China’s Stimulus Package and its Effect on China’s SOES: Bad for the Economy and Bad for the Prospect of Democracy

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Pundits have criticized that China’s stimulus package disproportionately benefits (SOEs). Given the tremendous emphasis on boosting public works projects and boosting loans to finance investments, state-owned enterprises are a prime benefactor. China’s stimulus package is posited as an essential plan for the Chinese leadership to maintain stability and achieve the magic eight percent growth rate. However, the effect of the stimulus plan on the financial sector and upstream industries, like energy, petrochemical, steel and construction, will not adequately address the structural problems that mar China’s governance and private sector development. Insulation of the state sector therefore exacerbates the problem of local economic nationalism, collusion and , inefficient allocation of resources and ultimately the preservation of single-party rule.

The dominant role of the state in China’s development path renders it different from the West. State-sponsored growth as in Taiwan, Korea, and Malaysia is a crucial element in the East Asian Model, which essentially eschews democracy for economic growth. Beijing’s stimulus model therefore is not very useful for the West, for the Party also seeks to maintain a particular political order along with buffering against the consequences of the financial crisis.

This article analyzes the economic and political implications of China’s stimulus plan on the state of SOEs and why Beijing is pursuing a plan that perpetuates market distortions and potential corruption and collusion.

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