* State sector controls economy despite major reforms
* China has detailed blueprint for state dominance
* Chinese state behavior seen behind trade friction
By Paul Eckert
WASHINGTON, Oct 26 China's state-guided
capitalism guarantees state sector dominance of the country's
economy -- a recipe for further friction with key trade
partners, said a U.S. research report published on Wednesday.
The study conducted for the U.S.-China Economic and
Security Review Commission by the Washington consulting firm
Capital Trade Inc says firms under various forms of Chinese
state ownership control 50 percent of China's economy -- with
huge impact on economic policy and trade outcomes.
"The current economic direction of China is 'commanding
heights' state capitalism, with the Chinese government picking
the winning industries of tomorrow and developing state-
owned national champions that are prominent at home and
abroad," said the report.
The study acknowledges that China's private sector has seen
explosive growth since the country initiated economic reforms
30 years ago, and notes that data show that private firms are
more productive than state-owned enterprises (SOEs).
But for ideological and policy reasons, China's state
sector will remain dominant even if its share of total output
shrinks, said the study.
"If anything, China is doubling down and giving SOEs a more
prominent role in achieving the state's most important economic
goals," it said.
"For some U.S. firms whose participation in China's economy
facilitates the government's goals, China will continue to be a
profitable market," the report said.
"For others, especially those in strategic and emerging
industries that the government is targeting, the Chinese market
may become far less hospitable," it warned in language heard
increasingly often from foreign businesses in China.
POLICIES LEAD TO FRICTION
China's economic policy dictates that "strategic
industries" will stay wholly or largely under government
control, "pillar industries" will feature the state as the
major player and emerging industries will be the domain of
"national champions" that likely will be state firms.
Strategic industries include defense, electric power,
petroleum and petrochemicals, telecommunications, coal, civil
aviation, and shipping. Pillar industries are equipment
manufacturing, auto, information technology, construction, iron
and steel, nonferrous metals and chemicals.
U.S. regulatory filings by Chinese state entities show
Chinese state firms enjoy "preferred access to bank capital,
below-market interest rates on loans from state-owned banks,
favorable tax treatment, policies that create a favorable
competitive environment for SOEs relative to other firms, and
large capital injections when needed," the report said.
The the Chinese state's role in practices that trigger
trade disputes with the United States and other countries has
drawn increasing attention and criticism from U.S. officials.
"Many of these troubling policies reflect China's
strengthening of state control over its economy and a retreat
from its initial strong push to liberalize markets in the first
years after its World Trade Organization accession," Deputy
U.S. Trade Representative Demetrios Marantis told a U.S. House
of Representatives hearing on China on Tuesday.
The USTR echoed that language in an official review of
China's first 10 years of WTO membership.
"Frequently, trade frictions with China can be traced to
China's pursuit of industrial policies that rely on excessive,
trade-distorting government intervention -- including the
widespread use of subsidies -- intended to promote or protect
China's domestic industries and state-owned enterprises," said
a statement issued in Geneva, headquarters of the WTO.
The full report on China's state sector is published here
(Additional reporting by Doug Palmer; Editing by Cynthia