Click here to view Part II: "Chinese Stimulus and the Enivornment

 

 

The global financial crisis has undoubtedly signaled an important transformation in the international system. With observers calling the G20 meeting a G2 between the US and China, Beijing has been ushered into a new role in the post-crisis era. Will the Beijing Consensus, a model centered on state-led growth, trump the neoliberal Washington Consensus? After all, it was precisely the laissez-faire, non-interventionist and anti-regulation culture that was criticized in the US for the collapse of Lehman Brothers. But does China's state-driven economy offer an alternative model?

     

China was one of the first few countries to develop a fiscal plan to buffer against the fall in global demand. The principle aim of the stimulus package is to spur domestic demand, reduce domestic savings and increase consumption to make up for the fall in exports. About 50% of the 4 trillion RMB injection has been earmarked for infrastructure projects, which the government hopes will absorb laid-off workers. A total of 30 percent is aimed at enhancing China's social welfare net to help increase individuals' purchasing power. The monetary element of the stimulus plan seeks to expand the banks' credit supply and increase existing loans. In January, new loans reached a record of 1.62 trillion Yuan and 4.59 trillion in March (see Zhang et al.).

     

Pundits have criticized that China's stimulus package disproportionately benefits state-owned enterprises (SOEs). Given the tremendous emphasis on boosting public works projects and boosting loans to finance investments, state-owned enterprises are a prime benefactor. China's stimulus package is posited as an essential plan for the Chinese leadership to maintain stability and achieve the magic eight percent growth rate. However, the effect of the stimulus plan on the financial sector and upstream industries, like energy, petrochemical, steel and construction, will not adequately address the structural problems that mar China's governance and private sector development. Insulation of the state sector therefore exacerbates the problem of local economic nationalism, collusion and corruption, inefficient allocation of resources and ultimately the preservation of single-party rule.

     

The dominant role of the state in China's development path renders it different from the West. State-sponsored growth as in Taiwan, Korea, and Malaysia is a crucial element in the East Asian Model, which essentially eschews democracy for economic growth. Beijing's stimulus model therefore is not very useful for the West, for the Party also seeks to maintain a particular political order along with buffering against the consequences of the financial crisis.

     

This article analyzes the economic and political implications of China's stimulus plan on the state of SOEs and why Beijing is pursuing a plan that perpetuates market distortions and potential corruption and collusion.

     

     

     

The gradualist perspective in economic transitions often lauds China's incremental reform policies, which in their view have successfully phased out the command economy. The introduction of township enterprises and the development of private entrepreneurship have created sufficient competition to innovate SOEs. With the introduction of market principles at the enterprise level and the policy "holding onto the big, letting go of the small", small and medium-sized SOEs have been privatized and restructured.

     

However Yasheng Huang and Minxin Pei are vocal critics arguing that China's private sector remains small and exhibits a lack of genuine market transformation. State monopolies continue to dominate banking, telecommunications, energy, rail transportation, shipping, petroleum, and major areas of the economy. Of the 2007 Fortune Global 500 list, 18 of the 22 Chinese mainland enterprises have strong ties to the CCP and the State-owned Assets Supervision and Administration Commission (SASAC) (See Chan). As of 2008, a total of 150 enterprises were under SASAC administration, engaging in 7 or more sectors.

     

A structural weakness in China's economic development lies in the financial and banking sector. Mired by debt in nonperforming loans, state banks have continued to support inefficient SOEs. They are governed more by political calculus than by profit and economic rationale.

     

Because of China's weak financial system and lack of a capital market, banks are the primary financial institution through which personal savings are funneled rather than bonds or other capital investments. Consequently, enterprises mainly seek bank loans to finance their ventures (See Liu et al). And given that state-owned banks favor SOEs over private entrepreneurs, it creates a vicious cycle, perpetuating market distortions.

     

In contrast, private entrepreneurs are more cash-strapped and are out-competed by their state-sector counterparts. Protected by the lack of competitive pressures, government assistance and preferential treatment in the banking system, SOEs have weathered the financial crunch. In late 2008, profits for SOEs have been declining. Thanks to the government stimulus plan, however losses in the state sector has been leveling off and declining at a less rapid pace. The government also recently announced it would lower targets and performance evaluation standards for SOEs.

