China is still reforming

Every once and a while you read articles suggesting that the reform process in China has stopped. Tyler Cowen discussed a book on China by Joe Zhang that makes 5 very dubious claims about reform. This one seems more than “dubious”:

In the past decade, China has erased most (if not all) of the liberalization of the previous two decades.

Thirty years ago China wasn’t much more advanced than North Korea.  The SOE share of the Chinese economy fell from 80% in 1978 to 18% today.  Here’s a graph showing the first decade of the 21st century:

Screen Shot 2014-09-14 at 1.01.45 PM

That graph is from a 2011 article in The Economist. But how about more recently? Has the reform process stopped?

Last year the FT reported that Xi Jinping was initially focusing on making the SOEs more efficient:

Reforms in train in China amount to a significant, albeit indirect, challenge to state companies across a range of industries, chipping away at their privileges. The government does not want to eliminate them. Instead, it wants to make them more efficient and more profit-focused – in short, more like private companies.

.  .  .

Private companies complain that they are struggling to compete against state companies and cannot access the same investment or funding opportunities as them. Moreover, the productivity gains at state companies have stalled, with their equity returns lagging behind private rivals by about 10 percentage points.

These problems form the basis of Mr Xi’s new round of SOE reforms. First, the government has promised to open up protected industries, including finance and energy, to more private capital – giving entrepreneurs capital opportunities that they lacked before. These openings, though, are expected to be modest.

The second and crucial part of Mr Xi’s push is to make existing SOEs more like private companies in their operations, if not their ultimate ownership. The reforms “will mainly focus on improving the operational efficiency of the SOE sector”, said Zhu Haibin, an economist with JPMorgan.

The government will allow state companies to introduce employee stock ownership plans, a way of encouraging managers to target profits. Bringing more private investors on board will also increase the portion of state companies in the hands of performance-minded shareholders, a disciplining force.

Even more important are the reforms that will change their operating environment. Shifts to market-based pricing for energy inputs and interest rates are, over time, undermining the advantages that state companies have over their private rivals.

An example of that was seen last week when China Development Bank, a state-owned lender that is one of the biggest creditors to local governments, had to scale back a planned bond issue because of tight monetary conditions. It was a case of an increasingly liberalised interest rate market forcing a state-owned company to weigh its investment plans more carefully.

“They know that if they issued the bond, the yield will be pretty high, probably higher than their returns,” said a credit trader with a European bank in Shanghai.

The industrials sector has also thrown up multiple examples this year of how market forces are impinging on state companies. The listed arms of Cosco, a shipbuilder, and Yunwei, a chemicals company, are among those that have announced assets sales in recent months to repair their balance sheets after big losses.

In 2014 things are moving even faster.  The Economist recently reported that privatization is back on the table:

The temptations to branch out have been too great: relative to their private-sector peers, they have benefited from cheaper financing from state-owned banks, favouritism from local governments in land sales and a lighter touch from regulators.

Second, despite these advantages, SOEs have given progressively less bang for their buck. Faced with mounting losses in the 1990s, China undertook a first round of drastic reforms of its state-owned companies. There were mass closures of the weakest firms, tens of millions of lay-offs and stockmarket listings for many of the biggest which made them run a little more like private companies. That initially paid dividends. SOEs’ return on assets, a gauge of their productivity, rose from barely higher than zero in 1998 to nearly 7% a decade later, just shy of the private-sector average. But over the past five years, their fortunes have ebbed. Profitability of state companies has fallen, even as private firms have grown in strength. SOE returns are now about half those of their non-state peers. For an economy that, inevitably, is slowing as it matures, inefficient state companies are a dangerous extra drag. Jian Chang of Barclays says that putting SOEs right is “the most critical reform area for China in the coming decade”.

