“State capitalism has had a good run in China,” said Yasheng Huang, professor of global economics and management at the MIT Sloan School of Management, in the Seventh Annual N.T. Wang Distinguished Lecture recently held at Columbia University. But, he added, today’s China “is far from a vibrant market economy.”
The talk, “The State of State Capitalism in China,” co-sponsored by the Jerome A. Chazen Institute for Global Business and the Weatherhead East Asian Institute, flew in the face of the notion that Chinese capitalism has sprinted ahead at a breakneck pace. Responding to an observation from the evening’s moderator, Shang-Jin Wei, the N. T. Wang Professor of Chinese Business and Economy at Columbia Business School, regarding how entrenched capitalism has become in China, Huang argued that the market economy has taken nearly 40 years to evolve, longer than the Cultural Revolution lasted. Progress, he said, can be measured in fits of starts and stops, progression and regression, with liberalizations countered every few years by setbacks.
As China’s production-driven economy faces increasing stress and as international trade issues threaten, the country’s leadership is positioned for new tightening, Huang said: Under Xi Jinping, China is reentering the era of strong-man rule. Pointing to a consolidation of power and efforts to reintroduce party unity, as well as a conspicuous slowdown of market reforms, he said: “China is going backwards toward the Mao blueprint.”
Two Steps Forward, One Step Back
To arrive at that conclusion, Huang walked through a modern economic history of China, beginning with what he considers the most liberal period, the early days of Deng Xiaoping. As it began opening its economy to the outside world in 1979, China embraced intra-party democracy, allowing for healthy doses of skepticism, Huang said. Citing editorials with competing views that faced off in the People’s Daily, he described an atmosphere of “debate, not edicts.”
In those early days, entrepreneurial activity was fed by a growing availability of loans made without regard to party affiliation. Land reforms helped rural China in particular. In a blow aimed at curbing corruption and nepotism, Deng ordered a dismantling of Karghua, one of the country’s larger businesses, which was run by his eldest son. Deng asserted: “We must begin our surgery close to home.”
But the liberalism abruptly backtracked in 1989 when Deng faced off against protestors at Tiananmen Square. Into the next decade, financial reforms languished as China concentrated on building its massive state-owned enterprises. Capital was redirected toward industrial production, and land was confiscated to build factories.
Still, China’s economy roared ahead, powered by entrepreneurs who were far more efficient than the bureaucrats who ran the SOEs and by globalization. Huang cited a series of milestones signaling reforms and setbacks, including China’s embrace of the World Trade Organization in 2001, the ouster of Google in 2009, and the privatization of some SOEs followed by the creation of newer (albeit smaller) ones.
Meanwhile, the “economic reforms had zero effect on the structure of political power in China,” Huang observed. De facto restraints occurred naturally with the yin and yang of leaders such as Deng and Chen Yun, and later Jiang Zemin and Hu Jintao. “But there’s a longevity problem because politicians die. China has no system of checks and balances,” he said.
Such a system was ripe for a return to more autocratic rule, said Huang, who argues that China has “walked back” economic reforms in the Xi years. Anecdotal evidence includes the rejection of corporate reforms such as requirements for independent boards and linking salaries to performance. Officials have become so wary that projects and reforms could backfire that they no longer are approving new ones.
An exception has been the wholesale construction of palatial government structures, even in regions where per capita GDP hovers below $1,000 a year. “You can argue that high-speed trains are good for the economy,” Huang said, “but impressive buildings don’t make government workers more efficient. Construction may raise the current GDP, but it has no effect on future income.”
Huang characterized even Xi’s lauded crackdowns on corruption as a political maneuver aimed at solidifying power rather than attempts to clean up crooked practices. Instead of curbing the startling rise of crony capitalism (“the NPC has the wealthiest individuals in the world,” he said), the campaign has prosecuted crimes dating back a decade or more.
The political maneuvering has played out against the background of an economy that is languishing. China has become very good at production, even as it refuses to consume at a pace necessary to sustain growth. Globalization provided an escape valve until demand faltered during the global recession and the more recent protectionist movement in the United States.
Although Huang expects the One Belt, One Road initiative to drain some of China’s excess production, he also fears further economic turbulence ahead. Mindful that “any number of scenarios could unfold,” he added, “the market economy in the People’s Republic is subject to the laws of diminishing returns.”