Tuesday, December 18, 2012

Socialism Needs a Private Sector?

According to the China's communist party leaders, private business needs to be able compete with state-owned businesses on equal footing in order to follow the road to socialism with Chinese characteristics.

On November 8, General Secretary Hu Jintao gave a typically long rambling "report" to the 18th party congress of the communist party which noted that China is still in an early stage of socialism and is now entering a new era of urbanization, industrialization, informationization, and modern agriculture. Secretary Hu observed that China faces many opportunities and challenges during this period when the world, China, and the party are encountering fundamental changes in conditions. He worried that China's development is still unbalanced, uncoordinated,  unsustainable. Among the problems he cited were weak innovation capabilities, irrational industry structure, a weak foundation for agriculture, and food safety problems. He scolded some cadres for lacking ideals, forgetting their purpose and engaging in corruption.

Over the past couple of months Chinese officialdom has been busy studying the great spirit of the 18th party congress. One article, "China's Great Economic Transformation," describes the concepts at the core of the the new economic growth strategy which sounds like Chinese socialism with World Bank characteristics, as the concepts seem to be drawn from the World Bank-Development Research Center report issued earlier this year. While the World Bank describes the report as recommending steps toward a market economy, communist officials describe it as another stage in the journey toward socialism.

The transformation calls for innovation-driven development. This entails a transition from growth based on government investment and "extensive growth" based on exploiting factors of production to internally-generated growth based on innovation, upgrading technology and human resources.

The new strategy emphasizes fair and open competition. The "Great Transformation" article says a core problem of economic reform is giving privately-owned businesses equal access to factors of production, fair competition in markets, and equal protection under the law. This is described as a great innovation of "socialism with Chinese characteristics."

The author of this article traces the progression back to the third plenum of the 11th party congress in 1978 when it was proclaimed that some need to get rich first. In 1982 the 12th congress decided that nonpublic ownership is necessary and has man benefits. In 1992 it was proclaimed that a diversified economy is a long-term component of development and in 1997 non-public-ownership was declared to be an important part of the economy.

During Hu's reign at the top of China's communist party  in 2002 began with an objective of "shoring up" the publicly-owned economy while encouraging and supporting the private sector. This followed several years of brutal reform and downsizing of the state-owned sector that began in the late 1990s. State-owned companies got access to bank loans, stock market listings, land, subsidies, and monopolies in some industries, prompting the "state comes in, private leaves" slogan in recent years.

The equal access strategy calls for breaking monopolies and lowing barriers to entry for private companies. It calls for a multi-level financial system that would presumably include another tier of banks that would lend to the private sector beneath the state-owned banks. The private sector should get equal access to resources and capital, says the "Great Transformation" article. It says the government should clarify its responsibilities and return to its original purpose. This seems to mean the government should become an impartial regulator, not a participant in business or a picker of winners.

This strategy will be hard to implement since the government has been busy giving state-owned companies a leg-up in many sectors. Agriculture and food sectors lack the real behemoths that dominate telecommunications, steel, railroads and banking. The feed and meat industries have a number of big private companies that got their start in the 1980s and '90s. However, the government has been busy trying to create big state-owned industry champions from the rump of the state grain-trading entities that originated during the central planning period. One reason for supporting these companies is to prevent domination of grain-trading, vegetable oil processing, seed breeding, and other industries by multinational companies. The handouts the state-owned companies get, including guaranteed loans from state-owned banks and help listing on Chinese or foreign stock markets, give state-owned companies guaranteed cash flow while private companies and farms have to start from nothing and compete against these behemoths.

Owners of monopolies have a strong interest in maintaining and strengthening their monopolies and other licenses to make easy money. For example, China has set aside a certain portion of tariff rate quotas to import several major commodities for state-owned enterprises. Ninety percent of the quota for wheat imports is reserved for state-owned companies. The other 10 percent is divided up among hundreds of applicants while one or two companies get the state-owned portion. That means if you want to import wheat you have to buy it from a state-owned company. These quotas are now becoming valuable as Chinese commodity prices move above world prices. The import quota system ultimately is a handout to COFCO and Sinograin. Are they going to give this up?

"Corporations" established to manage grain reserves get subsidies to buy and hold grain bought under price support programs. The government established a policy of raising prices every year which conveniently eliminates all downside risk of holding commodities. News media say that the grain reserve corporations make all their money from subsidies for holding reserves. They have little interest in making money from grain trading like private companies do.

Access to land is another handout to state-owned companies. On paper, rural land is owned by "collectives" which means no one really has concrete rights to it. The communist party rulers become the de facto owners and can expropriate it and sell it to a company (that party leaders likely have a financial interest in) at a low price at will. The company is happy to develop cheap land, sell it or borrow against it and pay taxes to the local government as a kickback. Who is going to break up this arrangement?


Funneling money to state-owned companies has been an integral part of the government's strategy to  address problems like lack of innovation, food safety, and lack of infrastructure highlighted in the 18th party congress's plan.

What companies can afford "innovation", i.e. to hire PhDs, do R&D, buy expensive equipment, take trips abroad and attract overseas investors? Big state-owned companies.


In July agricultural officials convened a "modern agriculture" meeting in Heilongjiang where the China Development Bank pledged to shower cash on state-owned farms in that province to help them buy big tractors, airplanes to spray pesticides, and fancy irrigation systems.

In many industries, strategic plans call for raising the threshold for entering the industry. That means keeping out under-capitalized companies or shutting down companies that lack food safety testing capabilities, up-to-date facilities, and expensive certifications. The well-capitalized state-owned companies are left standing. About half of dairy processors were shut down last year in a re-licensing campaign and there are plans to consolidate industries like pork processing and seed breeding.

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