State-owned enterprises, a failure of Chinese Keynesian experiment

William Hongsong Wang

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The chance of studying overseas is helping me become more and more international. That’s why I receive the same question all around the world, “William, do you think China will become a superpower in the 21st century?” Or I hear the compliment many times, “China has a strong market economy and it is becoming richer and richer!”

Unfortunately, due to the economic science and libertarian perspective, I ought to say “No. China will not become a superpower and there’s no ‘strong’ market economy in that country.” to my friends. I would like to ask them and myself a question, “In a society, if the government is killing people’s innovate ability by killing the liberty of free speech and NGOs, if authorities like your parents, bosses, teachers are strangling your entrepreneurship by their belief of patriarchy, would you still think that this society can achieve a long-term prosperity without respecting individualism?”

Maybe the whole countries with Confucian culture more or less have the similar problems. But the lucky issue for Japan, Korea, Taiwan and Singapore is, in a way, people in these countries have more liberty of free speech and more fair opportunities for managing small business than the ones in China. And what many Chinese people may envy them is the higher living standard in these countries, for which they are called “developed countries”.

To return to the analysis of the question and compliment I mentioned in the first paragraph, let us see a key problem in Chinese economy: the state-owned enterprises. Even there has a snack bar, the government would like to nationalized it! In my homeland Shanghai, there’s a snack bar named Qiaojiashan which was established in 1909 and was quite popular among local people. But after the communist regime took over Shanghai, it became a state-owned enterprise. It is still popular because of many delicious foods provided by it, though as a national-owned monopoly the service there is inefficient and poor. Even Chinese government restarted doing economic deregulation and hoped Shanghai could allow private sectors to do more, nothing changes in my homeland. These time-honored brands in Shanghai still belong to government.

If you are a Westerner and then count all other industries in China, things may become crazy for you. Chinese government almost monopolized the whole educational, medical, petroleum, telecom industries. And if you want to make contact with banks, only in a few circumstances can you avoid the four major state-owned commercial banks.

In the economic common sense, the more a government monopolizes industries in a country, the more inefficient an economy is, and more corruption the government has. The myth why the real living standard of Chinese people has improved is just because of market reform and deregulation, not the governmental monopolies in considerable industries.

If these big-government policies only bring us the consequences above, it seems not too bad. But remember, as what Lord Acton said in the 19th century, “Power corrupts, and absolute power corrupts absolutely.” Chinese government controlled almost all the important finance resources, i.e. the four major state-owned commercial banks, you will arrive at a conclusion by logical deduction: the government might issue many paper money for its own sake because it’s so power and wayward.

This is exactly correct. Chinese government issued paper money for infrastructure construction before 2008. As a natural outcome, malinvestment, brought by easy-money policy, the slowdown of Chinese year-on-year GDP growth was 5.7% in the first quarter of 2009, which was the lowest growth rate in the last 10 years. But it didn’t learn from the lesson of economic bubble created by the state-controlled credit management system, Chinese central government issued ¥4 trillion ($586 billion) to stimulus economy, then another term of false prosperity and economic depression happened again. The year-on-year GDP growth dropped to 7.3% in the fourth quarter of 2014.

This current Chinese central government indeed has done many deregulation measures to let the market spontaneous order work better, but I’m afraid that if it still owns many national enterprises and national banks, there will be no hope for the health of Chinese economy in the future. And there’s no evidence which can tell us that the government has the willing to destroy its own enterprises and banks. Surly if China still has a Keynesian big-government, rent-seeking, corruption, governmental malinvestment, inflation, economic crisis (as what Austrian Business Cycle Theory told us) will happen again and again. Then, China may face the famous “middle income trap”.

That’s my answer to the question and compliment referred to in the first paragraph: the failure of Chinese Keynesian experiment. We will not see a real Chinese superpower (For me, a real superpower means the system of the country respects individual liberty and there’s no governmental intervention neither in domestic nor foreign issues.) and a richer China if there’s no fundamental change happening in Chinese economic policy.

 

William Hongsong Wang is a researcher from the Shalom Institute and has graduated with a masters degree of Austrian Economics from the Universidad Rey Juan Carlos in Spain (King Juan Carlos University).

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