The dramatic rise of China’s economy has come with dramatic shifts in the makeup of its economy. China’s leadership has enacted various reforms over the past 30 years to move away from the dominance of state-owned companies and allow private enterprises to flourish and create a consistent growth of the economy at roughly 7.5 percent a year. Despite the trend, much of the economic reporting about China has remained centered on large state-owned companies. In this conversation with VOA’s Jim Stevenson, Nicholas Lardy of the Peterson Institute for International Economics says in his new book, Markets Over Mao, China has even more room to grow.
LARDY: I have been increasingly thinking that there is far too much emphasis in most of the commentary and coverage on China of big state companies. They are very big, some of them, and they do have a lot of influence in some sectors and sub-sectors. But I thought we were missing the main story which is that the private sector, private businesses have been the major source of growth, almost the sole source of increase in employment, increasingly the major source of export growth. It is hard to cover that sector because there are approximately 6.6 million private companies. It is a lot easier to tell the story about Sinopec, China Mobile or one of the big state companies. But in the aggregate, their influence and contribution to China’s economic growth has really faded dramatically.
STEVENSON: We have tended to look at the Chinese economy as a state capitalism model, how do you see it?
LARDY: I think the notion that China is a state capitalist economy is an exaggeration at best. The market is the decisive allocator of resources in China. The state has tried to intervene, but without much luck. The state is just not as dominant. If you take manufacturing, for example, when reform began in the late 1970s, state companies were producing about 80% of all manufactured goods. Today they are only producing 20%. So their footprint has shrunk. State companies today in urban China only employ about 13% of the workforce. This is a dramatic reduction from 20 to 30 years ago when most people in urban China were working for state companies. Virtually everybody now is working for a private company.
STEVENSON: What has led to the development in this rise of the private sector? What were some of the major forces that created this?
LARDY: I think number one, and the most important and one of the things I try to lay out carefully in the book, is that for the entire period private companies have been more efficient. They have a higher what economists call return on assets. They are earning more on their capital stock than state companies so their after tax profits are higher. Most investment in China is financed with retained earnings. So if you have a higher return on capital, high return on assets, you are going to be able to build your business more rapidly. That is what private companies have been able to do.
The second thing, which I think is a surprise to many people is that private companies have gotten better access to bank credit, particularly over the last 10 years and maybe even more so over the last 5 years. For the last 3 years, private companies have borrowed roughly twice as much as state companies from the banking systems. They have gotten much better access to credit. It is not surprising. If you have a much, much higher return on assets, you have a better ability to repay loans. Banks can see this so they are much more willing to lend to private companies today than they had been 10 or 20 years ago.
STEVENSON: Does this put some unique pressures on the state-owned companies to perhaps perform better or streamline?
LARDY: I think that is exactly right. We see Sinopec, which is one of the three big state national oil companies - they have a very inefficient operation. They are now proposing on the biggest privatization that has ever occurred in China. They are proposing to sell off a third of their ownership in their downstream distribution system. In my view, this is really unheard of. Big state companies have never ever sold off chunks of their businesses in order to raise funds. Yet that is what we are seeing in one of the most heavily monopolized sectors of the economy.