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China's transition to a market economy has propelled its remarkable economic growth since the late 1970s. In this book, Nicholas R. Lardy, one of the world's foremost experts on the Chinese economy, traces the increasing role of market forces and refutes the widely advanced argument that Chinese economic progress rests on the government's control of the economy's 'commanding heights.' In another challenge to conventional wisdom, Lardy finds little evidence that the decade of the leadership of former President Hu Jintao and Premier Wen Jiabao (2003-13) dramatically increased the role and importance of state-owned firms, as many people argue. This book offers powerfully persuasive evidence that the major sources of China's growth in the future will be similarly market rather than state-driven, with private firms providing the major source of economic growth, the sole source of job creation, and the major contributor to China's still growing role as a global trader. Lardy does, however, call on China to deregulate and increase competition in those portions of the economy where state firms remain protected, especially in energy and finance.
- Sales Rank: #364941 in Books
- Published on: 2014-09-10
- Original language: English
- Number of items: 1
- Dimensions: 9.00" h x 6.00" w x .50" l,
- Binding: Paperback
- 154 pages
About the Author
Nicholas R. Lardy is the Anthony M. Solomon Senior Fellow at the Peterson Institute for International Economics. He joined the Institute in March 2003 from the Brookings Institution, where he was a senior fellow in the Foreign Policy Studies Program from 1995 until 2003 and served as interim director of Foreign Policy Studies in 2001. Before Brookings, he served at the University of Washington, where he was the director of the Henry M. Jackson School of International Studies from 1991 to 1995. From 1997 through the spring of 2000, he was also the Frederick Frank Adjunct Professor of International Trade and Finance at the Yale University School of Management. He is an expert on Asia, especially the Chinese economy.
Most helpful customer reviews
44 of 55 people found the following review helpful.
I totally disagree with Lardy
By Joe Zhang
I disagree with Lardy's thesis, and data.
Official data show (1) The state sector is outperforming the private sector by big margins, (2) state budget accounted for 12 percent of GDP 15 years ago, but it is 23 percent today. My research shows, due to discrimination, economies of scale and economies of scope, the state sector is doing much better than the private sector.
His definition of SOEs is wrong. He clearly classified China Life, China Mobile and China PetroChina as private companies just because they are listed in the stock market. But guess who makes all important HR appointments there, and where their political allegiance lies. And equally, who is the controlling shareholder there.
Essentially, there are two issues in his comparison of returns on assets between the private and state sectors.
(1) Half of the economy is finance (banks, insurance, trust companies and stock brokers). Except Minsheng Bank, all others are state-run. But it is meaningless to compare their ROA with the ROA of another sector (industrial, hotel or catering). Finance is very highly geared. Its Return on Equity is what counts: 20%. Very high by global standards and China standards.
(2) Tens of thousands of private sector companies voluntarily shut shop or go bankrupt each year. When that happens, they exit from statistics. So, when you calculate ROE or ROAs, the dead companies automatically drop from the data. That is called "a survival bias". But SOEs do not drop as they survive long.
Liberals like to see a dominant private sector in China. But we must separate our wishes from reality. True, the state sector is corrupt and inefficient. But the private sector is worse. Moreover, the private sector has not been given a fair chance to fight in China.
I have published a full critique of his thesis at South China Morning Post, http://blog.sina.com.cn/s/blog_50c88c400102v1ha.html
4 of 4 people found the following review helpful.
Readable, Informative, and Authoritative
By Loyd Eskildson
The World Bank classified China in 1980 as a low-income economy. By 2013, the Bank put China in the upper-middle-income category. En route, China transformed itself from a state-dominated economy into a predominantly market economy.
Before its transformation, bureaucrats set low prices for forced deliveries of agricultural products to the state - this supported China's low-wage policy in urban areas and helped boost profitability of SOEs. Similarly, low prices were set for coal, energy, and many other raw materials. This concentrated profits in a smaller number of state firms producing final goods - the government believed this concentration facilitated revenue collection and enhanced state control. The most important consumer goods (grains, edible vegetable oil, cotton cloth, bicycles) were rationed in urban areas.
