The standard account of China’s economic rise focuses on its state capitalism, whereby the government, endowed with huge assets, can pursue a wide-ranging industrial policy and intervene to mitigate risks. This explanation is wrong

The standard account of China’s economic rise focuses on its state capitalism, whereby the government, endowed with huge assets, can pursue a wide-ranging industrial policy and intervene to mitigate risks. This explanation is wrong

China’s rapid economic rise in recent decades has astonished the world. Yet the reasons behind the country’s success are often misunderstood and misinterpreted.

The rise of China widely attributed to its state capitalism, whereby the government, endowed with huge assets, can pursue a wide-ranging industrial policy and intervene to mitigate risks. Accordingly, China owes its success, first and foremost, to the government’s “control” over the entire economy.

This explanation is fundamentally wrong. True, China has benefited from having a government with the capacity to implement comprehensive and complementary policies efficiently. With leaders not subject to the short election cycles that characterize Western democracies, China’s central leadership can engage in visionary and comprehensive long-term planning, exemplified by its Five-Year Plans.

Moreover, the Chinese state’s power has buttressed its implementation capacity, which dwarfs that of most developing and transitional economies. A strong state – and the social and political stability that it underpins – has been essential to enable China’s rapid advancement in areas like education, health care, infrastructure, and research and development.

It is telling, however, that China is using its long-term planning and robust implementation capacity not to entrench state capitalism, but rather to advance economic liberalisation and structural reform. It is this long-term strategy – which has remained unswerving, despite some stumbles and short-term deviations – that lies at the heart of the country’s decades-long run of rapid economic growth.

Interestingly, elements of this strategy come directly from the advanced countries. Over the last 40 years of diplomatic normalisation with the United States, American-style capitalism has gained a solid foothold in China, not least among the country’s intellectual and business elites. So, while China’s government has always placed a high priority on stability, it has also worked to apply global best practices in many areas, including corporate governance, finance, and macroeconomic management.

Yet this process of economic liberalisation and structural reform is also uniquely Chinese, insofar as it has emphasised local-level competition and experimentation, which in turn have supported bottom-up institutional innovation. The result is a kind of de facto fiscal federalism – and a powerful driver of economic transformation.

The fruits of this approach are irrefutable. In the last decade, a number of Chinese private financial and tech giants have emerged that, unlike their state-run counterparts, have managed to establish themselves as global leaders in innovation. The recently released Fortune Global 500 list for 2019 – which ranks firms by operating revenues – includes 129 Chinese companies, compared to 121 from the US.

Among China’s Fortune 500 firms are e-commerce giants Alibaba, JD.com, and Tencent, the company behind the popular mobile app WeChat. The tech giant Huawei managed to rise 11 places since last year, despite US President Donald Trump’s campaign against the company. And the nine-year-old Xiaomi, a smartphone manufacturer, made history as the youngest firm ever to make the list.

The spectacular rise of these companies – and the prosperity and competitiveness that they have helped to foster – was not enabled primarily by top-down industrial policies, but by economic liberalisation and the bottom-up innovation it has facilitated. At a time when the US is accusing China of using state-capitalist tools – such as subsidies for domestic companies and entry barriers for foreign firms – to gain an unfair advantage, it is worth highlighting the extent to which the country does not owe its economic success to such policies.

This is not to suggest that China’s own leaders should not also take note of its unfinished reform programs. After three decades of double-digit GDP growth rates, a slowdown was inevitable. But, even as China’s central government accepts some decline in annual growth, it must be alert and remain committed to addressing the structural factors that are compounding the trend, such as the rising cost of finance and declining return on capital.

Meanwhile, China’s government must continue to encourage private entrepreneurship and innovation (and has already committed to doing so), while reinforcing its system of competitive quasi-federalism. And it must also accelerate governance reform, as promised, to ensure that it can keep up with further market liberalisation.

China has traveled far along the path of reform and opening up. But it should not underestimate the challenges ahead, let alone forget how it got this far in the first place. As a Chinese proverb puts it, “On a journey of a hundred miles, 90 is but halfway.”


Zhang Jun is Dean of the School of Economics at Fudan University and Director of the China Center for Economic Studies, a Shanghai-based think-tank.  Copyright 2019 Project Syndicate, here with permission.

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I always wonder how much China pays New Zealand journalism to place these bullshit propoganda pieces.

Perhaps it's China's Red Queen strategy: journalists and academics need to keep running (via articles like this) just to stand still, lest their Motivations come under suspicion and their Social Credit Scores start declining......

Not bullshit - it contains a great deal of sense - China's economic success is more despite is govt rather than because of it.
However I can see what riles you - take aphrase such as "" economic liberalization and structural reform is also uniquely Chinese"" - if someone wrote a similar sentence about NZ equally fantastic economic success during Queen Victoria's reign and ended it with "uniquely causasian" they would rightly be attacked as white supremacist.
And if I was a Ugyhur I might object to ""A strong state – and the social and political stability"" being imposed on me in a reducation camp.
May the rest of the world is astonished that China with all its deliberate effort over four decades still has a GDP per capita that is a fraction of Hong Kong, Singapore and Taiwan's.

