An unapologetic Socialist friend of mine e-mailed me two insights recently. The first one was that China is not a Socialist country – he didn’t want his pie-in-the-sky economic model tainted by the practicalities of Maoism and the Chinese version of the gulag – and the second one was that mercantilism is dead. Both insights are partly true and partly untrue. China’s economic model is a state-driven one, much more so than that of Anglos-Saxon countries. This is a Socialist practice, but it is also similar to the models once practiced in pre-modern France and Prussia. And also, closer to home and in history, in Japan, Taiwan and South-Korea. The modern Chinese economic model has many traits of both European classical mercantilism and the Asian version of the ‘tigers’ of the 1960s till the 1990s. The Chinese Communist Party calls it Socialism with Chinese Characteristics and it is arguably the most successful form of Socialism ever practiced, measured by living standards.

According to a working paper for the American National Bureau of Economic Research, Chinese state-owned companies are not the inefficient Soviet-style monoliths of old. Researchers Chang-tai Hsieh and Michael Song present new evidence in the long-running debate about what fuelled China’s decade long ‘industrial revolution’.

Photo: Wikimedia Commons.

The working paper’s title Grasp the Large, Let Go of the Small: The Transformation of the State Sector in China, is an allusion to the Fourth Plenum of the Chinese Communist Party in 1999, when Beijing announced plans to merge large state-owned enterprises and allow them more freedom to find profits, while simultaneously dismantle lesser SOEs. In the 10 years that followed industrial output by SOEs fell from 50 to 30 percent. Many economists and observers of China’s transition saw this as the triumph of the private sector.

The authors calculate that the surviving state-owned enterprises fueled a disproportionate part of the rapid economic growth that followed. In the second part of the previous decade the government also created new SOEs to compete both internally and internationally, which added another wallop of economic growth. Mercantilism, in its new form of Socialism with Chinese Characteristics, seems to work. In fact, Dani Rodrik of Princeton University calls China ‘the torch-bearer of modern mercantilism’.

The digest of the NBER quotes the changes at Baoshan, a large steel manufacturer in Shanghai, as illustrative. In 2000, the company was “closed” and all its assets transferred to a corporate entity, Baoshan Company Ltd., which became publicly listed on the Shanghai Stock Exchange. Private investors can own the stock, but Baoshan and five other Chinese steel manufacturers became part of the BaoSteel Group. BaoSteel, which is wholly owned by the Chinese central government, controls 75 percent of Baoshan’s shares. Its senior executives are appointed by the Organization Department of the Chinese Communist Party. The company has thrived. Total sales rose sixfold, profits soared more than 20-fold and Baoshan is now China’s largest steel producer and the second largest in the world.

The busy Nanjing Road in Shanghai. Photo: Wikimedia Commons.

But with the housing boom nearing its end and the Chinese stock markets in turmoil, I would hold off on investing in Baoshan right now.

The working paper seems to conclude that the Chinese model of a state-driven economy actually works despite all our western ideas about sound economic models – and the perennial truth that ‘Socialism does not work’, as I keep reminding my friend. This research, at first glance, seems to play into the hands of the many western admirers of the Chinese model. There are, however, two arguments against concluding too quickly that China’s hybrid of Socialist central planning and market capitalism is a winning formula of new mercantilism.

The first argument lies in the size of the private sector. Just how large is China’s private sector compared to the SOEs? It would be easy just to look at the size of firms officially classed as private. But this would miss joint enterprises that are controlled by private shareholders; it would also ignore the thousands upon thousands of mom-and-pop companies with revenues below 5m yuan ($163,000) that only show up in more obtuse data sets in the already murky waters of Chinese statistics. Nicholas Lardy, author of the deliciously alliterative Markets over Mao, suggests the share of China’s private sector is understated in official statistics, and official statistics is virtually all that Hsieh and Song were able to use for their working paper.

Pedestrian crossing in Tokyo. Photo: Wikipedia Commons.

The second argument is that mercantilism only works for a while. When the Japanese model of a symbiosis of state and business was heralded as an alternative to ugly Anglo-Saxon capitalism, some more sanguine observers saw inefficient and oblique power structures and predicted an economic slump. Karel van Wolferen’s The Enigma of Japanese Power came out in 1989 and it criticized both the Japanese power-players and their western cheerleaders. At the time it was seen as overly critical of Japan and not critical enough of western models. Then came the Asian economic crisis and Japan has never truly recovered. This could very well be China’s fate if, or even before, the country reaches an income level comparable to that of Japan in the 1980s. To their credit, Hsieh and Song do not predict a golden future for Chinese SOEs into the era of what Premier Li Keqiang calls ‘the new normal’ of less economic growth and consolidation.

The economic model of that Japan, South Korea and Taiwan employed to industrialize and compete globally had many western admirers in the last decades of the twentieth century. In the twenty-first century we have Daniel A. Bell who posits in The China Model that Chinese meritocracy is superior to western democracy and Martin Jacques, who became the chief apologist of the new rising China after the publication of his When China Rules the World. We are forever looking for alternatives to capitalism, we seem destined to bite the invisible hand that feeds us, as financial journalist Peter Foster puts it. With regards to China we must wait and see how the Chinese Communist Party continues down the ever-narrowing path of economic reforms without political liberalization. Historically, mercantilist supertankers have proved too difficult to steer away from the cliffs.

Alexander Zwagerman

Alexander is a lecturer at the Arnhem Business School in the Netherlands and a fellow of the Sima Qian Foundation, advising governments and businesses about how the rise of China affects the global economy. With over ten years of work experience in China, he has written extensively about Chinese business and how free market solutions would solve many of China's problems. He has published books and articles in Dutch and English. On Press Freedom Day 2016 a Dutch collection of his essays was published by Pharos publishers and the proceeds were donated to HKFP.