Until recently, however, few analysts thought that China had the desire or the ability to get back into the muck of SOE reform.  Companies under the central government, such as PetroChina, the country’s biggest oil producer, were believed to be strong enough to resist the changes that would erode their privileges. At the provincial and municipal levels, local officials were thought bound to government-owned companies by ties of power, patronage and money. China was not expected to sit entirely still: gradual deregulation of interest rates and energy pricing was placing indirect pressure on state companies to operate more efficiently. But a direct, frontal assault on them of the kind waged by Zhu Rongji, then prime minister, in the 1990s seemed out of the question. Even when the party unveiled a much-ballyhooed reform plan last November and vowed to target SOEs, there were doubts about how far Xi Jinping, China’s president, could go. People close to the State-owned Assets Supervision and Administration Commission (SASAC), the agency that oversees China’s biggest SOEs, say that it was still dragging its feet at the start of this year.

But a flurry of announcements in the past few months shows that reforms are getting on track. There is no one-size-fits-all approach. Sinopec, Asia’s biggest refiner, is close to selling a $16 billion stake in its retail unit, a potentially lucrative opening for private investors. CITIC Group, China’s biggest conglomerate, is poised to become a publicly traded company by injecting its assets into a subsidiary on the Hong Kong stock exchange, for $37 billion. After its initial reluctance, SASAC announced reforms at six companies. They are to experiment with larger private stakes and greater independence for directors.

Although generating fewer headlines, moves by local governments to sell their companies could be even more significant for the Chinese economy. Local SOEs have performed worse than their central counterparts, meaning there is plenty of scope for improvement. They are more accessible to private investors since they are concentrated in non-strategic sectors. “It’s opening wide up. There is a ridiculous amount of deal flow coming our way,” says a manager with an international private-equity firm. The southern province of Guangdong recently held a meeting at which it offered stakes in 50 different SOEs, according to people present. Shanghai has also been at the forefront. In June it sold a 12% stake in a subsidiary of the Jin Jiang hotel group to Hony Capital, a local private-equity firm. Analysts say that this will encourage better management practices at Jin Jiang, including stock-option incentives for executives, and that it could serve as a template for future such deals.

The received wisdom in China used to be that “vested interests”, namely SOEs themselves, would thwart reform. Few believe that any more. With more than 100 officials from PetroChina, the biggest SOE of all, now under investigation for corruption, Mr Xi has flexed his muscles.

I often get commenters making very strange claims.  They’ll assert that the success of the 4 East Asian “tigers” was due to mercantilist policies and the failures of Latin America were due to free market neoliberal policies.  That’s of course the exact opposite of the conventional wisdom. They always cite a couple economists whose names I forget (one American and one South Korean.) While I haven’t read the original papers, my guess is they make the common mistake of forgetting that all economies are very complex.  You can find market reforms everywhere, even in North Korea.  You can find lots of government intervention everywhere, even in Hong Kong much of the real estate is owned by the state.  The trick is to get an overall view of the situation.  Was East Asia or South America more open to trade?  (The two most successful tigers were completely open, the other two fairly open.) Which South American economies did the least bad?  (The neoliberal ones like Chile did best, the highly statist ones did the worst.)  Perhaps some people believe intervention is good, and then look for examples of intervention in a successful economy.  You can always find some, but were they the decisive factor in the success?  Almost never.

I haven’t read the book Tyler discusses, so I can’t comment on the specifics.  But I’d love to see someone provide a short summary of how someone could claim China today is roughly as illiberal as 30 years ago.  That seems preposterous at first glance.  Is it possible the author made the same mistake as those who claim Latin America is a test of free markets, and East Asia a test of statist policies?

On the other hand my claim that tight money by the Fed caused the Great Recession also seems “preposterous at first glance.”  🙂

PS.  I’d recommend Coase’s book on China (written with Ning Wang) for those who are interested in how they reformed their economy.



40 Responses to “China is still reforming”

  1. Gravatar of cassander cassander
    14. September 2014 at 14:17

    I’d say that the absolute size of the chinese SOEs matters as well as their share. Considering the growth of the chinese economy over that period, it seems like the SOEs are growing, just more slowly than the economy as a whole.

