Home' Trinidad and Tobago Guardian : September 13th 2015 Contents SBG14 CHINA
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt SEPTEMBER 13 • 2015
"There are no genuinely private companies
in China," declares a veteran adviser to multi-
In one sense he is right.
The state and the party are omnipresent and
their role is enshrined in the law. Moreover,
as Kent Kedl of Control Risks, an investigative
firm, said, "You don t become successful in
China as a purely private entity. You need a
powerful connection. But this can prove an
asset or a liability."
Cronies of Bo Xilai, a once-powerful Com-
munist Party leader who is now in jail, know
this only too well.
To find out whether a given local firm is
likely to behave like a state champion or a mar-
ket-minded entity, you need to ask three ques-
First, how strategic is its industry? Peter
Williamson of Cambridge University s Judge
Business School said the government will always
meddle with firms in industries it sees as strate-
gic, even if they are multinationals.
But the opposite is true, too. State firms that
operate in sectors of little concern to the gov-
ernment can behave like private ones. Gree
Electric, which makes appliances, is state-
owned, but Dong Mingzhu, its fiercely inde-
pendent boss, has transformed it into a highly
Second, who decides on pay, promotion and
hiring? For big state-owned enterprises like
Sinopec, an oil giant, the party s organisation
department deals with senior executives. Jack
Ma, Alibaba s boss, said he believes that if the
board and top executives are selected by share-
holders, the firm is private.
Looks can deceive. The Chinese Academy
of Sciences still controls about a third of Legend
Holdings, a giant conglomerate founded by Liu
Chuanzhi, which seems to make it a SOE. But
thanks to shareholding reforms introduced by
Liu, its management is independent.
Yang Yuanqing, the boss of its offspring,
Lenovo, said many of his company s top man-
agers have been foreigners: "If the government
controlled our firm, this would never happen."
The trickiest question concerns the firm s
relationship with the party. Some business
leaders proudly don the red hat. Wang Jianlin,
the billionaire boss of Dalian Wanda, a vast
private-sector conglomerate, was born an elite
"princeling" and cunningly cultivates connec-
tions. Many of his group s divisions, ranging
from films to theme parks, fit with the lead-
ership s desire to promote soft power. This "is
very beneficial," he said, as his firm gets "more
financial support and especially policy sup-
But just because an entrepreneur has good
guanxi (connections) does not mean the party
controls his firm. SOEs enjoy huge advantages,
which forces private firms to get close to the
party if they want to succeed, said Scott
Kennedy in a report by Gavekal Dragonomics.
"China s entrepreneurs are more pink than
red," he said.
If employees are party members, where do
their loyalties lie? Kedl found that the party
units within companies are usually pretty
benign. Ma of Alibaba, who is not a Commu-
nist, said party members are among his top
employees. Liu said the same about Legend.
Then the man who has done most to modernise
business in China dropped a bombshell: He
revealed that he is the head of his firm s party
After a summer of tumbling
stock markets and gloomy
data, the Chinese econo-
my has the rest of the
world on edge. The value
of imports sank by 14.3
per cent in August year on year, reinforcing
worries that a sharp slowdown is under
way. Those years of double-digit growth
are firmly in the past.
The question many ask is whether China
can find a new model of growth to replace
the old one. The good news is that it already
exists. It is called the private sector.
The private sector has created almost all
new urban jobs in the past decade, and now
employs about four-fifths of urban workers.
Average growth in output at private industrial
firms since 2008 has been double that seen
at state-owned enterprises (SOEs). The
returns on assets at private firms are higher
than those at SOEs, where they are below
the cost of capital.
The country s manufacturing sector, which
is almost entirely controlled by private firms,
remains the world s most formidable: China s
share of global exports rose from 11.5 per
cent in 2011 to 14.3 per cent in June.
Important as private firms already are,
the onus on them to propel China s economy
forward will only grow, for three reasons.
The first is China s transition away from
investment-led growth and toward con-
sumption-led industries and services. SOEs
have been central to China s long investment
boom: They account for perhaps a third of
capital spending, against a figure of 5 per
cent or less in most rich countries.
Consumer industries, by contrast, are the
province of world-class private enterprises
such as Tencent, an online-gaming and
social-media giant, and Xiaomi, a smart-
Second, China needs to become more
inventive. McKinsey Global Institute, a
think-tank, estimates that if China is to
sustain annual growth of 5.5-6.5 per cent
until 2025, a third to a half of this increase
must come from improvements in total fac-
tor productivity---essentially, innovation.
China s nimble entrepreneurs are brilliant
at coming up with new products and services
to cater to exacting consumers: a Chinese
firm commands half the burgeoning global
market for commercial drones, for example.
Chinese businesses are also good at busi-
ness-process innovations designed to
The third reason for thinking that private
firms will become more central is that
China s debt-driven growth model is sput-
tering. The SOEs are the channels through
which much official credit has been shoveled
into the economy, often aimed at white-
elephant projects. The average debt-to-
equity ratio at state firms is roughly 1.6; at
private firms it is below 0.8.
If China is to keep growing fast, credit
will need to be withdrawn from state-owned
zombies and directed to flourishing private
China s leaders know all this, of course.
The lash of competition is what turned
Chinese exporters into world-beaters. Offi-
cials have publicly vowed to give markets
a "decisive role" in the domestic economy,
The problem for them is that, if China
Inc. is fully to realise its potential, the Com-
munist Party must ease its grip. The tension
between liberalisation and control has long
existed; successful private firms themselves
carefully cultivate good relations with the
party. But the slowdown has sharply raised
the cost of sacrificing output for domi-
Take innovation. China s central planners
are spending more than US$200 billion a
year on research and development, and
want to triple the number of patents award-
ed in China by 2020. But patents and PhDs
get you only so far.
If world-class innovation is to flourish,
private companies must have access to the
best ideas and the brightest people in the
world. Yet the party ultimately controls
what is taught at the country s universities,
and state censors routinely block access to
international websites and useful collabo-
rative tools like Google Docs. China also
makes it too difficult for foreigners to immi-
It is a similar story in other areas. The
government has embarked on much-needed
reform of the SOEs, of China s legal regime
and of the country s financial system.
But conflicts, compromises and questions
On SOEs, the details are fuzzy but reports
this week suggest that the government is
focused on splitting firms into two camps,
one commercially oriented and the other
focused on something vaguely defined as
the public good.
The real problem is that vested interests
inside the SOEs parry reform. Even if the
proposed changes were fully implemented,
they do not go far enough. The leadership
is still loath to see any state-owned firms
go bust, for example.
On the rule of law, the government wants
to curb the meddling of city and provincial
party officials in local courts. That is wel-
come, yet China s legal system and courts
remain subservient to the party.
On financial reform, interest rates are
being liberalised and Internet finance is
vibrant, but what investors will remember
from this summer are the bans on selling
shares and the investigations into market
If China is to sustain strong growth---
and with it the high employment that but-
tresses social stability---the only option is
to encourage more enterprise and innova-
tion. Such dynamism will not come from
stodgy state firms. It can be generated only
by the China that works.
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
The China that works
How red is your
A fruit vendor checks stock prices on his computer while waiting for customers in a market in Hangzhou in eastern China's Zhejiang
province Wednesday, September 9, 2015. Japanese stocks posted their biggest gain in nearly seven years Wednesday, leading other
regional indexes higher, as Asian officials sought to counter pessimism about prospects for markets and economic growth.
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