State Capitalism: Reason for Worry?

Founder and editor-in-chief of Caixin and Century Weekly Hu Shuli warns that China’s current system of state capitalism is both politically and economically unhealthy. From Caixin, via South China Morning Post:

The state’s heavy hand creates and sustains monopolies, stifles competition and undermines a fair market. Empirical evidence repeatedly shows that state capital is less efficient than private capital. Moreover, it creates room for officials to seek personal gain. China’s high-speed rail development, with its series of corruption scandals, is a microcosm of a sick system ….

State enterprises can play a useful role in the market, especially in industries that favour natural monopolies. But a well-developed market needs to protect fair play. As the economist Mancur Olson put it, a market economy requires fair rights and the absence of unfettered power. Thus, the unchecked growth of state capital is incompatible with China’s chosen model of a socialist market economy ….

China’s economy has hit a limit under this outdated model of development. Whether China can now re-engineer a new path of growth and avoid the middle-income trap will depend on its determination to transform itself ….

If our pace of reform continues to lag behind the pace of expansion of state-owned capital, we will soon hear talk not of the rise, but a crisis, of state capitalism.

At China Real Time, Stanley Lubman examines Chinese state capitalism’s implications for the rest of the world:

Questions surrounding Chinese laws and corporate governance within China may seem remote, but they are not. If any SOEs intend to invest in the U.S., they must be reviewed by the Federal Interagency Committee on Foreign Investment in the United States (CFIUS), which is charged with evaluating mergers or takeovers that ”threaten to impair the national security.” Legislation specifically requires that foreign investment transactions in which the foreign entity is owned or controlled by a foreign government must be reviewed. Foreign firms have the burden of proof to demonstrate they are not “a threat to national security.”

Not only is this standard vague and undefined, but the process is politically charged, as demonstrated by two notable cases.

Perhaps most notable is the attempt state-run Chinese oil firm China National Overseas Oil Corporation () to acquire Unocal, a U.S. subsidiary of the Union Oil Company, in 2005. The attempted acquisition set off a storm of Congressional criticism while the transaction was being reviewed by CFIUS, eventually leading to withdraw its bid. “The national security argument gets bound up in a zero-sum view of China: the idea we can’t give them any advantage, any edge, if they are going to be a future enemy,” Georgetown Law School China exerpt James Feinerman was quoted as saying at the time.

See also last summer’s ‘Government’s role in industry: The long arm of the state‘ from The Economist, and the more recent ‘State capitalism in China: Of emperors and kings‘.