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Privatization In China. The State Never Falls Too Far From The Business Tree.

By Dan Harris on Posted in China Business, Recommended Reading

The Economist has a very interesting article on “privatization in China.” The article is entitled, “Capitalism Confined” and its subtitle is that “Chinese companies, like companies everywhere, do best when they are privately run. In China, however, the state is never far away.”

The article does an excellent job explaining the role the Government(s) play in various sorts of Chinese companies and I recommend this article for anyone who has ever been confused about the relationship between China’s government and its companies. This article is not going to clear up everything for you, but it will help.

  • http://Www.inpraiseofchina.com Godfree Roberts

    Businesses in China, like everything else, are intended to serve the greater good of the country. Indeed, many leading businessmen are quite publicly proud of this fact.
    Chinese banks, for example are really public utilities with capitalist characteristics.
    The Chinese government has been tweaking the private ownership/public good formula for years and finally seems to be getting it right: making room for the irrepressible Chinese entrepreneurial spirit while avoiding the US’s fatal mistake of letting the merchant class set the national agenda.
    I predict that we will never see a Chinese company do what GE has done: transfer billions of dollars of US taxpayer-subsidized IP–its X-Ray and FADEC knowledge–to a foreign country. (China in this case).
    The always-wrong-about-China Economist cannot grasp this concept.

  • http://www.geoffinwuhu.blogspot.com Geoff Gibson

    @Godfree Roberts…”the irrepressible Chinese entrepreneurial spirit”?…”the US’ fatal mistake”?
    What fatal mistake? Is the USA dead? …. Oh, never mind.
    Sir, if you want to believe – and, clearly you do – that China is run on entirely altruistic lines by eight squeeky-clean engineers with nothing-but-good on their minds, then believe it.

  • Chris

    @ Godfree” “The Chinese government has been tweaking the private ownership/public good formula for years and finally seems to be getting it right: making room for the irrepressible Chinese entrepreneurial spirit while avoiding the US’s fatal mistake of letting the merchant class set the national agenda”
    While I enjoy a good anti-capitalist rant more than most and think corporate behavior in the West is appalling, I don’t buy Godfree’s claim that the alternative “private ownership/public good formula” is at all good for China. Having worked for both foreign and domestic private enterprises in China, the tensions between enterprises and government are unhealthy, parasitic both ways and there is far too much rent-seeking rather than entrepreneurial behavior generated as a result.
    Heavy regulation using transparent and efficient regulatory frameworks in China would be helpful rather than the current “grace and favor” relationships with too little reference to the rule of law.
    @ Godfree: “I predict that we will never see a Chinese company do what GE has done: transfer billions of dollars of US taxpayer-subsidized IP–its X-Ray and FADEC knowledge–to a foreign country. (China in this case).”
    That outcome in China is indeed unlikely. More likely would be the transferring millions of dollars of “rental income” to the Cayman Islands to be shared by the rent seekers.

  • Twofish

    * Chinese companies, like companies everywhere, do best when they are privately run.
    There is a funny trick here. Most Chinese companies are a mix of private/public characteristics, and so when you have a successful company, the Economist calls that “private” and when you have a massively unsuccessful company, the Economist calls that “public.” Also one dodge here is that they talk about “privately *run*” companies, which is different from privately *owned* companies. The Party-State owns the big companies in China, but you get promoted in the Party based on whether or not you can turn a profit.
    It really gets in the way of figuring out what is going on, and what to do about it. For example, what the state has been trying to do with the big SOE’s is to make them owned by the state, but run by managers in ways that are intended to make a profit. Whether that is public or private, both or neither is debatable, but because the terms are vague, if it works, you claim that as a victory for privatization and if it doesn’t work, then it’s the evil publicly run enterprise getting in the way of everything.
    The sad part is that if you get rid of this “whatever is good we call private, and whatever is bad we call public”, the article was a pretty good survey.
    The other thing is that regardless of what you call it, there isn’t a big push in China right now to change it since it seems to be working, and there is really no push to change it.