  2. Gravatar of Bill Reeves Bill Reeves
    14. September 2014 at 17:15

    I don’t think anyone disputes that China is much more liberal than it used to be. I believe China’s real issue is that the state is so heavy handed in so many areas and growth has been so meteoric that immense, intergalactic scale imbalances have built up – like fifty million new homes standing empty. I call China the Insane Clown Posse economy because it looks like other boom economies and feels like other boom economies but because the state is coming from a place of pervasive control it isn’t really like them. It’s an Insane Clown Posse and nobody really knows what’s going to happen next. Which is scary bad.

  3. Gravatar of ssumner ssumner
    14. September 2014 at 19:06

    Cassander, Yes, but the share is the best measure of influence.

    Bill, You said:

    “I don’t think anyone disputes that China is much more liberal than it used to be.”

    That’s an odd thing to say after a post that quotes someone disputing the point you claim that no one disputes.

    China has some empty houses, but even so it has no where near enough houses to meet the future demand by people from the countryside moving to the cities.

  4. Gravatar of Brett Brett
    14. September 2014 at 19:36

    They’ll assert that the success of the 4 East Asian “tigers” was due to mercantilist policies and the failures of Latin America were due to free market neoliberal policies. That’s of course the exact opposite of the conventional wisdom. They always cite a couple economists whose names I forget (one American and one South Korean.)

    You’re probably thinking of Ha-Joon Chang. He was the one who made the point that the Asian Tigers all used industrial policies and selective tariffs/subsidies to build up their economies*, and in a podcast with Tyler Cowen made the good point that the fastest growth in most of the Latin American economies was when they were in the Full ISI Mode (Mexico’s growth before 1982, for example, was much faster than what has come after).

    Some of that is undoubtedly because it’s easier to grow much faster when you’re poor than when you’re already rich, but we’re still talking about longer periods of growth under regimes with far more state intervention into the economy.

  5. Gravatar of Tom M. Tom M.
    14. September 2014 at 20:29

    Umm, there is a reason why the illegal immigrants are coming from El Salvador, Honduras and Guatemala and NOT Nicaragua.

  6. Gravatar of adaf adaf
    14. September 2014 at 23:20

    Scott, take a look at this article:
    “Finally, paralleling Alwyn Young’s “Tale of Two Cities” for the growth rates in Hong Kong and Singapore is an equally striking fact about levels. Per capita GDP in Hong Kong and Singapore in 2000 was about 82 percent of that in the United States. The welfare numbers are dramatically different, however, with Hong Kong at 78 percent but Singapore falling to just 39 percent. The bulk of this difference is explained by Singapore’s exceptionally high investment rate, which reduces its level of consumption for a given level of income.”

  7. Gravatar of Vivian Darkbloom Vivian Darkbloom
    14. September 2014 at 23:59

    I have not read the book either, but this is what the author says in the introduction (available at Amazon):

    “In the next eight chapters of this book, I answer the question: Why has state sector reform in China gone backward, instead of forward, in the past decade? I analyze why this inconvenient truth is largely ignored by Western observers while it is widely accepted as a fact inside China. It is true that the government has sold off a big number of enterprises in the past three decades, but this has only relieved the government of a huge financial and political burden. By holding tightly onto strategically important sectors, such as infrastructure, telecoms, banking, finance and tobacco, the Chinese government has not only turned itself into the Warren Buffett of China, but it also retains the maximum financial flexibility of a broadly balanced budget and the ability to pick winners where it seems them.”

    Even this summary does not strike me as logically very rigorous. “Holding tightly onto” (tobacco?) does not strike me as the same as *reversing* liberalization. If China were really picking winners and shedding losers, why would SOE profits be declining, as reflected in the chart Scott reproduces above? Admittedly, the chart Scott cites is only for *industrial* profits which would likely exclude the finance, banking, telecom and (tobacco?!) sectors. I guess you really need to read the whole thing.

