Chinese Renationalisation

According to the Anglo-American news magazine The Economist, "China's success owes more to its entrepreneurs than its bureaucrats.” Is this true? Is the Chinese economy really dominated by dynamic to small medium-sized private companies that are responsible for its phenomenal growth rate? If so, what would happen if these companies did not exist?

According to China's National Bureau of Statistics, China has between 40 and 43 million small to medium-sized enterprises. Depending on the statistic 93 per cent of them are private and they employ between 75 per cent and 92 per cent of the countries workers. They also produce 68 per cent of China's industrial output. In theory according to one study, private businesses grew by more than 30 per cent a year between 2000 and 2009.

Statistics and China should be taken with a grain of salt. According to a Wikileaks document vice Premier and potentially the next to Premier, Li Keqiang “confessed to the US ambassador that he did not believe official figures for GDP. They were “for reference only”. This is certainly true regarding statistics about private or public enterprises in China for several reasons. The main problem is that all of the statistics and documents are in the hands of the government. In a country where an Olympic gymnast's birthday can change and there are strict limits on journalists, the reality may be quite different.

There is also a question as to whether private businesses in China are growing. In 2008 a survey in Guangdong province estimated that 10 to 20 per cent of the 70,000 factories had closed and another 10 to 20 per cent expected to close within two years. Of the 3,631 toy exporters, 52 per cent had shut down in 2008 even before the crash, which probably created more devastation. In contrast in 2009 alone local governments set up over 8000 state owned investment companies in order to take advantage of the cascade of stimulus cash.

What does appear to be true is that private companies tend to dominate factory assembled exports, clothing and food. Like Korea this sector of the economy is highly fractured and filled with very small businesses. Large industries like finance, communications, transportation, mining and metals are under the control of the central government.

A paper by a professor at the University of Hong Kong estimates the profits of businesses owned by the state were only 4 per cent and that small private firms accounted for 75 per cent of profits. In contrast the Chinese department that technically owns largest state owned businesses insists that their profits rose 22 per cent from 2003 two 2009 and that their share of GDP has been rising.

Even if we assume that private firms in China are more efficient and profitable than public firms, their future is not necessarily guaranteed. The main reason is that they have very limited access to capital.

Over the past two years a great wall of money has been lent by the state owned banks. Most of the money went to state owned enterprises and local governments. Only 4 per cent or less went to small and medium-size enterprises.

The only source of capital for these smaller companies can be found in the shadow banking system which covers everything from loans from relatives to Mafia style loan sharking. Interest rates can exceed over 300 per cent with the average between 12 and 15 per cent. The size of this banking system is unknown, but estimates of its loans last year are approximately 6 trillion renminbi or slightly smaller than the 7 trillion renminbi loans by the state banks.

Capital starvation is not the only threat to private businesses in China. According to Prof Huang Yashang of MIT, there was a huge expansion of state owned enterprises in 2009. In certain industries like coal and steel and rare earths state firms have either taken over or bought out private firms often utilising the excuse of safety.

In 2006 there were eight private airlines in China, now there is only one. The other seven were run of business through a combination of a price war and other obstacles like the refusal of the state oil firm to provide jet fuel. According to an agreement with the WTO, China is supposed to open its telecommunications industry. Eight years later, it has yet to issue one license and the industry remains 100 per cent in state hands.

Is often assumed that inefficient state owned enterprises in China and many other countries would simply wither away in the face of competition from more efficient and globalised smaller firms. This is not true if only for the simple reason that state owned firms everywhere are an extension of political power in the last thing a politician likes to lose is that power.

Which leads us to the final question if Chinese policy is guo jin min tui: state advances, private retreats or renationalisation, then will the Chinese economy retreat along with its entrepreneurs?

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