As the state tightens its grip on the economy, will China reject capitalism again?

  • Joe Zhang says Beijing has turned decisively towards more state control of the economy in the past decade, and public support for tighter regulations means capitalism may be in trouble
PUBLISHED : Wednesday, 02 January, 2019, 11:34am
UPDATED : Wednesday, 02 January, 2019, 10:32pm

China has just celebrated the 40th anniversary of its economic liberalisation. While everyone praised Deng Xiaoping again for his vision and leadership, one of his famous sayings, “Let some people get rich first”, was conveniently not mentioned. Amid widening inequality in China, that slogan just doesn’t feel appropriate now.

If China were to hold a referendum today on increasing or decreasing state controls, chances are that the public would vote overwhelmingly for increasing them. Capitalists and liberals in the country must be relieved that holding a referendum is not a common occurrence in the Middle Kingdom.

Capitalism is not new to China. After the last emperor was removed from power in 1912, China flirted with capitalism for 37 years until the communists took over in 1949. The feudal version of capitalism proved disastrous on many fronts, but it was the glaring inequality that really dug capitalism’s grave.

Will China reject capitalism once again? And, if so, how? I do not know the answers but the truth is that, in the past decade or so, the pendulum has swung from capitalism to greater state control. This may not have happened by design, but the cumulative effect has been striking.

First, the state budget expenditure as a percentage of GDP has risen from 18 per cent in 2004 to 25 per cent in 2017. More significantly, hidden taxes through the printing press and thus inflation are a crucial feature of state controls. Endless flows of subsidised credit go directly to state-owned enterprises, diluting the interests of everyone else. Four decades on, China’s outstanding credit is as big as that of the United States and European Union countries combined at the current exchange rates.

Second, SOEs have become more dominant in all sectors except for the internet and, even there, “Big Brother” has boosted its oversight of content and licensing requirements. Large numbers of SOEs have sold minority stakes in the stock markets, in telecoms, aviation, ports, airports, roads, banking, insurance, oil and real estate. But their governance has hardly changed. And, even in sectors where the state maintains a minority interest, there is no doubt who calls the shots.

Cheer up, crises like the US trade war reform China’s economy

Each year, hundreds of thousands of private-sector businesses in China fall victim to economic turbulence (which occurs often), harsh funding conditions (a constant) and their own mismanagement (also common). It is often the bloated SOEs that march in to take over the damaged companies and their market share. Unfortunately, both the public and the government seem to take delight in the change of relative fortunes.

Finally, the state has substantially boosted its controls in the economy, through a complex web of approval requirements, licensing, policy pronouncements, random inspections and reviews. All this has happened with the endorsement of many members of the public.

There has been little research done on why capitalism has such a negative image in China, or why the state sector commands such popular support despite its embedded corruption and inefficiency. It is tempting to blame this on the government’s propaganda.

Talk of stability in China is empty without confidence and reform

But that argument is getting weaker now that millions of Chinese have travelled the world in the past few decades. Globally, when so many capitalist economies perform worse than China’s, and when many in the West even question capitalism, is it still fair to say capitalism is the least bad way of organising our economies?

China has taken Deng’s teachings too seriously by helping some people get rich first, but the trickle-down effects have been elusive. At this important anniversary, a vast majority of Chinese are somber and find little to celebrate, but a lot that warrants reflection.

Joe Zhang is the author of “Party Man, Company Man: Is China’s State Capitalism Doomed?”