Rural free markets led the transition after the Cultural Revolution. Once delivery quotas to the state were met, farmers in the localities were allowed to sell their surplus in those markets. The biggest breakthrough came in 1983, when that state established a two-tier structure for the pricing and distribution of coal, steel, machinery, and equipment - enterprises were still required to deliver planned levels of output to state agencies at state-fixed prices but could sell their above-plan output in parallel markets with freely determined prices. Given steady economic growth and government's keeping the overall physical quantity of each product subject to controls more or less constant, the share of output allocated at government-fixed prices gradually declined.
By the mid-1980s over half of all farm sales were at market-determined prices, and retail commodities close behind; producer goods changed much more slowly. By 2002-03, market determined prices prevailed in about 95% of all transactions of retail commodities and agricultural products and 87% of all transactions for producer goods.
In the first five years of the new agriculture arrangements, per capital grain consumption rose 19%, vegetable oil consumption more than doubled, and pork consumption rose 60%. Between 1978 and 1985 rural per capital income growth rose an average of almost 15%/year in real terms - a huge multiple of the sluggish growth between 1957 and 1978. State farms are a minuscule portion of Chinese agriculture, accounting in 2011 for about 1% of the agricultural labor force and 3% of the value of farm output.
The government still controls prices of fuels, electric power, water, railway freight rates, and postal and telecommunication services, though their prices now are much closer to market levels than pre-1980s. Prior to the late 1970s there was no market for labor- almost all potential workers were assigned jobs when they left school. Labor mobility and turnover were nil. Factory workers were divided into 8 wage grades and officer workers into 24 levels. once assigned, wage increases were strictly a function of seniority. The transition after 1978 was very gradual, beginning after rising farm productivity released rural workers from being essential on the land - some farmers than ran their own businesses or worked in TVEs in nearby towns. In 1982 only 7 million (< 1% of population) had migrated and were employed outside their native county; this rose to 22 million by 1990, 79 million by 2000, and 163 million in 2012. Including 99 million who migrated within their native county, the total number of migrant workers for 2012 was 263 million, about 20% of the total.
SOEs dropped the system of lifetime job assignment for factory workers and introduced 5-year labor contracts for new employees in the mid-1980s. Contract workers accounted for only 4% of total employment when the system began, but had grown to 39% by 1995. The real end of permanent employment in SOEs came in 1995 under 'seizing the large and letting go of the small,' in which the government began massive downsizing of SOEs. Thirty million state workers (about 40% of the total) lost their jobs as small and medium-sized state-owned firms were closed or privatized. The share of job losses in the collective sector was even larger.
SOEs fell from 127,600 in 1996 to 34,280 by the end of 2003. Privatization of small SOEs typically took the form of sale of shares to employees, with the firm's sale price frequently equal to the value of outstanding debt. Managers of corporatized SOEs are accountable to the firm's board of directors, and if the firm is listed on the Shanghai exchange, regulations require one-third of the board members to be independent. When these are listed, the state typically retains control because only a minority of the shares are sold; there numbers (about 10,000 by 2011) accounted for 60% of all state companies.
The last domain of labor assignment was for college graduates. As early s the 1980s, some college graduates bean seeking employment on their own, by 1992 only about half of graduates were assigned to jobs through the Ministry of Education, and by 2001 this was less than 5%.
China's labor market, however, is not fully marketized because of household registration system controls introduced in 1955. Migrant workers living in cities generally are not eligible to participate in pensions, health care, unemployment, workers' compensation, and maternity leave, and their children cannot attend urban, publicly funded schools.
