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Guo Jin, Min Tui (国进民退)

August 30, 2010

Michael Wines has an excellent report in today’s New York Times, about the rising dominance of China’s state-owned enterprises, at the expense of the once-vibrant private sector.  Although partly an unanticipated consequence of China’s big stimulus push, he notes, the trend may — to some degree — reflect a more profound shift in philosophy:

Once eager to learn from the United States, China’s leaders during the financial crisis have reaffirmed their faith in their own more statist approach to economic management, in which private capitalism plays only a supporting role.

“The socialist system’s advantages,” Prime Minister Wen Jiabao said in a March address, “enable us to make decisions efficiently, organize effectively and concentrate resources to accomplish large undertakings.”

The trend has given rise to a catch-phrase among Chinese entrepreneurs: “guo jin, min tui,” or “the state advances, the private sector retreats.”  (The rough ambiguity of the characters could also suggest “the nation advances, but the people fall behind”).  Or as one official quoted in the article colorfully puts it, the new policy amounts to “leaving the private sector drinking the soup while the state enterprises are eating the meat.”

Wines cites China’s airline industry as a revealing, concrete example:

Six years ago, the central government invited private investors to enter the business.  By 2006, eight private carriers had sprung up to challenge the three state-controlled majors, Air China, China Southern and China Eastern.

The state airlines immediately began a price war. The state-owned monopoly that provided jet fuel refused to service private carriers on the same generous terms given the big three. China’s only computerized reservation system — currently one-third owned by the three state airlines — refused to book flights for private competitors. And when mismanagement and the 2008 economic crisis drove the three majors into financial straits, the central government bought stock to bail them out.

Today, only one private competitor remains.

The implications of this shift depend on who you talk to.  Columnists like Thomas Friedman have hailed China’s ability to make state-led investments in infrastructure and technology.  As Wines observes:

Those who see little evidence of an expanding state sector generally believe that China has a decade or more of robust growth awaiting it before its economy matures. Theirs is a Goldilocks view of state intervention — not too much or too little, but just enough to push a developing economy toward prosperity.

The skeptics have a darker view: they believe distortions and waste, in no small part due to government meddling, have resulted in gross misallocation of capital and will end up pushing growth rates down well before 2020. What drives their pessimism, the skeptics say, is that China, like Japan a generation ago, has too much confidence in a top-down economic strategy that defies conventional Western theory.

Anyone who reads this blog regularly knows I fall into the skeptic camp.  Which leads me to mention another excellent article, an op-ed by Chrystia Freeland in today’s Washington Post called “China’s economic model isn’t the answer for the U.S.”  She raises a number of important points, regarding the link between freedom and innovation, that I couldn’t agree with more.

As for China, my concern is that its leaders, its policy-makers, and to some extent its people have forgotten what made the economic miracle of the past 30 years possible.  It was not the product, as is commonly portrayed these days, of a series of five-year government plans, in which entrepreneurs played their cooperative but subordinate part.  It was the courageous and far-sighted decision, on the part of China’s leaders, to get out of the way and allow the Chinese people to create better lives for themselves — starting with the humble step of allowing farmers to grow and sell their own surplus crops.  When the state advances, and the people retreat, China wanders and backtracks on the very path that has led it to accomplish so much.  I’ve seen remarkable things these past 30 years, an incredible transformation, and I believe even more remarkable things are still to come in China — but not if it keeps heading in this direction.

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21 Comments leave one →
  1. Terry Crossman permalink
    August 30, 2010 11:49 pm

    I agree with you wholeheartedly and had much the same reaction when I read that article earlier. In some ways, I felt like it sadly signaled the beginning of the end of China’s economic miracle. They are still wedded to their intellectually arrogant belief in their ability to control and manage stemming from their marxist/socialist beliefs and combined with a good dose of Keynesian fallacies. They have gigantic economic problems looming as you well know, not only bubbles but major inflation as well. My one item of faith in the future, is that the entrepreneurial genie has been let out of the bottle and can never be suppressed to the degree it was in the past and the government here is still practical enough to drop bad policy when things start to turn sour. The soup drinkers will always aspire to eat the meat.

    When studying China’s economy from the 50′s through the 70′s in college, my professor often pointed out the tightening and loosening cycle in govt. policy with regard to private endeavor and we can only hope that as SOE’s start to fail and incur even greater debts and as unemployment grows even greater that the government will be wise enough to place fiscal limits on the SOE’s and once again turn to the private sector to save their sorry ass in order to preserve social harmony.

