The usual assessment of Xi Jinping’s performance as China’s leader goes like this: since taking the reins at the end of 2012, he has over-delivered on anti-corruption and underwhelmed on economic reform.
The headlines out of China suggest there is no denying the scale and robustness of activity on the anticorruption front. First, there were the high-profile political slayings of ‘tigers’ such as Bo Xilai and Zhou Yongkang. At the same time, more than 200,000 ‘flies’, or lower level government officials, were swatted. Operation ‘Fox Hunt’ targeted corrupt officials hiding overseas. Next, President Xi moved on to tackling graft in state-owned enterprises. Now he is taking on the military.
Putting a finger on Xi’s economic reform achievements has been harder. What disappoints many China-watchers (particularly those overseas) is that there have not been any big announcements on privatising state-owned enterprises (SOEs) and state-owned banks (SOBs). However, China’s economic reform program has not underwhelmed. Rather, it is continuing to follow its own, highly successful, course.
Here is another way of looking at it.
Do not interpret Xi’s anti-corruption drive as just a political power play. There has been a lot written about how the clampdown is hindering short-term economic growth: sales of luxury brands have slumped and restaurants and entertainment venues have lost their best customers. Government officials are reluctant to issue required approvals for fear of accusations of extending favours. However, according to the World Economic Forum, corruption is still the second most problematic factor for doing business in China today. If China can weed out corruption, the economy will thrive in the long term.
Some commentators are also getting it wrong by confusing privatisation with economic reform. Economic reform is about raising productivity. The leap in living standards in China is proof that productivity has gone through the roof.
One of the great lessons to come out of China over the past three and a half decades is that privatisation is not crucial for boosting productivity — competition is. In 2014, eminent China-economy scholar Nicholas Lardy said that private firms now account for more than two thirds of output, up from nothing in 1978. In manufacturing, their share is four fifths. In addition, in 2012, the World Bank reported that measures of monopoly power across China’s economy are low and declining. In fact, they are lower than in the US.
Even in a limited number of ‘pillar industries’ — where SOEs continue to dominate — the reformers in China’s government have gotten creative. In aviation and telecommunications, incumbents have been broken up and corporatised. Now, there is fierce competition between SOEs.
What about finance, that most stubborn of sectors?
In 2014, lending by the big SOBs increased by RMB4.4 trillion (US$705 billion). But total aggregate financing — the broadest measure of credit in the economy compiled by the central bank — swelled by RMB15.4 trillion (US$2.5 trillion). In other words, even those behemoth SOBs have become minority players.
That serves to make an important point. The critics are right that the SOBs are still there. But they are wrong that they are a serious drain on productivity. SOBs now face more competition than ever before and simply do not control the share of resources that they used too.
In early 2015, e-commerce giants Alibaba and Tencent launched themselves headfirst into becoming serious financial sector players. A Chinese banking regulator pilot program to establish privately owned banks made this possible. The government’s support was on show when Premier Li himself launched Tencent’s new creation. He declared that part of its job was to ‘[force] traditional financial institutions to accelerate reforms’.
Alibaba and Tencent are also going into the credit rating business. Again, that has happened because the central bank opened up the credit reporting market to private firms. Premier Li’s work report earlier this month to the National People’s Congress did not mention privatisation at all. But it was full of references to relaxing market access for private participants.
That is China’s economic reform agenda in a nutshell.
If you are looking for SOEs and SOBs to be privatised in 2015, you will be disappointed. Better to put that to one side and look instead at China’s progress with competition and productivity.
Competition the true marker of Xi Jinping’s economic reforms is republished with permission from East Asia Forum