ABSTRACT

This chapter refl ects on the role of the state in China’s economy and its banking system. A proper understanding of how the mainland works in this regard is central. At the heart of the matter is this main issue: On the one hand, China has come a very long way from a traditional communist economy, where the state had full control of all assets and authority over almost every commercial transaction; after three decades of reforms, there is no doubt that the mainland has become much more market-oriented. On the other hand, the government still formally owns and runs a sizeable chunk of the system and, in particular, the ‘commanding heights’ of heavy industry, capital-intensive services and the fi nancial system. As a result, describing China’s economy can resemble the tale of the blind men and the elephant; there’s plenty of evidence to support the most contradictory arguments. If you want to portray the state economy as a ‘basket case’ with chronically loss-making fi rms, excessive bureaucratic intervention and highly distorted incentives, you can always fi nd data to argue your case. By the same token, if you wish to trumpet the state role as positive and promarket, with healthy companies and very limited interference, supporting fi gures are also readily to hand. How should we view the situation? As usual in such cases, ‘the truth’ is likely to be somewhere in the middle, but as I conclude below, it is much more useful and accurate to think about today’s China as a predominantly market economy with a few state-induced distortions, rather than a traditional socialist system with a mere market veneer. This, in turn, implies a more stable and sustainable growth outlook than the casual observer might assume. Here are the keys to supporting this perspective:

• The state share of the economy is still sizeable. The government still owns a signifi cant share of the economy, a good deal larger than in other Asian countries. State commercial enterprises account for 26 per cent of Chinese GDP and more than half of productive assets although they employ only

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• Even the state economy is now market-driven. Despite high levels of ownership, however, the government allows market forces to control its assets to a surprising extent. Although most state fi rms still have a bureaucratic internal management structure, they are not subsidized, operate in a highly competitive environment and face closure or restructuring if they cannot pay their bills. From the point of view of macroeconomic performance, this is more important than the issue of formal ownership.