China’s Highly Unequal Economy-II

qdl library 2011-08-07

展开全文

China’s Highly Unequal Economy

By Victor Shih

And, lest we begin to think of China as a dynamic market economy, the latest data showed that of the 27.8 trillion yuan in fixed asset investment, 15 trillion was accounted for by investment undertaken by state-owned enterprises or investment in real estate. Even among the ‘joint stock’ firms, many are actually state-controlled. Thus, at least in terms of investment, the state still controls the lion's share. Meanwhile, well-financed state owned enterprises have nationalized firms in the coal, automobile, and steel industries in recent months, meaning competition and efficiency in these sectors might actually have suffered from large-scale, state-led investment.

Why does China have an economy that is highly unequal and dominated by the state? The answer is quite simple when considering China’s political system and contemporary history. Despite economic reforms that liberalized goods markets and the labour market, the state continues to hold a tight grip over most of the financial institutions. The financial sector in essence takes money from foreign exchange earnings and from household savings and channels it to state-owned firms controlled by the central or local government. Having little choice, households in China must deposit money in the state banks, and when there’s inflation as there is today, they earn a negative real interest rate from the banks because the government fixes deposit rates at a level that is below inflation. Meanwhile, real estate developers with political connections and large state-owned enterprises can borrow money at interest rates that are near zero in real terms. In effect, the Chinese financial system channels wealth from ordinary households to a small handful of connected insiders and state-owned firms. To be sure, other Asian countries have also pursued this state-led financing model. But China has pursued it for the longest period of time. Meanwhile, there’s still no liberalization of the financial sector in sight.

At the local level, local governments confiscate the other major source of wealth—land and real estate holding—often giving residents illegally low compensations. Without political accountability and elections, ordinary people can do little to change what amounts to property theft. Even escalating welfare spending in recent years can’t make up for the large transfers of income and savings from ordinary households to the wealthy and connected, which are shaped by government policies.

As a result of all this, ordinary households actually get poorer in relative terms and even in absolute terms. Meanwhile, although growth appears robust, the nature of the growth has changed over time. As Yasheng Huang at the MIT Sloan Business School has documented in his Capitalism with Chinese Characteristics, the healthiest period of growth in China was in the 1980s, when farmers made and sold light manufacturing goods and agricultural outputs to rapidly emerging goods markets. Into the late 1990s, however, China ‘restructured’ its banks so that they could continue to channel cheap loans to state-owned behemoths, now even larger due to consolidation in the 1990s. Growth from that point increasingly relied on net exports and state-led investment and decreasingly on household consumption. Although growth of this sort can continue for a few more years, the vast majority of China’s population won’t see many of the benefits.

Victor Shih is associate professor of political science at Northwestern University and author of ‘Factions and Finance in China’ (Cambridge University Press).