China’s state capitalism: can it last? - Editor's Blog -

Donald Trump should relax his China bashing. There are reasons why China will have to reform its model of its own accord, writes Brian Caplen.

We have lived through several decades in the West in which centrally planned economies have collapsed (in the former Soviet Union) and experiments with nationalisation and major market intervention (in western European countries, including France and the UK) have failed.

So why is it that in China the prospect of massive state subsidies in key industries, the role of state-owned enterprises in the economy and the growing links between the Communist Party and business are of such great concern to the West? Surely such a strategy is bound to fail, especially as an economy grows in sophistication and does not respond so readily to state control?

China analysts are to be found on both sides of this argument with some fearing the continued rise of the country through unfair business practices while others predict that its current strategy will end in failure.

In a Financial Times article, trade expert Sherman Katz recently critiqued China’s 'Made in China 2025' programme – which includes efforts to make the country a leader in 10 key industries by 2049 – as “state support for industry on an unprecedented scale”.

Mr Katz continues: “Too little is known about the 100,000 state-owned enterprises that produce one-third of China’s gross domestic product and provide one-fifth of all its jobs. How much government funding do they receive? How extensive is government ownership? What positions are occupied by government officials?”

By contrast other seasoned China commentators such as George Magnus and Nicholas Lardy argue that China’s resurgent state make it unfit to tackle the country’s problems such as an ageing population, and high indebtedness will be a drag on the country’s potential.  

Beijing-based independent political economy commentator Zhang Lin, in an article in the South China Morning Post, says that China’s private sector enterprises are losing efficiency by being forced to set up party cells.

“As the recession of the downstream private economy starts to spread, the upstream state-owned economy also faces great risks because it needs to sell monopoly resources to downstream firms. That’s why Beijing is busy trying to revive the confidence of the private economy through financial support and promises of tax cuts. But the cause of the problem has not been touched: the government and the party need to stay out of private businesses,” he writes.

Unless we believe totally in the concept that China is different, we must conclude that the laws of economics, not American pressure, will eventually make the country change course. 

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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