  8. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. September 2014 at 00:15

    State ownership of business should not be the only measure of the degree of “liberalization”. The Chinese may be quick to learn that you don’t need to formally “own” business in order to control it. You can do the latter pretty effectively through regulation, taxation and ultimately punitive fines when businesses don’t tow the state line. Control without accountability seems to be the modern “liberal” ideal. What could be better from the political point of view?

  9. Gravatar of ssumner ssumner
    15. September 2014 at 05:36

    Brett, Yes, I think that was one of them. Of course almost all countries grew fast in the 1950s and 1960s, even the Soviet Union. So that doesn’t tell us anything about the development model. You need to look at cross sectional data to get more than one observation.

    adaf, Yes, I am aware of that claim, and there’s some truth to it (I don’t know about the exact numbers.) But it no longer applies in 2014.

    Vivian, Thanks. And yes, that paragraph doesn’t make one want to read the book.

    You said:

    “You can do the latter pretty effectively through regulation, taxation and ultimately punitive fines when businesses don’t tow the state line.”

    As Obama has learned. 🙂

  10. Gravatar of benjamin cole benjamin cole
    15. September 2014 at 06:03

    Egads, trying to decipher China, 1.5 billion people and no freedom of the press. Blind men describe an elephant?
    BTW, the most interesting thing I ever read about China was that all companies, even those on stock exchanges, are controlled by the CCP through voting stock or board seats.
    I think the biggest plus that China has is a central bank devoted to growth.

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    15. September 2014 at 07:07

    ‘Umm, there is a reason why the illegal immigrants are coming from El Salvador, Honduras and Guatemala and NOT Nicaragua. ‘

    Oliver North’s revenge?

  12. Gravatar of adaf adaf
    15. September 2014 at 07:24

    Scott, Singapure’s actual individual consumption is just 34.2 % of GDP(24,725), a record low

    4.Hong Kong 65.2 (32,690)
    22.Singapure 34.2 (24,725)

  13. Gravatar of rob rob
    15. September 2014 at 16:22

    I am almost always disappointed by foreign accounts of China. Say what you will about their censored media(which is clearly not great), but you definitively get a better idea of America from CCTV than you get a view of China from virtually any western news source. The claim the author makes is clearly patently ridiculous, but to a good number of Americans China is the “enemy” so I am sure it does a good job helping book sales. Markets as the backbone of the economy are the current CCP line, and the most heavy handed regulations like the hukou system, one child policy, and farmers “renting” the land are all on the docket to either be drastically changed or phased out. I agree Coase and Ning Wang’s book on China is the best and truest representation I have seen. One key point everyone should understand is that instead of a single 1.5 billion person juggernaut all shifting and falling in line with the new CCP directives like some giant insect colony, it is a place where each area has much more diversity and autonomy than the American states. The people in China want the same stuff everyone else across the world wants, I have not noticed their personal goals being any more “collectivist” than in the west.

  14. Gravatar of ssumner ssumner
    15. September 2014 at 18:57

    adaf, Maybe I’m wrong. I’d like to see some more information on that, as those figures look fishy. Where is all the GDP spent? Government spending is also quite low in Singapore. Does that include things like housing consumption in government-owned apartments?

    I should probably investigate further before speculating.

    rob. Great comment.

  15. Gravatar of ssumner ssumner
    15. September 2014 at 19:00

    adaf, I also noticed the consumption ratio is really high in Germany. Almost everyone claims it is really low in Germany. If those figures are correct then someone should write a story, as it would overturn conventional wisdom.

  16. Gravatar of Benjamin Cole Benjamin Cole
    15. September 2014 at 19:55

    Okay, The Economist (Scott Sumner’s fave mag) just published a table that will make you nuts.

    In their latest issue, there is a table entitled “Closing in.”

    What nation has most closed the gap in per capita GDP, compared to the USA, since 1998?

    Russia. That’s what the table says.

    The Economist says now Russia has a per capita GDP (at PPP no less) at 45 percent of the USA’s, while China is at 22 percent.

    Sheesh, Russians have twice as much income at Chinese?

