China’s industrial policy should think small
According to a recent Chinese study, the country’s 500 largest companies now account for more than three-quarters of its gross domestic product. That sounds an impressive testament to the scale of the nation’s industrial transformation. However, like many other Chinese data, it is misleading.
Corporate revenues are turnover. GDP, by contrast, measures value-added, the stuff of wealth creation. On that criterion, the economic contribution of China’s top companies would be far smaller. The study does not estimate it, though it admits that their productivity still lags far behind US levels.
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The study is nonetheless revealing because it embodies two strands of prevailing Chinese thinking about business. One is the conviction that bigger means better. The other is an almost knee-jerk tendency to look to the US as the model and benchmark of corporate success.
Officials commonly assert that, as an emerging superpower, China must have its own General Electrics and Microsofts. Big western companies attract palpable admiration from Beijing bureaucrats. Such attitudes are not unique to China. What is striking is how energetically it has sought to act on them.
In the past decade, weak state enterprises have been shut, while the survivors have imported modern management and accounting techniques. State-led restructuring has consolidated “strategic” sectors such as steel, telecoms and energy. Oil companies have scrambled to acquire reserves abroad, in imitation of western majors. Lenovo has sought to become China’s IBM by buying the latter’s personal computer business.
The shake-up has benefited corporate performance. Overall, however, it brings to mind one of those Chinese-made cars that superficially resembles a dated Japanese or western marque. Beneath the bodywork, it soon becomes clear that it is not the genuine article. Likewise, the core of China’s new industrial order has not been shaped by the free play of market forces, but is a bureaucratic construct.
Yasheng Huang of the MIT Sloane Management School argues in a forthcoming paper* that China’s economic reforms differ fundamentally from those in transition economies such as Russia and central Europe. Their goal was to institute capitalism; China’s is to preserve socialism. Instead of mass privatisations, China has opted for selective liberalisation that has favoured foreign investors over local entrepreneurs.
The exact reach of state ownership is much disputed. Professor Huang reckons only 14 per cent of fixed assets are in private hands
