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

Percent

4

Nicholas R. Lardy

Return on assets in industry, 1997 - 2012

13.2

4.9

0

2

4

6

8

10

12

14

16

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Private State

Percent

5

Nicholas R. Lardy

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

12

Nicholas R. Lardy

Public enterprise employment, 1999 - 2011

Millions

0

5

10

15

20

25

30

0

10

20

30

40

50

60

70

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Mn Workers

% of urban workers

Percent

13

Nicholas R. Lardy

General government revenues, 2012

37.1

31.1 30.4 27.6

23.3 22.7

0

5

10

15

20

25

30

35

40

AdvancedEconomyAverage

Japan United States Emerging MarketAverage

Korea China

Percent of GDP

14

Nicholas R. Lardy

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

17

Percent

0

2

4

6

8

10

12

14

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

State Non-state

Nicholas R. Lardy

Profits of SASAC central enterprises, 2002 - 2013

Percent of total non-financial enterprise profits

0

200

400

600

800

1000

1200

1400

0.1

2.1

4.1

6.1

8.1

10.1

12.1

14.1

16.1

18.1

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Rmb Bn

18

Nicholas R. Lardy

3.8

6.8

0

1

2

3

4

5

6

7

8

2005 2006 2007 2008 2009 2010 2011 2012 2013

ROA of SASAC Central Enterprises

Average Bank Lending Rate

Return on assets of SASAC firms, 2005 - 2013

Percent

19

Nicholas R. Lardy

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

48

54 52

36

28

32

0

10

20

30

40

50

60

2010 2011 2012

Private State

Percent

22

Nicholas R. Lardy

Interest coverage ratio, 1996 - 2012

9.6

4.3

0

2

4

6

8

10

12

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Private

State

Percent

23

Nicholas R. Lardy

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

16.3 17.2

25.5

12.9 11.7

9.0

16.7

8.3 8.8 7.4

11.4

5.5

0

5

10

15

20

25

30

Average of all forms ofownership

Foreign enterprises Private enterprises State-Controlled

AVG 2002 - 2007 AVG 2008 - 1H2014 1H2014

Percent

25

Nicholas R. Lardy

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.

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