    Even more surprising, in 1998 Russians were at 17 percent of the USA, in per capita GDP. Now at 45 percent.

    The Chinese have gone from about 7 percent to 22 percent (hard to read the table exactly, but this is close enough).

    So, arguably, the bigger economic success story since 1998 is Russia!!?? They gained nearly 30 percent points gain on the USA, while the Chinese could only muster 15.

    Yes, I know, Russia has oil.

    Still, income is income, increases in per capita GDP either mean something or they don’t. No wonder Putin is popular.

    If your income tripled in 15 years, would you vote for Putin?

    And, if you showed any initiative and hard work, or just held down your job and if your income, say, quadrupled in 15 years would you like Putin?

    If my income had gone from $25k to $100k (adjusted of inflation), and so did that of all my friends and family, how would I view the Bush-Obama years?

    And why are we honking about China when Russia is doing much better?

  17. Gravatar of Tom Brown Tom Brown
    16. September 2014 at 01:06

    Benjamin, very interesting. I wonder if having a much smaller population helps. Russia has 144 million: about 10% of China’s. I’m not sure how it would off hand… just thinking out loud. Less people to share oil revenue with for one (as if it’s “shared” in the 1st place… Ha!).

  18. Gravatar of Tom Brown Tom Brown
    16. September 2014 at 01:15

    Benjamin, also, for what’s it worth both China and Russia are currently “QTM applies” economies in this analysis. So if there’s merit to that theory, they are both well positioned for nominal growth as far a that goes.

  19. Gravatar of ssumner ssumner
    16. September 2014 at 04:12

    Ben, Assuming those figures are accurate, let’s go back to 1980. China’s income would have been about 2% of US levels, and Russia’s income about 50%.

    So . . . in the last 34 years China has grown 11 fold relative to the US, Russia not at all. I’d say that’s a more meaningful comparison than starting from 1998, when Russia was in a deep recession.

    But I agree that Putin’s popularity is related to the oil boom, which helped Russia recover from the recession.

  20. Gravatar of adaf adaf
    16. September 2014 at 04:35

    Actual individual consumption:,,contentMDK:22378612~pagePK:60002244~piPK:62002388~theSitePK:270065,00.html

    “Does that include things like housing consumption in government-owned apartments?”
    I don’t know.

  21. Gravatar of Benjamin Cole Benjamin Cole
    16. September 2014 at 04:35


    Well, that sort of took the wind out of the sails….

  22. Gravatar of Steven Kopits Steven Kopits
    16. September 2014 at 04:51

    My views on Scotland and its oil prospects:

  23. Gravatar of Benjamin Cole Benjamin Cole
    16. September 2014 at 05:54

    Still, would anybody think that a bunch of alcoholic Russians have incomes double that of mainland Chinese?

  24. Gravatar of Daniel Daniel
    16. September 2014 at 06:33


    I assure you, no way Russia’s income in 1980 was 50% of US levels. More like 10%.

    Moscow & St Petersburg are/were pretty decent, but once you left the big cities you entered the third world (no, this is not an exaggeration).

    So you’re flat-out wrong when you say Russia hasn’t grown at all, relative to the US.

  25. Gravatar of Daniel Daniel
    16. September 2014 at 06:41

    Lest you think I’m talking out of my ass

  26. Gravatar of Daniel Daniel
    16. September 2014 at 06:47

    Also, you might want to consider that the Red Army’s budget was HUGE, off-limits to anyone but the highest leadership.

    The military got all the quality items Soviet industry produced, and the civilians had to make do with what was left.

    There were occasional food riots – despite the conscripts in the army and the university students being forced to work in the fields.

    Soviet times was REALLY BAD, and Russia has in fact improved A LOT.

  27. Gravatar of W. Peden W. Peden
    16. September 2014 at 07:07


    One could add that the pre-1990s data is very dubious. The Soviet economist Grigorii Khanin actually estimated that even the CIA were overestimating Soviet GNP growth rates (often double his estimates) in the 1970s and 1980s.

