China’s capitalist revolution ended a long time ago

There is a general view among global investors that the Chinese authorities are really good at economics. As the rest of us knock around in a state of semi-collapse, they have somehow managed to keep growing – and to do so at rates that governments in the West no longer dare to dream of ever seeing again.

The Chinese authorities apparently like to think they’re especially skilled as well: leaked reports have the Chinese Communist Party (CCP) spending a good amount of time referring to “America’s decline” and dwelling on the fact that across the OECD, “countries are mired in deep recession” and there are “threats to social stability everywhere”.

But if the China bears are to be believed, they would be much better off cutting out the crowing and having a go at fixing the problems within their own borders. Why? Because, according to Hong Kong based Asianomics (among others of course), the belief that China is steadily turning into a self-sustaining capitalist economy is absolutely wrong.

Instead it has spent the last 20 years – since the country-wide protests against the CCP back in 1989 – sponsoring an extreme kind of state corporatism.

Post-1989, says John Lee in a report for Asianomics, terrified Chinese leaders spent much of their time analysing the dynamics behind the collapses of previous authoritarian regimes (the Soviet Union etc). Their conclusion was simple: the regimes had fallen because they had “become irrelevant” to their elites.

The CCP set out therefore to retake full control of the economic levers of power – so aligning the interests of the urban middle classes with the party. Most of the lucrative areas of the economy – finance, media, telecommunications resources etc – were reserved for state-owned enterprises (SOEs). The private sector may have continued to expand, but SOEs were “deliberately positioned to control key sectors”.

And to get all the capital. They produce around a third of the country’s output. But they get 75%-plus of the capital. Worse, in terms of capital allocation at least, they got 95% of the oceans of stimulus money chucked out in 2008/9, and 85% in 2010. Which is why private sector firms “consistently reveal credit and capital restraints as the most formidable barrier to expansion”. The state has effectively put in place a system of “policy lending” to often corrupt, badly managed, and unprofitable SOEs with the aim of maintaining the growth and support of the urban middle class the CCP needs to survive.

One shocking stat that sums up the problem? “Less than 50 of the approximately 1,400 listed firms on the two Chinese stock exchanges are genuinely privately owned.” The general presence of the state has grown in tandem with its economic penetration: in the 1980s, China had around 20 million officials on the pay roll. Now it has around 50-55 million.

The existence of the SEOs has led to a predictable problem with non-performing loans: were it not for periodic bail-outs, the Chinese banking system would be bust many times over – the extent of this problem is finally beginning to come to light but that won’t stop it getting worse if no action is taken to improve lending practices after each bailout.

The problem with all this is that to insiders it doesn’t look sustainable. In order for the banks to survive, the government has to (just as in the West) maintain very low interest rates so that the banks can make proper money on their lending spreads. But this drives discontent, as does the fact that some studies show that even as the elites have grown in China over the last 20 years, absolute poverty has risen. China has gone from being Asia’s most equal country to being its most unequal in a generation.

Worse, from the point of view of the man in the street, is the corruption that permeates everything: it is generally accepted that being in the party or knowing people in the party is the only way to get ahead, and that the CCP – its only aim being to stay in power – has the law come second to the wishes of the party.

How worried should the authorities be? The Chinese are allowed to file petitions of grievances against local officials. Again, on Asianomics’ numbers, they did so 20,000 times from 1979 to 1982. And 30 million times in 2005. What keeps China’s leaders awake at night, as Jim Walker of Asianomics points out – as does Jamil Anderlini in today’s FT – is not what Obama is up to, or even how long it will be before the eurozone implodes. It is revolution at home.