalists battled with entrepreneurs for business primacy

The Jingdezhen model

Passengers arriving at Wenzhou airport are greeted first by a text message. According to bestselling author Peter Hessler, it welcomes you to one of “China’s 10 most vital economies” and “sincerely hopes you find friendship, business opportunities and success”.

The sender of such warm regards? The Wenzhou City Municipal Communist Party Committee.

It doesn’t sound like a particularly Marxist greeting but that should be no surprise: Wenzhou has long been regarded as China’s most avowedly capitalist city. Over 90% of the local economy is in private hands and its factories turn out (among other things) 70% of the world’s cigarette lighters and a quarter of China’s shoes.

Centuries before Wenzhou became famous for its commercial prowess, there was another city associated with business success in China. During the 15th century, Jingdezhen was the centre of the country’s porcelain industry. Located in Jiangxi province, Jingdezhen’s experience differed from Wenzhou in a key respect. Its businesses were run as going-concerns by the country’s emperors, who sought a monopoly on porcelain exports (just as they had done before with silk, and later would attempt with tea).

As such, the city was an earlier equivalent of today’s “state-owned” enterprises. So in WiC30 we referred to the ‘Jingdezhen Model’, a term coined to define what looked to be the increasing clout of ‘state capitalism’ within China’s economy.

Simply put, the big state firms seemed to be muscling out the private sector.

A debate soon raged in China’s media as to whether this was a good thing. Another phrase was even invented to explain the trend: guojinmintui, which literally translates as ‘the state advances as the private sector recedes’.

Between 1999 and 2009 – a golden era for China’s capitalists – the share of output controlled by state firms fell from 49% to 27% of GDP. But in the wake of the global financial crisis that began to reverse. State-owned firms were the prime beneficiaries of Beijing’s Rmb4 trillion stimulus package ($633 billion at today’s exchange rate, but worth $586 billion when it was announced in November 2008). State enterprises were also at the forefront when Beijing gave the order for Chinese companies to take advantage of the crisis by going abroad to acquire strategic assets.

There are about 114,000 state-owned enterprises (SOEs) in China today, but the largest and most profitable are the 117 housed under Sasac (the State-owned Assets Supervision and Administration Commission, see WiC45).

Sasac explains its mandate as making its corporate charges more efficient. But increasingly that seemed to be occurring in a manner that crowded out the activities of private businesspeople. Take the example of Zhao Youshan, an entrepreneur who ran petrol stations and oil depots. As the founder of Longqing Petrochemicals, Zhao spent years competing with state-owned oil giant CNPC (parent of Hong Kong-listed PetroChina). But in 2009 he sold his business to CNPC, commenting: “Most of Heilongjiang’s private enterprises have been acquired by CNPC and now in the northern market you can barely see any privately-owned petrol stations.”

There were other high-profile cases. The country’s largest milk producer, Mengniu Dairy fell under the sway of state food giant, COFCO. A survey by Southern Weekly in 2009 also found that 60% of the buyers of China’s most prized plots of land that year were state-owned. And then there was the case of steel magnate Du Shuanghua, pressured by his local government to sell his profitable firm at a knockdown price to lossmaking SOE, Shandong Steel.

More than most, Du’s case had other tycoons worried. Would they be next?

Sasac’s former boss, Li Rongrong waded into the debate this January, telling 21CN Business Herald that most of the SOEs worked in situations of “natural monopoly”. That explained why they were getting bigger, he suggested. Academics scoffed at his reasoning but Li retorted: “Guojinmintui is a pseudo question, and the SOEs are the scapegoats of criticisms against state monopoly. I am now teaching at Tsinghua University. Half of the students are from private enterprises. I can say that I have never heard any private company criticise the SOEs. It’s only a few scholars who are really criticising them.”

The guojinmintui debate is complicated by the fact that state firms are as likely to square up to one another as bully the private sector. Witness how all three of the state’s oil majors frequently bid against one another for assets. As we reported last week, two state firms also look set to battle it out for control of publicly-listed gas distributor, China Gas.

Nor is there much love lost between SOE rivals. China Mobile even sought to sabotage China Telecom’s network in Wenzhou (see WiC35). “They were deliberately interrupting our signal,” the director of China Telecom’s local office told the China Daily. “This is not the only time they have sought to interfere with our signal in densely populated areas.”

The case of steel magnate Du Shuanghua also took an interesting turn. As we wrote in July last year (see issue 116), Du looks to have delayed Shandong Steel’s bid for Rizhao Steel by injecting 30% of the firm into a Hong Kong-listed vehicle (that he controlled). That makes it harder for the SOE to absorb Rizhao Steel without a more transparent bidding process (and a higher price, Du must be hoping).

For a little added protection, Du also teamed up with a far bigger SOE than Shandong Steel, China Minmetals. In an inversion of the guojinmintui principle, Du took on one of Minmetals failing subsidiaries, promising to bear all the losses but to split any profit. His team turned the operation around in four months. As of this week, Shandong Steel’s acquisition of Rizhao remains in the pending category.

In fact, earlier this year there were indications that the guojinmintui trend might have peaked, and that China’s pro-market reformers were making a comeback. The first blow to the state capitalists came with a carefully orchestrated campaign from People’s Daily to celebrate Deng Xiaoping’s 1992 Southern Tour. The anniversary (in late January) seemed to have been designed to trigger memories of the former paramount leader’s call for bold economic reforms in which state controls were loosened (see WiC136).

Also perhaps significant: prime minister-in-waiting Li Keqiang gave his blessing in March to a controversial report on China’s economy co-authored by the World Bank and an adjunct of the State Council (China’s cabinet). The paper pretty much rejected the state capitalist model and said that if China continued on its current trajectory it would face genuine problems. “More than one in four state enterprises makes a loss,” the report warned. “Besides being less profitable, state enterprises are less dynamic than private sector firms.”

Further evidence that guojinmintui was on the retreat: the purge of Chongqing Party boss, Bo Xilai in April. That was telling in terms of its symbolism, as Bo was a flag bearer for the state capitalist model. His interim successor Zhang Dejiang is striking a different note, this week telling a conference: “Chongqing will definitely further open up and be more active in terms of its economic development.”

That sounds like code for encouraging more private sector investment. And there have been other signs that official policy isn’t always skewed to helping the state monoliths. Take the recent approval from the country’s leading planning agency, the NDRC, for China’s first privately-owned oil pipeline, which will import the fuel from Russia.

The speculation is that the news heralds a major crack in the state monopoly on importing that commodity too (see WiC147).

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