Explaining China's growing reliance on national flagship companies

NYT story by Michael Wines notes World Bank data saying the China's state sector, after years of declining share of the national economy, is starting to edge back up:

During its decades of rapid growth, China thrived by allowing once-suppressed private entrepreneurs to prosper, often at the expense of the old, inefficient state sector of the economy.

Now, whether in the coal-rich regions of Shanxi Province, the steel mills of the northern industrial heartland, or the airlines flying overhead, it is often China’s state-run companies that are on the march.

As the Chinese government has grown richer — and more worried about sustaining its high-octane growth — it has pumped public money into companies that it expects to upgrade the industrial base and employ more people. The beneficiaries are state-owned interests that many analysts had assumed would gradually wither away in the face of private-sector competition.

New data from the World Bank show that the proportion of industrial production by companies controlled by the Chinese state edged up last year, checking a slow but seemingly inevitable eclipse. Moreover, investment by state-controlled companies skyrocketed, driven by hundreds of billions of dollars of government spending and state bank lending to combat the global financial crisis.

Besides the obvious explanation of the huge stimulus package, I would cite three other key trends:

1) the push to jump-start industrial development of the second-tier cities;

2) Beijing's fears about access to raw materials means it's pushing national companies to lock-in a lot of assets while it has the bank account to do so; and 

3) the shift to trying to rely more on domestic demand has incentivized Beijing to champion national flagship companies (however "red" their affiliation) at home so as to be able to dominate expanding market spaces.

These are all great temptations and normal strategies for this point in China's developmental trajectory.  Will they overcome the general trend toward more reliance on markets?  Perhaps for a while but then these strategies will contribute to an overall stagnation of growth simply because they favor the inefficient over the more efficient.

But here the thing to remember:  most development paths consist of two steps forward and one step back. Linear projections are always wrong.

Comments

[David Dunn]

The reason China want's to stimulate their economy is to avoid an economic downturn which could threaten the CCP grip on power. From personal observation Chinese state-run enterprises make decisiions based on two criteria: what helps the decision-makers to look good and get promoted and what helps the decision-makers to personally profit. The decision-makers rarely have the best perspective on what makes the most sense for the company but they are good at knowing how their decisions will work out pollitically and what benefits them most. I've seen how state-owned companies work in Taiwan and it's quite different. In China the benefit of the company counts for very little and accountability is avoided. (I could talk a long time about how accountability is avoided in the power industry.) There are political considerations in decision making for Taiwanese companies but they're not the only consideration. My guess is that state control in countries with poor values is the worst of all worlds. I am inclined to believe the dissidents interviewed in Ian Buruma's book "Bad Elements" are correct that China's fundamental weakness is a lack of values. (Many suggest religion as a way to grow those values.) How is it that China has so much weaker values than Korea, Taiwan and Japan, which China may sometimes be compared to? 1. China did not try to consciously learn from the west as these three did. 2. Korea, Taiwan and Japan did not experience the cultural value disruption of communism and the cultural revolution.