Money News

ANALYSIS - In China's economy as elsewhere, the state rises

BEIJING (Reuters) - No one can blame the Chinese state for taking the lead in rebooting the economy. It would be irresponsible of it not to do so, and Beijing after all is acting no differently from governments around the world.

A vendor counts Renminbi banknotes at a wholesale market in Changzhi, Shanxi province in this November 10, 2008 file photo. REUTERS/Stringer

Yet at this stage in its development, China needs less state involvement in the economy, not more.

Fostering innovation, developing the stunted services sector and tapping the potential of rural business are tasks for smaller, privately owned firms that China-watchers fear will suffer as Beijing directs the big banks and capital-intensive heavy industries it controls to ramp up investment.

The increasingly common phrase “guo jin min tui” -- the state advances, the private sector retreats -- sums up which way the wind is blowing.

“With the stimulus benefitting the traditional commanding heights of the economy, there is a risk that, without specific policy attention, new activities and new firms do not get the attention that they need,” said Louis Kuijs, the senior economist in the World Bank’s Beijing office.

One particular risk is that small and medium-sized enterprises (SMEs) will pay the price as state lenders squeeze out marginal clients to focus on state-owned enterprises (SOEs) when they bankroll Beijing’s 4 trillion yuan ($585 billion) pump-priming plan.

“If the bulk of lending were to go to SOEs under the stimulus package, this would serve the short-term goal of propping up the economy and ensuring employment,” said Alastair Campbell, vice-chairman for Greater China in Beijing at APCO Worldwide, a consulting firm.

“But it would not be very good if you looked longer term because SMEs and private companies are the ones that are going to drive innovation and growth,” he said.

In his annual news conference last Friday, Premier Wen Jiabao reaffirmed his commitment to SMEs, noting that they generate 90 percent of all jobs. “In responding to the financial crisis, not only can we not slow reform, we must accelerate reform,” he said.

But SMEs, which struggle in the best of times to borrow from banks in any developing country, not just China, will be swimming against a strong tide.


The ruling Communist Party is doing what it does well, mobilising the massive resources at the disposal of the state in pursuit of a clearly articulated goal -- in this case attaining the 8 percent growth rate deemed necessary to underpin the party’s legitimacy and reduce the risk of social tensions.

The state owns China’s banks and so has been able to generate 2.7 trillion yuan in new loans just in the first two months of 2009, more than half of the minimum target for the entire year.

Much of the lending is being steered to local governments and SOEs, which still control the most capital-intensive sectors of the economy, including oil and gas, petrochemicals, steel, aviation and power, noted Andy Rothman, an economist with brokers CLSA based in Shanghai.

“These state firms account for more than 40 percent of all urban fixed asset investment and, under direction from the Party, will continue to invest this year,” Rothman said.

“With a one-party system, there are no political or legal obstacles,” he said in a report. “There is basically one large pool of cash controlled by the Party, whether at the central government level, at local governments, at the state-controlled banks or at the SOEs.”

A related concern is that the increasing influence of the state will reinforce what Western businessmen already see as a striking trend in China towards favouring domestic, usually state-owned, firms.

Postponing the issuance of 3G telecoms licenses until a home-grown alternative was available to rival established Western standards is a prime example.

“That has applied in a number of industries. China is clearly putting a much stronger emphasis on the ability to create technology which is not dependent on foreign intellectual property,” said Campbell.

“From a Chinese point of view, it’s entirely understandable. From the foreign vendor’s point of view, it seems to be a barrier and a barrier that could be described as economic nationalism.”


China has no monopoly on economic nationalism. Look no further than the “Buy American” provisions in the U.S. stimulus package or President Nicolas Sarkozy’s offer to aid French car makers if they shift production back home from eastern Europe.

And by the standards of the times, China’s steps to date to reassert the economic primacy of the state have been moderate. While the United States and Europe are bailing out their car sectors, China has pumped cash into two major state airlines.

China has increased tax rebates for some exporters, but it has not erected barriers against imports in the way India and Russia, among others, have.

“The government is much more present than it was two years ago. But what we have seen so far in China is a lot of the relatively uncontroversial government responses,” Kuijs said.

Indeed, China has frozen the yuan’s rise against the dollar, but it has not halted the currency’s climb on a trade-weighted basis, which economists view as the more important measure.

And central bank governor Zhou Xiaochuan said recently that he was considering giving banks more leeway to set lending rates.

“Given the origins of the global financial crisis in the shortcomings of the U.S. financial sector, it is quite striking that China has maintained a commitment to continue moving forward with financial-sector marketisation,” said Barry Naughton, a professor who specialises in China’s economy at the University of California at San Diego. He was writing in the latest edition of China Leadership Monitor,