  28. Gravatar of ssumner ssumner
    16. September 2014 at 07:14

    Daniel, I agree the official data overstated GDP. But then I’d just say we can’t really trust the Russian data. Certainly Russian living standards have risen a lot since they shifted from wasteful SOE investment and military spending, to more consumption goods.

    But Chinese living standards have risen much faster, even if they are still at lower levels in absolute terms.

  29. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. September 2014 at 07:47

    I’ll second Scott’s recommendation of Coase and Ning Wang’s ‘How China Became Capitalist’, and raise him Francis Spufford’s novel ‘Red Plenty’ (for Russia);

    Reviewed on Amazon by a former resident of the Soviet Union, thus;

    ‘I’ve read a lot about Soviet Union, both in Russian and English, and most of the Russian books have strong prejudgement and they are either showing socialism in a very positive or a very negative light. The English sources might be more or less objective, but their lack of understanding of the culture sometimes make them simply laughable.

    ‘Mr. Spufford managed to keep his point of view very objective and filled the book with the finest very authentic details.

    ‘So if you want to learn about life in Soviet Union in 1950s-1970s, understand how that Superpower was ruled and what socialism was about and why it ultimately lost the historic race – I can’t think of any better single source.’

  30. Gravatar of TravisV TravisV
    16. September 2014 at 08:53

    “China Launches CNY500 Billion In “Stealth QE””

  31. Gravatar of TallDave TallDave
    16. September 2014 at 11:15

    That graph needs an additional line — “technically not state-owned, but substantially owned by officials of the armed forces or Party.” I suspect it would be somewhat less rosy.

    China has made the leap from N Korean-style basket case communism to banana republic crony-kleptocracy, and we should all applaud the fact that has lifted several hundred million people out of grinding poverty and into middle incomes. At the same time, there are definite limits to the progress that can be achieved under China’s current institutions.

  32. Gravatar of Robert Robert
    16. September 2014 at 14:58

    Net exports are about 20% of Singapore GDP. You may want to adjust consumption share for this fact.

  33. Gravatar of Saturos Saturos
    16. September 2014 at 19:11

    Off topic: what do people think of the new INET intro to economics?

  34. Gravatar of Saturos Saturos
    16. September 2014 at 19:12

  35. Gravatar of TravisV TravisV
    17. September 2014 at 10:13

    CNBC: “Nearly every change made to the language was to the dovish side.”


  36. Gravatar of Brian Donohue Brian Donohue
    17. September 2014 at 10:31

    @TravisV, so far, Yellen’s a bit of all right!

  37. Gravatar of TravisV TravisV
    17. September 2014 at 10:33

    Yellen should say “Yeah, I know Fisher and Plosser dissented. Who gives a rat’s ass?”

  38. Gravatar of ssumner ssumner
    18. September 2014 at 12:20

    TallDave, Agreed, but they are far from those limits.

    Robert, Good point—and that’s pretty impressive saving! No wonder there are so many millionaires in Singapore, and in Switzerland, which also has an insanely high net export figure.

  39. Gravatar of E. Harding E. Harding
    22. September 2014 at 15:05

    Russia’s catch-up growth during the 2000s shouldn’t be at all surprising.
    It was just returning to its Soviet-era trend. The Baltic States and Belarus were doing the same at the same time. Unlike Brazil (which, due to having the most complicated tax code in the world, never had a lot of potential beyond that built up in the 1970s), Russia had much economic potential during the 1990s depression-and its economy wasn’t losing it. Russia’s scarce resources were simply being disallocated from less productive uses during that time, to be reallocated to more productive ones during the 2000s. It’s like Mises’s bricklayer having to tear down the old structure to build one better grounded in market principles.

  40. Gravatar of breaks breaks
    26. September 2014 at 06:45

    Agree that VD makes a solid point, but what are you referring to here?

    “You can do the latter pretty effectively through regulation, taxation and ultimately punitive fines when businesses don’t tow the state line.”

    As Obama has learned.

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