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More interview than debate.
STATE CAPITALISM 101

The answer to the unanswered question in the Fox-CCTV trade war debate

Mary Hui
By Mary Hui

Reporter

Towards the end of the highly anticipated (but ultimately disappointing) trade war debate on Wednesday (May 29) between Trish Regan and Liu Xin, the Fox anchor posed her Chinese counterpart possibly the most interesting question of the 17-minute exchange: What, exactly, is state capitalism?

“I’m paying you a compliment here,” said Regan. “Your system of economics is very interesting. You have a capitalist system, but it’s state-run. So talk to us about that. How do you define it?”

Liu seemed to be caught off guard by the question, though the lag in the satellite connection may have caused her apparent confusion. In any case, she managed to stall for enough time—intentionally or not—to give an oft-heard definition. State capitalism, she said, is “socialism with Chinese characteristics,” where market forces are expected to play the dominant role in the allocation of resources.

“We want it to be a market economy, but there are some Chinese characteristics, for instance some state-owned enterprises which are playing important, but increasingly smaller role, maybe,” Liu continued, noting that the vast share of employment in China is generated by private firms.

Contrary to popular misconception, “not everything is state-controlled, state-run,” she added. “We are actually quite mixed and very dynamic, and actually very, very open as well.”

The numbers do back up Liu’s claims. In 2017, just over a third of China’s workforce was employed by state-owned firms, according to the latest available numbers from the country’s National Bureau of Statistics. Meanwhile, less than 10% of China’s exports come from state-owned enterprises, compared with almost 50% from private firms, according to the latest numbers from China’s customs administration.

But there’s more to be said than Liu was able to cover.

So what is state capitalism?

Liu is essentially correct in her answer that state capitalism refers to the co-existence of the state and private sectors in an economy, said Zhigang Tao, a professor of global economy and business strategy at the University of Hong Kong who researches the Chinese economy. He gave Liu “80 or 90 out of a 100” for her definition, and more broadly for her performance in the debate with Regan.

State capitalism, said Tao, is basically “state ownership or control of the economy for the purpose of redistribution.” He explained that while the US can be understood as a dichotomy between, on the one side, Republicans who embrace the market economy but don’t want high taxes and, on the other, Democrats who don’t trust the market economy but want high taxes, China’s version of state capitalism actually takes the middle road between the two: it embraces the market economy (hence the large role played by the private sector) but taxes the rich (in that the many advantages enjoyed by the state sector is a form of tax on the private sector).

“State ownership is one way of redistributing the gains among people,” Tao said. “It’s a way of ensuring social stability.” (This reporter has previously collaborated with Tao on business research.)

How did state capitalism begin?

To understand how state capitalism came to be, we have to go back to 1978, when economic reforms began to take hold and China’s economy slowly opened up. Prior to that, the private sector was virtually non-existent in China. Over the next several decades, the size of the state-owned sector gradually decreased as the private sector grew.

But state-owned enterprises were not completely eliminated, and in fact continue to play a substantial role in China’s economy, despite generally being less profitable and efficient than their private counterparts. One explanation for why this is the case is that the Chinese government gets to reap the benefits of both: the social stability that state-owned enterprises provide, which in turn is good for businesses, whether state-owned or private.

One thing Liu wasn’t able to touch on is the relationship of private firms with the government within this framework. While firms anywhere seek to lobby governments and maintain good ties, the relations between private firms and the state in China are a more delicate and intimate dance than in a more purely capitalist system, where the roles of the government and private firms may be more adversarial and the distinctions between the two more clear-cut. And the state is in a stronger position to create powerful private sector players than might be possible in a more laissez-faire system. On the flip side, the fact that private firms have to survive in an environment that favors state-owned enterprises mean that weak players get weeded out, and those that survive come out with sharpened elbows. 

The government is also able to ask things of private firms that would be impossible—or face a lot more pushback—in a different system. For example, a common fixture in private firms that might seem odd to outsiders is the “party committee,” formed of Communist Party members that are in the company, and whose roles are far from clear (foreign companies in China have them too).

Meanwhile, for China’s biggest media firms, hiring and training censors (or outsourcing the work) to make sure what’s circulating meets rules set by the government is a normal part of operations.

Where to from here?

The gradual retreat of the state since the late 1970s, however, has reversed course over the past decade, as the state appears to be making a comeback (paywall). “Starting from 2008, you had the advance of the state at the expense of the private, precisely because of the financial crisis,” said Tao.  Researchers have shown that the massive stimulus package that the Chinese government rolled out disproportionately benefited state-owned enterprises, crowding out private sector investment.

As China’s cracked down on risky financing in recent years, the corporate credit that does remain appears to going more often to state-run firms, even though they’re not as profitable as private ones. For example, in 2016 state-owned enterprises accounted for 80% of the growth in corporate debt, up from 60% five years earlier, according to the Council on Foreign Relations.

Still, the size of the state economy is nowhere near where it was before reforms started four decades ago.

The fact that the debate between Regan and Liu failed to get anywhere is a broader reflection of the fundamental clash between the Chinese and American economic systems. China plays by state capitalism, grounded in the strong role for the Party, while the US adheres to free-market capitalism. Regan’s question—what is state capitalism?—is a reminder of the immense gulf between the two countries.

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