Samuelson: Alibaba IPO signals new era in Chinese capitalism

Robert Samuelson

WASHINGTON – Alibaba, China’s giant e-commerce firm, is a harbinger.

We are going to see more Chinese firms venturing out onto the world stage. The most ambitious are no longer content to operate just in China or act as manufacturing contractors for well-established American, European and Japanese brands. More and more of them will raise money in global capital markets (as Alibaba did in its “initial public offering” of stock), acquire foreign firms and set up foreign manufacturing and distribution operations.

It will be tempting to view this expansion as the next phase in China’s state capitalism: a consciously orchestrated move by the government and the Communist Party to increase Chinese influence and market power abroad. This is at best a simplification and at worst a mistake. The more likely explanation is that privately owned Chinese firms – albeit with the blessing of the party – want to be global players for their own reasons.

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State capitalism is often viewed as China’s ability to control the economy through its state-owned enterprises, which receive preferential bank loans and government subsidies. Indeed, China’s leaders have sometimes attempted just that. But the reality is murkier: These efforts have usually failed and private companies have been China’s main engine of economic growth. So argues economist Nicholas Lardy of the Peterson Institute in a new book, Markets Over Mao: The Rise of Private Business in China.

Since 1978, when premier Deng Xiaoping launched China’s economic reforms, there have been two basic transformations of the economy, Lardy writes. The first has been the shift of pricing decisions from government agencies to the marketplace. In the late 1970s, few prices were set in the market; by 2003, more than 95 percent of retail and food prices were established by private buyers and sellers. Some prices – for gasoline, electricity, water, railroad freight, postal services and telecommunications – are still government controlled, but these exceptions are “commonplace in other market economies,” Lardy notes.

In economic theory, market pricing promotes efficiency and growth. Prices rise for products or services in short supply, prompting existing producers to expand or new companies to form. Similarly, competitive pressures favor efficient over inefficient firms, rather than imposing identical prices on both.

The second major transformation, Lardy says, has been the steady shift of production away from state enterprises to private companies. This, too, favored efficiency and growth, because private firms have greater incentives to maximize profits by keeping costs down and providing products that meet market demand.

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An impressive array of statistics buttresses Lardy’s conclusion. By 2011, state-owned companies represented only 26 percent of China’s gross industrial output, down from nearly 80 percent in the late 1970s. In 1978, private employment – mainly small mom and pop firms – was less than 1 percent of the total in urban areas. Now it’s about two-thirds, estimates Lardy. (Note also that these figures exclude farm workers and employees of foreign-owned firms; both are overwhelmingly private.)

To be sure, many powerful state firms, most prominently three huge oil companies, endure. But the gradual expansion of private firms will continue, Lardy argues, for one compelling reason: Private firms are more profitable than state firms. That gives them more retained earnings from which to finance new investment; this more than offsets state firms’ preferential access to bank credit and government subsidies. In 2012, Lardy reports, private firms’ rate of return on assets – a broad measure of profitability – was nearly triple that of state businesses: 13.2 percent versus 4.9 percent.

State capitalism is an elastic term; it can mean whatever people choose it to mean. Lardy has debunked one common version: that the state-owned businesses enable the government to guide economic growth. But he hasn’t dispensed with the important question of the nexus between the Communist Party and China’s businesses. As he notes, the party has eagerly recruited entrepreneurs as members, and entrepreneurs have often eagerly sought to use party connections to advance their business interests.

Who dominates and for what ends? As Chinese business expands abroad, it’s still an open question how much they are driven by commercial interests and how much they serve as instruments of state policy. Similarly, it’s unclear whether or how much, in its domestic laws and regulations, China discriminates against foreign firms to give local companies an advantage. But these are questions for another day.

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Robert Samuelson’s column is distributed by The Washington Post Writers Group.