Revisiting the developmental state 3: Fitting China into the debate

The key questions are how much China’s hybrid state and market economic structure is really focused on development and whether it is sustainable

Where you think you are can depend on where you came from.  If you start mentally in the ‘liberal west’ and then go to China, the Chinese economy is much more state-guided and coordinated (and, indeed, state-owned) than your starting point.  However, if you start from China’s (fairly recent) past – let’s say the beginning of the 1990s – then the startling thing about the country is not the pervasiveness of the state, but the extent of the role played today by market and private actors in directing economic activity when compared to the past.

And it’s not a case of one perception being wrong and the other right.  The transition from socialism in China has created an economy where the market and the private sector is the main source of growth, employment and profits.  Where the state used to set prices for goods and commodities, they are now overwhelmingly priced as a result of supply and demand.  It is for this reason that some have concluded that China should be viewed as having a market economy, rather than a form of state capitalism.

But equally, state ownership remains dominant in what used to be called the commanding heights of the economy (like energy or transportation), sectors that impact on much of what happens elsewhere.  These State Enterprises receive significant support in terms of tax breaks, financial transfers and other forms of assistance that places them in a privileged position in the Chinese market – and also, through outward investment, in some non-Chinese markets too.

Moreover, if you search through the ownership details of many nominally private companies, you often end up back with a state-owned company at the apex of a complicated ownership pyramid. The financial system also remains heavily influenced by the state (albeit supported by a large and growing informal financial sector that has emerged to serve those who struggle to get what they want through the formal system).  Take the Commercial Bank Law, one of the clearest examples of what at times appears to be a rather tenuous balance between the state and the market as drivers of the Chinese economy.  It mandates banks to consider commercial criteria before extending loans, but also insists that they ‘conduct their business of lending in accordance with the needs of the national economic and social development and under the guidance of the industrial policies of the State’.

Crucially too, land remains state-owned and controlling who uses it has become a major source of local government finance. At the local level, the relationship between the state, local enterprise and local financial institutions can be very intimate indeed.  These relationships also vary significantly from one location to another, suggesting importantly that we should not talk about a single Chinese model of state developmentalism, but rather varieties of them ranging from areas where the private sector dominates (like Zhejiang) to more statist and mercantilist parts of the country.

Amidst all of this complexity across a huge country, can we identify a more fundamental philosophy that informs the state-market relationship in contemporary China?  Deng Xiaoping referred to the plan and the market as being ‘just economic means’, which raises the question of means to what end. The answer is regime legitimacy and stability.

The market is allowed to flourish as long as it does what it is meant to do by providing growth and all that growth brings.   In the process, other actors, including those who retain close contacts with the state, can follow their own objectives and even utilise the state’s strategic concerns to pursue personal commercial profit-based agendas.  However, the market isn’t trusted to do all that the leadership wants to it do, at least in ways that are politically palatable.  Crucially, the threshold at which the market is deemed to be failing, and at which the state is willing to intervene, seems rather low in China compared to other countries.  It certainly doesn’t take a full-blown economic crisis like the one that spread from the West to China in 2008-9 to spark a concerted state effort in response (though the extent of that response showed just how powerful the state remains when it needs to be). For example, China’s leaders have been careful to ‘protect the interests of farmers’ if the market fails to provide them with decent prices for their produce.  More generally, too, the state has still concertedly sought to get growth rates – which other countries would consider highly acceptable – even higher.

This strong desire to maintain high growth levels generates two important questions.  Is the Chinese economic structure really focused on development, and is it sustainable?  My answer to the first question is ‘not as much as it might be’.  Hu Jintao (the Chinese Communist Party leader from 2002-12) officially recognised the need to worry less about raw growth figures and more about whether growth was used, in his exhortation, to ‘put people first’ and develop a ‘scientific concept of development’.  Certainly, more could still be done to provide the guarantees of decent (rather than universal but not extensive) education opportunities, health care and welfare in old age that China’s poorest citizens still lack.

In addition, while there have been some Chinese economic breakthroughs, overall the results have been somewhat disappointing, given the amount of money spent on innovation: a disappointment reflected in a determination to do things much better in the future as set out in the new ‘Made in China 2025’ strategy.  Finally on this developmental point, as China’s leaders have acknowledged, growth has been achieved at colossal cost to the environment and the health of millions of Chinese citizens.

My answer to the second question about sustainability is ‘probably’ – and notwithstanding the fact that, since responding to the global financial crisis, continuing Chinese growth has come with a significant increase in debt.  At the same time, real estate and property prices have continued to rise, making the cost of accommodation relative to income in many Chinese cities amongst the highest in the world.  In other words, at both the macro and household level, there is considerable uncertainty about the future, with economists divided over whether or not the state has the financial wherewithal to cope with this debt and prevent a financial crisis.

As indicated, my guess is that it probably can in the short term (though dealing with current debt is not the same as undertaking a structural shift to prevent it building up again in the future).  Stabilising (let alone lowering) real estate and property prices without harming the personal finances of millions of ordinary Chinese citizens might prove even more of a challenge.  Debt also impacts on local government finances and, although this is not as high profile as potential financial and/or property crashes, sorting out the way that local governments are funded (at the moment, underfunded) is one of the fundamentals that China simply has to get right if it is to lay the foundations for more sustainable growth patterns in the future.

Perhaps even more central is the extent to which its political leadership is prepared to deal with the potential political consequences of the shift to a (s)lower growth rate and mode it thinks is economically essential in the long term.  Ultimately, the key might not lie in the economic realm at all, but rather in finding ways that legitimise one-party rule and the nature of the current regime that do rely less than they did in the past on the attainment of high growth as an indicator of success.

This article is the third in a new SPERI Comment series on revisiting the developmental state. Read all of the articles in the series so far here