Reform is a tall order in China
2014-09-07 02:00阅读：
Joe Zhang, South China Morning Post, 19 December
2013.
Despite suggestions the private sector is gaining ground on the
mainland, state-owned firms are more dominant than ever, with the
past decade seeing a reversal of earlier liberalisation
gains.
In an essay published in the Financial Times
eight years ago (Oct-2005), I said China's private sector
was in the shadow of the state.
I can make the same argument today with one significant difference:
the state sector’s dominance in China has grown considerably in the
last eight years.
The last decade has almost completely undone the reforms of the two
previous decades.
The consensus in the West is that China’s state sector is corrupt,
inefficient and ideologically inferior, so it must be
losing ground against private enterprise which is
steadily chipping away at the communist, state-backed old
guard.
Tha
t is just not the case.
The playing field is unfair and aligned against the private sector.
Nicholas Lardy, in a recent Bloomberg Brief piece,
compared the financial performance of China’s state sector with the
private sector. Citing the National Statistics Bureau, his numbers
were predictable: last year, the state sector return on assets
(ROA) was merely 4.6 per cent and well below the private sector’s
12.4 per cent.
I think those numbers are biased and wrong.
The biggest components of the state sector are the banks, which
account for almost half of the domestic stock market valuation, and
about half of the total net profit of all the listed companies.
Other big components in the stock market, or in the unlisted
universe for that matter, are state-controlled big
insurance companies, big oil corporations and telecommunications
operators.
Chinese banks have an average return on equity (ROE) of about 20
per cent – twice the level of their global peers. Insurance
companies do well in general, and telecoms operators enjoy
exorbitant privileges. How can the state sector underperform the
private sector in financial terms?
Of course, you can argue that the banks’ profits are entirely due
to the government’s control of interest rates. That is a true and
fair assessment, but the fact remains that the state sector has a
much higher ROE than the private sector.
Lardy’s use of ROA is meaningless because banks
by definition are highly-geared business and their ROAs are low in
nature (around 2-3 per cent). The nature of the banking business is
such that you cannot usefully compare bank ROA with other sectors.
ROE is the appropriate benchmark.
The other problem with Lardy’s comparison is that tens of thousands
of private sector companies go bankrupt, or voluntarily close each
year. Once that happens, they exit from the statistics. So there is
a “survival basis”. But you do not hear any state-owned enterprise
being shut down.
Uneven playing field
The state sector not only benefits from the economies of scale, but
also from the economies of scope. The state sector as a whole is
like a giant conglomerate company that benefits from
diversification, the low cost of plentiful funding and political
favours.
The playing field is unfair and aligned against the private
sector.
Moreover, there are many hybrid joint venture companies in China
that blur the distinctions between the two sectors.
Finally, the state sector takes on many social functions, and their
existence and activities provide a positive spill-over effect for
the whole economy and society.
While liberal commentators may disagree with this, the state sector
is designed to achieve more than just financial ratios.
Utilities (power, water, natural gas and public transportation),
for example, where the state sector dominates, are not charged at
full price because of affordability and other social reasons. That
drags down their financial returns, but the financial ratios do not
reflect their efficiency.
More state involvement
It is wrong for liberal economists to say that the dominance of the
state sector goes against the public’s wishes.
In China, the public wants more, not less, involvement by the state
sector. The public wants a bigger state sector to tackle the many
challenges China faces, even if many of these challenges are
by-products of the state sector (inequality, overpopulation and
pollution).
Even the recent third plenum does not mention the private sector, a
point Lardy acknowledges.
The official data shows that the government tax revenue as a
percentage of gross domestic product almost doubled from 12 per
cent a decade ago to 22.3 per cent last year. This is almost a
wholesale reversal of the economic liberalisation of the previous
two decades.
But Western economists do not mention this uncomfortable
fact.
The state dominates strategically important sectors – essential
infrastructure and sectors with pricing power – while the private
sector is left to fight it out in fiercely competitive sectors such
as low-end manufacturing, retail, service industries and (some)
real estate.
The writing is on the wall: the score of the past decade’s match of
the private sector versus the state sector in China is “private
sector - zero” and “state sector - one”.
Joe Zhang is a corporate adviser based in Hong Kong, and the
author of Inside China’s Shadow Banking: The Next Subprime
Crisis?