     

Furthermore, because of their privileged position, they have the resources and economies of scale to undertake foreign acquisitions and extend China's place in the global market. The Shanghai Automotive Industry Corporation's (SAIC) most recent purchase of GM shares and Lenovo's purchase of IBM's personal computer, highlight China's go global policy. Taking advantage of low valuations as a result of the financial crisis, large SOEs are increasing their foreign investments especially in the mining sector. China's future global economic conglomerates are less likely to come from the private sector, but rather from the burgeoning state sector.

     

     

     

While Beijing's fiscal plan intends to buffer against the loss of jobs and contain social unrest, critics warn against the disproportionate benefits that SOEs will gain. Large cash flows and investment in infrastructure projects are likely to exacerbate the problem of debt and nonperformance loans in China's banks. Furthermore the massive scale of public works programs leaves the country vulnerable to corruption and collusion. The Sichuan earthquake highlighted the precise problem of endemic corruption and collusion between local officials and companies eager to secure lucrative business contracts.

     

China lacks the financial and governing institutions needed to weather these challenges. Why then does the CCP pursue such a rigorous plan?

     

Simply put, Beijing is most concerned about its survival. Unemployment, mass jobs loss and a global recession may prove to be too volatile for the regime to manage.  The need to contain social unrest therefore trumps the lack of economic soundness of the stimulus package, specifically regarding the state of SOEs.

     

Since the Hu-Wen administration came to power, there has been a greater emphasis on building social harmony and addressing growing economic disparities. SOE reform and restructuring under the Hu-Wen administration has slowed. This is in contrast to Jiang Zemin's rapid growth agenda in the early 1990s. According to Scissors, a characteristic of the Hu-Wen government is a serious rollback in market reforms and privatization and greater state involvement in the state economy.

     

Continued support for SOEs is also linked to the vested interests of local officials, what Pei calls fragmented predation and Chan, local economic nationalism. The financial crisis' threat to SOE profit and production therefore has direct bearing on the fiscal revenue of local governments and their patronage system.

     

As seen with the Asian financial crisis in the 1990s, single party regimes collapsed with the onslaught of massive unrest. The noticeable example is of course the fall of the Suharto regime in Indonesia.  Authoritarian systems are particularly vulnerable during times of economic crisis not only because of the rise in social discontent against poor governance, but the toll the economic downturn has on the regime's patronage system. According to Pei, China's long period of economic growth has allowed the regime balance competing regional, factional and institutional interests. A reduction in the state coffer may hamper the regime's ability to secure party loyalty and co-opt opposition.

     

Preservation of the state sector as a result of the government stimulus plan therefore consequently buffers the regime against these two vulnerabilities, potential mass discontent and weakening patronage system.

     

It therefore should not come as a surprise that Beijing should intervene to protect the public sector against the effects of the economic crisis. A state-sponsored growth model is very much in line with the neo-authoritarian political model. State dominance of the economy is essential for the regime to distribute benefits and patronage. China's nomenklatura system, of appointments and promotion is very much tied to the SAIC and SOE bureaucracy.

     

It is a difficult task to evaluate China's stimulus plan. While on one hand its fiscal policy may accrue real social benefits, such as cushioning against job loss and initiating healthcare reforms, the protection of the state sector reflects a darker side to the stimulus plan.

     

State intervention in a neo-authoritarian state like China is not the same as in the West. Greater state involvement does not mean a shift towards a welfare state model, but rather greater means to preserve its single party rule. The protection of SOEs not only spells future economic problems of inefficient markets and bad loans, but wider state control of the economy at the expense of the private sector. Within this entrepreneurial class there exists democratic potential. Echoing Barrington Moore, there can be no democracy without the bourgeoisie. Beijing's quest for stability may mean that China's democratizing potential in the private sector is put on hold.

     

     

 

Chan, Hon. S. "Politics over Markets: Integrating State-Owned Enterprises into Chinese Socialist Market" Public Administration and Development 29: 43-54

 

Huang, Yasheng. (2008) Capitalism with Chinese Characteristics: Entrepreneurship and the State. Cambridge: Cambridge University Press

 

Pei, Minxin. (2006) China's Trapped Transition: Limits of Developmental Autocracy. Cambridge: Harvard University Press

     

Zhang, Zhichao et al. (2009). "Handling the Global Financial Crisis: Chinese Strategy and Policy Response" Working Paper Series