  • Twofish

    * What fatal mistake? Is the USA dead?
    The USA is not dead, but right now no one is looking at the USA for economic advice, especially since the USA really doesn’t know what the USA should be done.
    * Sir, if you want to believe – and, clearly you do – that China is run on entirely altruistic lines by eight squeeky-clean engineers with nothing-but-good on their minds, then believe it.
    In fact, China is run by eight extremely selfish people with nothing on their minds except how to stay in power, and that’s a good thing. The Chinese government knows that if the economy cracks, that most of them will end up like Mubarak, so they are willing to do anything and everything to keep the economy going well.
    That makes economic policies discussions in China refreshingly non-ideological. You might have to change the names for marketing reasons (i.e. call things distributing capital among the people rather than privatization) but because the people in power are selfish, if you have any ideas on how they can stay in power, they will listen to you.
    Robert: I predict that we will never see a Chinese company do what GE has done: transfer billions of dollars of US taxpayer-subsidized IP–its X-Ray and FADEC knowledge–to a foreign country. (China in this case).
    We just had an embarrassing situation in which Chinese arms manufacturers were talking with Qaffafi about selling weapons in ways that the Foreign Ministry would not have liked.
    I predict we will. There are a number of cases in which Chinese companies and the government are screaming at each other. The thing about the big SOE’s is that all of the senior managers are Party officials with a lot of political pull in the government. So it’s not a matter of the managers taking orders from the government, but rather the SOE’s making up one interest group that goes in making policy. Because SOE’s are part of the Party, they are insiders which are part of the power game in China.
    Robert: US’s fatal mistake of letting the merchant class set the national agenda.
    The Chinese “merchant class” has a strong role in setting the national agenda. It’s just that they’ve been absorbed into the Party so it’s less obvious.

  • Twofish

    Chris: I don’t buy Godfree’s claim that the alternative “private ownership/public good formula” is at all good for China.
    I don’t think that really is the formula anyway. People in China do things for their own selfish reasons, but after 150 years of trial and error, people have come up with something that works, at least for now.
    Chris: Having worked for both foreign and domestic private enterprises in China, the tensions between enterprises and government are unhealthy, parasitic both ways and there is far too much rent-seeking rather than entrepreneurial behavior generated as a result
    I think it’s better to think of “better” and “worse” rather than “good” or “bad”. At the end of the day, the Chinese economy works, and one reason I’m a little skeptical of people that call for massive changes in the Chinese economy is that countries that have gotten their advice have ended up in worse shape than China.
    Also I’m not sure that rent-seeking is always as bad as it is sometimes portrayed to be or entrepreneurship is always a good thing. One problem with the US is that the entire corporate system is designed to be more efficient. That’s a good thing when unemployment is at 2%, but when unemployment is at 9% then maybe efficiency and doing more with less *isn’t* a good thing. The other thing is that Chinese companies get something for their “rent.” If all hell breaks loose, then in return for paying rent in the good times, you get government backing in the bad, so it’s less a matter of “rent” than “insurance.”
    The other question that you really have to ask is whether or not there is in fact more rent seeking in China than the United States or whether it just takes another form. Same with transparency. In China, it’s surprisingly easy to figure out who is getting paid off and why, whereas in the US, people get paid off but its much harder to follow the money.
    Chris: Heavy regulation using transparent and efficient regulatory frameworks in China would be helpful rather than the current “grace and favor” relationships with too little reference to the rule of law.
    Not sure if that is true or even if it is possible. Also, you have to ask what is the *goal* here. Increase GDP growth? China doesn’t have a problem with that. Decrease inflation? Good goal, not obvious how regulatory changes will change that. Make things more efficient? When you realize that there are several hundred million people that want to get rich, efficiency doesn’t seem like such a great thing.
    Chris: That outcome in China is indeed unlikely. More likely would be the transferring millions of dollars of “rental income” to the Cayman Islands to be shared by the rent seekers.
    Really hard to do right now. Cayman Island banks don’t take RMB.
    One thing that makes China different from Russia, is that even if someone steals a ton of money in China, the money stays inside China, so if someone does something corrupt and then puts their RMB into a bank, that money is *somewhere* in China available to do useful things. Also as long as you are in China and your money is in China, then you aren’t going to go totally crazy with corruption.
    Finally, one thing about the economic crisis is that you end up asking a lot of questions. In 2000, you could argue that “rent seeking” is bad and “entrepreneurship” is good, and the US economy is proof of that. You just can’t make that argument in 2011.