Nicholas R. Lardy Markets over Mao: The Rise of Private Business in China The Peterson Institute for International Economics Washington D.C. September 10, 2014 Nicholas R. Lardy Anthony M. Solomon Senior Fellow Peterson Institute for International Economics Peterson Institute for International Economics | 1750 Massachusetts Ave., Washington, DC 20036 | www.piie.com
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Markets over Mao - US-China Business Council...number, today’s SOEs are more powerful than ever. - The Economist, October 6, 2012. “The profits of the 117 central SOEs are as astronomical
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Nicholas R. Lardy
Markets over Mao: The Rise of Private Business in
China The Peterson Institute for International Economics
Washington D.C. September 10, 2014
Nicholas R. Lardy
Anthony M. Solomon Senior Fellow Peterson Institute for International Economics
Peterson Institute for International Economics | 1750 Massachusetts Ave., Washington, DC 20036 | www.piie.com
Nicholas R. Lardy
Share of transactions at prices fixed by the state by type of good, 1978 - 2003
2
10
2 0
20
40
60
80
100
120
1978 1985 1991 1992 1995 1999 2000 2001 2003
Producer Goods
Agricultural Commodities
Retail Commodities
Percent
Nicholas R. Lardy
Industrial sectors in selected concentration ranges, 1998 and 2007
3
15% 12%
73%
7% 7%
87%
0
50
100
150
200
250
300
350
400
450
500
Highly concentrated Moderately concentrated Not concentrated
1998
2007
Number of Sectors
Nicholas R. Lardy
Retained earnings of non-financial corporations as a share of corporate investment, 1992-2011
71
56
0
10
20
30
40
50
60
70
80
90
Retained earnings/gross capital formation Average share, 2000–2008
Misconceptions of state rule in China: #1 The economy is dominated by state firms
China is “commanding heights” state capitalism, with the Chinese government picking the winning industries of tomorrow and developing state-owned national champions - U.S.-China Economic and Security Review Commission, 2011.
6
Nicholas R. Lardy
State share of industrial output, 1978 - 2011
Percent
7
90
59
26 20
0
10
20
30
40
50
60
70
80
90
100
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Utilities
Mining
Industry
Manufacturing
Nicholas R. Lardy
Share of state industrial output by sector, 2011
Percent
8
99.3
93.0
92.1
69.4
68.6
53.6
44.4
44.0
36.9
28.8
28.7
26.2
20.5
18.7
16.7
16.5
6.5
0 10 20 30 40 50 60 70 80 90 100
Tobacco
Electric Power
Oil and Gas Exploration
Water Supply
Petroleum Refining
Coal Mining
Natural Gas Supply
Transport Equipment
Steel
Aluminum
Mining of Nonferrous Metal Ores
Average
Special Purpose Machinery
Chemical Products
Iron Ore Mining
Beverage
Average of 24 remaining sub-sectors
Nicholas R. Lardy
Share of fixed investment in manufacturing, 2006 - 2012
73
11
0
10
20
30
40
50
60
70
80
2006 2007 2008 2009 2010 2011 2012Private State
Percent
9
Nicholas R. Lardy
Share of exports by ownership, 1995 – 2014 Ytd.
46
40
11
0
10
20
30
40
50
60
70
80 Foreign
Private
State
Percent
10
Nicholas R. Lardy
Misconceptions of state rule in China: #2 The Chinese Government is Large
“China is one of the world’s most powerful bureaucracies in terms of employment, income, ownership of the means of production, and regulatory powers.” - Stephen Green, Standard Chartered, 2013.
11
Nicholas R. Lardy
Government employment, 2008
Per 1,000 population
95
74
53
38 38 35 32 30
0
10
20
30
40
50
60
70
80
90
100
France US Germany Turkey Mexico Japan South Africa China
Misconceptions of the state and the economy #3 SOEs extract profits at the expense of private firms
“though fewer in number, today’s SOEs are more powerful than ever. - The Economist, October 6, 2012.
“The profits of the 117 central SOEs are as astronomical as one would expect given the monopolies and protected markets they enjoy.” - James McGregor, 2012
15
Nicholas R. Lardy
Timeline of State Industrial Policies
Medium and Long-Term Plan for Science and Technology Development (2006-2020)
Strategic Emerging Industries Plan
2006
2010
SASAC created, and SDPC is reformed into a stronger organization renamed NDRC
2003
NDRC becomes “super ministry” after absorbing the National Grain Bureau and National Energy Bureau
2008
Indigenous Innovation Policy 2007
16
Nicholas R. Lardy
Profit margins in industrial sector by ownership, 1985 - 2013
Misconceptions of state rule in China: #4 private firms have little access to credit
“the more vibrant segments of the private sector …are typically starved of cash. Meanwhile, the larger state-owned enterprises enjoy easy access to loans... ” - Financial Times, 2014.
Chinese banks overwhelmingly lend to SOEs and always have. - Carl Walter and Fraser Howie, 2010
20
Nicholas R. Lardy
Stock of enterprise loans by ownership, 2009 and 2012
State 56%
Collective 9%
Private 26%
Hong Kong,
Macau, Taiwan
4%
Foreign 5%
2009
State 48%
Collective 9%
Private 36%
Hong Kong,
Macau, Taiwan
4%
Foreign 3%
2012
21
Nicholas R. Lardy
Flow of bank loans to enterprises by ownership, 2010 - 2012
Misconceptions of the state and the economy #5 State resurgence in the Hu/Wen era
SOEs started as Soviet-inspired drivers of China’s industrialization under Mao, then faded into the background during Deng Xiaoping’s reforms. The SOEs returned to prominence under the Hu Jintao and Wen Jiabao administration as anointed “national champions.” - James McGregor, 2012
24
Nicholas R. Lardy
Growth in value added industrial output, 2002 - 1H2014
Reforms to enhance the private economy: The Third Plenum Agenda
We must ensure the decisive role of the market in allocating resources and further eliminate different forms of monopoly. - Communique of the Third Plenum, November 12, 2013
26
Nicholas R. Lardy
45
36
-
10
20
30
40
50
60
2006 2007 2008 2009 2010 2011 2012State Private
Fixed investment in services by ownership, 2006 - 2012
27
Percent
Nicholas R. Lardy
Percent
Fixed investment in modern services by ownership, 2012
46
60 60
35
49
34
19 22
43
35
0
10
20
30
40
50
60
70
Total InformationTransmission,
Software, andInformationTechnology
FinancialIntermediation
Leasing andBusiness Services
Technical Services
State Private
28
Nicholas R. Lardy
Real deposit rate, 1997 – 2014 Ytd.
3.0
-0.2
-6
-4
-2
0
2
4
6
8Percent
29
Nicholas R. Lardy
Average real lending rate, 2007 - 2013
30
1.8%
3.7% 3.5%
2.8%
3.9%
3.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
China Thailand South Korea Japan Indonesia India
Nicholas R. Lardy
Bank WMPs vs deposit rate, 2011 - 2014 Ytd.
31
Percent
5.1
2.9
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2009 2010 2011 2012 2013 2014
Average Return on Three Month Bank WealthManagement Product
Three Month Deposit Rate
Nicholas R. Lardy
Conclusion • China’s growth largely reflects the rise of market forces
and private businesses.
• China has not developed a successful model of state capitalism.
• There was no resurgence of the state during the Hu-Wen era (2003-13).
• China’s banking system does a much better job of serving the private sector than its critics suggest.
• State employs only 11 percent of China’s labor force.
• China can support further growth by demonopolizing upstream oil and gas and modern business services.