  2. Hua Qiao permalink
    August 31, 2010 8:22 am

    The story of the attempts at creating a competitive private sector airline is a good example at what should be of grave concern to foreign firms wanting to do business in China. These are not so subtle examples of how easy it is to tilt the playing field.

    If equal treatment of competitors is not evident amongst mainland firms, does anyone think for a minute that foreign firms attempting to compete will be treated any better?

  3. David permalink
    August 31, 2010 10:50 am

    I was starting to wonder myself when the Chinese leadership would starting getting cocky from their capitalistic successes and revert to trying to “improve” on freedom. I guess the answer is “now”.

  4. Karen permalink
    August 31, 2010 11:02 pm

    This is scary stuff, because the Chinese Communist Party doesn’t have the durable source of political legitimacy that democracies have, and has been relying on economic success and jingoistic patriotism as its “selling points.” If the first of those goes off the rails, how will the Politburo react? I hope not by switching too much of their focus to jingoistic patriotism!

  5. greg permalink
    September 1, 2010 12:34 am

    China Asks C.E.O.’s to Work for State

    http://www.nytimes.com/2010/08/31/world/asia/31hire.html?src=me&ref=world

    So the State-Owned Assets Supervision and Administration Commission is recruiting senior executives for these large SOEs. I wonder if there are foreign executives interested in these jobs at all – it would be a huge challenge.

    • Terry Crossman permalink
      September 1, 2010 9:35 am

      Great link Greg, thanks.

      It would be a huge challenge and not at all likely that they would hire a foreign executive for anything other than “window dressing”. I am an executive search consultant and have known many professional Chinese managers who have been successful working for MNC’s who have tried going back to SOE’s out of some sense of patriotism and usually gave up within 6 months! Their reasons were mostly due to the stultifying management and political culture within such organisations and a feeling that they were totally unable to make a difference and unable to institute real reform based on international best practices.

      I loved the comment that was censored about returnee prince-lings and princesses.

      @huaqiao – great point on tilted playing fields!

      • Hua Qiao permalink
        September 1, 2010 11:36 am

        For further understanding, read The Party by Richard McGregor, a Financial Times reporter previously located in Beijing. After writing the book, I don’t think he is allowed back in the country.

  6. Tim Teng permalink
    September 3, 2010 6:01 am

    Just one question to all:

    How many privately held (i.e. deep pocket) entities can take on the multi-pronged, trial/error (and very likely money-losing) challenge of green-energy revolution- if it’s up to the marketplace (i.e. profit-motive only) to determine its fate?

    • prchovanec permalink*
      September 3, 2010 8:45 am

      You’ve just described the entire premise of venture capital. Invest in 10 high-risk companies, maybe 5 will fail, 3 will break even, and 2 will be hugely profitable. The model has proven successful in developing a wide range of high risk, hit-and-miss type industries, such as IT and biotech. In the past few years, a lot of VC money has flowed into green energy ventures.

      The notion that the only way to diversify risk is to socialize risk just doesn’t hold water — especially when you’re talking about the development of highly commercial technologies.

  7. Karen permalink
    September 5, 2010 3:31 am

    Venture capital is all well and good, but only up to a certain scale of effort. If we had left the running and financing of World War II exclusively in their hands, that effort would have been a mere shadow of what was actually accomplished – by government, of course. All really huge efforts through history, as far as I know, have involved governments mobilizing the resources of the entire society.

    That said, I suspect the “green energy revolution” probably doesn’t have to be pursued with quite that level of commitment to be effective.

    No, the main reason government has to be involved in pursuing the green energy revolution is that the G.E.R. is an effort to correct a problem of the commons (climate change), in which the costs of actions are socialized while the benefits accrue to the private actors (those who burn cheap dirty coal, for example).

    Another good reason for government involvement in some countries would be the preservation of autonomy/freedom of action in world affairs. A country that depends on untrustworthy foreign sources for its vital energy needs opens itself up to coercion by those foreign sources.

  8. Mike permalink
    September 5, 2012 10:32 am

    Japan!?

    The Japanese economy did very well when it was more directed. It was only after they liberalized the economy that the it went bust.

Trackbacks

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  5. The Truth About China: An Economy On The Verge Of A Nervous Breakdown « InvestmentWatch – The best source of news, analysis, and intelligent discussion
  6. Chen Ying » Blog Archive » 国进民退- Guó Jìn Mín Tuì
  7. China's Politics In Rare Bloom - Forbes
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  9. Which way for China – part two « Michael Roberts Blog
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