At the outset of the reform process, 95% of investment was financed through the state budget and planning processes. By 1985 this had fallen to less than one-fifth, less than one-tenth by 1988, and less than 3% by 1996. The reductions were offset partly by expanded bank credit, but more importantly by the expansion of retained earnings. At the same time, central, provincial, and local fiscal revenues dropped from 31% of GDP in 1978 to 11% in 1996; corporate income taxes accounted for only 13% of government revenues in 1996.
Only one Chinese company was included in Fortune Global 500 in 1990, but 70 in 2012 - all but four of the latter were state companies, and 42 under the administration of the State-owned Assets Supervision and Administration Commission of the State Council.
Evidence undermines the argument that state firms generally have substantial market power. Example - in 2011 there were 880 SOE firms in coal mining, 109 in ferrous metal ore mining and processing, 312 in steel production, etc. In addition, there were 4,420 private firms in coal mining, 2,536 in ferrous metal ores, and 4,246 in steel - controlling a substantial share of output in each industry. The top eight steel firms produced 49% of 1985 output, 44% in 2010. Average profit margins for SOE and private enterprises from 1985 - 2010 were almost the same. (Telecommunications and energy are exceptions.)
Author Lardy contends that China's SOEs don't have the power they're said to have - they only account for between one-third and one-quarter of GDP, and 20% of manufacturing. Lardy also believes that 'state capitalism' doesn't fit China anymore - the state's role has considerably fallen from 20 - 30 years ago; in fact the proportion employed by the state is less than in France. As for political control - the Party controls the appointment of the three main executives in the top 50 firms, while provincial officials control a much larger number of appointments.
In 2001 Jiang Zemin, then general secretary of the CCC, invited private entrepreneurs to join the party. Five years later, one-third of China's private entrepreneurs had joined - a sign that China was increasingly relying on them to generate the growth the provided it the legitimacy to continue to rule.
In the late 1970s, China had a single large bank system that controlled almost 80% of all deposits and responsible for over 90% of all loans. Banking still underserves the private sector - between 2010 and 2012, private firms received about 52% of the loans going to all enterprises, while producing between two-thirds and three-quarters of its GDP. Between 1978 and 2011, output from the state sector fell from 75% of the total to 25%. By 2011 the original four large state-owned banks (1980s)accounted for only 44% of banking system assets (including credit cooperatives); adding the Bank of Communications, China's large-scale commercial banks comprise 48% of the system - exactly the concentration ratio for the top five banks in the U.S.in 2011. (The concentration ratio is rising in the U.S., falling in China.) Banking asset returns in China in 2012 are very close to those in other Asian countries.
Losses of state industrial firms in 2012 total 1.3% of sales and 0.6% of GDP, involving 24.5% of those firms. Moreover, in the past decade a large share of SOEs' losses appear transitory and self-financed rather than chronic. U.S. state and local governments provide subsidies - about $80 billion annually, plus special breaks for oil and gas, tariffs on eg. pickup trucks and sugar, and farmers (about $25 billion/year). Further, China exports in 2012 were $2.05 trillion - subjecting 25% of its GDP to global competition.
Current five-year plans are far less detailed than the first, and are largely 'forecasts' rather than 'mandatory.' Targets for capacity increases are focused on a few high-priority areas - eg. construction on nuclear and hydroelectric power plants, fast rail system mileage, and no plans for increasing steel or a large number of other basic industrial products.
Why do so many believe otherwise? Lardy contends that part of the answer lies in the visibility of SOEs and their domination of some sectors - tobacco (very profitable), oil and gas (strategic importance), finance and health. Lardy believes that freeing private business in the services area can contribute significantly to the nation's economic growth, and that statements by its current leaders indicate they will likely do so.
1 of 2 people found the following review helpful.
Demolishing the myth
By William H. Overholt
Lardy destroys the myth that state enterprises are the core of the Chinese economy. He shows that growth and jobs nowcome from the private sector and that state enterprises are not earning back their cost of capital. A superb analysis. More for the specialist than the general reader.
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