Unstated capitalism

Markets over Mao: The Rise of Private Business in China. By Nicholas Lardy. Peterson Institute for International Economics; 185 pages; $21.95 and £17.50. Buy from Amazon.com, Amazon.co.uk

CHINA’S state capitalism has attracted legions of admirers and critics. Admirers highlight the government’s hand in guiding the economy to its superlative growth record, and see in its state-owned companies a well-oiled combination of commercial management and national mission. Critics counter that it is a brittle façade, that innovative private entrepreneurs are suffocated, losing out to state firms whose debt-heavy, politically motivated investments will eventually spell disaster for China.

Taken for granted by both camps is the idea that China is a practitioner of state capitalism. It seems self-evident: of the 95 Chinese companies on the Fortune 500 list of the world’s biggest firms, some 80% are owned by the government. But Nicholas Lardy, of the Peterson Institute for International Economics, throws this conventional wisdom into doubt. In “Markets Over Mao” he methodically pieces together Chinese data to argue that it is the private sector, not the state, that has powered growth since the country’s reform era began in 1978.

In the often-noisy debate about the Chinese economy, Mr Lardy’s is a voice worth listening to. He started his research more than four decades ago, when Mao still ruled, and has somehow preserved his sanity during that time while tracking the twists and turns—the revisions, discontinuities and anomalies—in official statistics. His is a dispassionate, number-crunching approach that is short on drama for the casual reader but packed with hard evidence for those trying to take the measure of China’s business environment.

Consider this seemingly straightforward question, central to any discussion of state capitalism: how large is China’s private sector? It would be easy just to look at the size of firms officially classed as private. But this would miss joint enterprises that are controlled by private shareholders; it would also ignore the thousands upon thousands of mom-and-pop companies with revenues below 5m yuan ($163,000) that only show up in another corner of the Chinese data labyrinth. According to the simple calculation, private companies accounted for one-fifth of industrial output in 2007. An expansive calculation triples their share to three-fifths.

Using a broad, though not the broadest, definition of private companies, Mr Lardy shows that they have played the starring role in China’s growth story. In cities almost all the 250m jobs created since 1978 have been in the private sector. More than 99% of the urban labour force worked for the state in 1978; by 2011 only 18% did. Looking at exports, the share of state-owned companies has fallen from two-thirds in 1995 to 11% in 2012. The state has also been on the back foot in many “pillar” industries—those that the government has sought to control as a matter of policy. The state’s share of coal mining, a pillar industry, fell from 66% in 2006 to 50% in 2011. Ever since 2008, when China used a massive state-directed stimulus programme to ward off the global financial crisis, the march of the private sector has continued. The average output growth for state-owned industrial companies since 2008 was 9.2%, whereas private companies nearly doubled that at 18.2%.

The private sector’s barnstorming success comes, in Mr Lardy’s view, from its impressive efficiency and the state’s gradual relaxation of controls. The government has not made it easy for entrepreneurs. The concept of limited liability, which spares owners from bankruptcy if their companies fail, was not enshrined in Chinese law until 1994, and it was only applied to smaller firms in 2006. Despite this and other hurdles, private companies have consistently performed far better than their state rivals; in 2012, private industrial companies achieved a 13.2% return on assets versus 4.9% for state companies.

This difference is the reason why, although state-owned companies are a shrinking part of the economy, reforms to make them more efficient are so important. They are still too much deadweight for the Chinese economy. Even the state-controlled financial system has started to recognise this. Just over half of enterprise loans went to private companies in 2012 up from nearly nothing two decades ago.

Mr Lardy’s assessment is controversial. At least three other books and scores of academic papers have focused on Chinese state capitalism in recent years, giving credence to the idea that the government really does move the economy. One riposte to Mr Lardy is that the state, through its menacing regulatory apparatus and the co-option of businessmen as Communist Party members, is still in charge. For example, China’s private-sector tech giants such as Baidu, a search engine, have thrived thanks in part to rules that make life hard for foreign firms, and at the end of the day their businesses operate within Party-defined limits. But the question is not whether the Chinese government is powerful—of that there is no doubt. The real issue is whether the Chinese government has created some new form of state-led capitalism. On closer inspection, its biggest contribution has been creating the space for private companies to do their thing.