A strong state – and the social and political stability that it underpins

Underpins by sending anyone who opposes them to a labour/re-education camp.

Free market versus state planning. That is the main if not the whole question. We have seen what the free market does. So let’s go back to looking at state planning.

North Korea, Pol Pot's Cambodia, Lenin & Stalin's Russia, Castro's Cuba for example. The two best comparisons are North -v- South Korea and East -v- West Germany. I prefer the middle route - maybe Benelux. All have problems all have virtues but surely total state planning is now disproved. If Russia's biggest brains couldn't manage how to distribute resources then nobody can.
The author is correct when he points out it is the Chinese firms rising to the top of a competitive free market that have done well whereas China's state owned businesses are problematic.

China in the 70's to now is a completely different place. While NZ is like an ageing socialite crack whore thinking she still commands the room, China bought the room and supplies the crack.

Perhaps a piece from someone argueing the opposing case would restore my dented faith in David's judgement, I mean, what Kool-Aid has he been drinking? Steve Bannon, for example, on how the US corporate and political establishment sold their countrymen down the river, and continue to do so.

https://www.wsj.com/articles/china-completes-runway-on-artificial-island...

https://www.theguardian.com/world/2019/aug/09/1mdb-malaysia-files-charge...

Oh, please

The spectacular rise of these companies [Alibaba, JD.com and Tencent] – and the prosperity and competitiveness that they have helped to foster – was not enabled primarily by top-down industrial policies, but by economic liberalisation and the bottom-up innovation it has facilitated. At a time when the US is accusing China of using state-capitalist tools – such as subsidies for domestic companies and entry barriers for foreign firms – to gain an unfair advantage, it is worth highlighting the extent to which the country does not owe its economic success to such policies.

Tencent is little known as a consumer name in the West but its WeChat app dominates in China, where Facebook, Twitter and Google are banned.

https://www.telegraph.co.uk/technology/2017/11/21/chinas-biggest-social-...

Or has that changed?

We should probably ban Facebook, Twitter and Google as well.

Shanghai-based think-tank pushing the party line. As a wise kiwi once said "yeah na".
Surely China is aware we use Google in the west know their true history?

According to Washington officials China's econonic rise is partly due to forced technology transfers, intellectual property theft and other such methods.

Forced tech transfers - who is to blame? If they want to grow kiwifruit and we wish to sell our methods isn't it our fault? Ditto US technology. Their space program proves they can innovate themselves since it is unlikely it was either sold by USA or Russia or easily stolen.
I'm old enough to remember Japan being accused of merely copying western technology (they renamed a town 'Birmingham' so they could say 'made in Birmingham') but then the Japanese started selling motorbikes which didn't drip oil and were steady enough to have rear view mirrors and the British motor bike industry collapsed. I was the proudest of Brits but could only admire the Japs and pity the lack of investment in Britain. Another country that massively under invests resulting in hard work and long hours but poor productivity is New Zealand.

"but then the Japanese started selling motorbikes which didn't drip oil and were steady enough to have rear view mirrors". All they had to do was tighten all the bolts up all the way

Certainly the Japanese developed better quality control. One of the reasons the Japanese and Germans had better industrial outcomes after the war was because much of their industrial infrastructure was bombed out or even outright looted by the victors. This meant they had to innovate and also acquire new industrial machinery. It turned out to be an advantage to replace all the old machinery with the latest and greatest technology.

Not being able to put money into war weapons was a huge bonus for them, as it turned out. Pity the rest of the world didn't take a leaf out of that book.

I wonder if China's economic rise in recent times has something to do with property ownership. Under communism people didn't own property but now housing makes up more than 70 per cent of personal wealth in China.

A lot of the workers were provided apartments in the cities and these apartments were transferred to them to own possibly for a fee albeit quite a bit smaller than their current value. This suddenly created a middle class with comparative wealth in property.

They don't actually own the land but have rights of use for 50-70 years. Private property laws have been introduced and strengthened in the 21st century, notably in 2007. After 2007 property prices surged.

The next challenge will be what happens when those leases approach the end of the term. They will probably need to simply extend them at no cost or minimal cost to the owners. These fairly short leases may be one reason why Chinese liked to buy foreign property however the CCP would be wise to simply make the titles fee simple like what we have in NZ.

Is that why the 3rd Bank to fail in China in the last 3 months needed a bail out from China's sovereign wealth fund? Because only China's Government can make it do that kind of thing? That's a soverign wealth fund, that's money China has been saving for maybe 20 years. It just doesn't make sense. If china has the four largest Banks in the World, why didn't a big bank step in instead? I heard it's all been held together by glue which, probably explains this weird propganda we're getting here in New Zealand. Sorry it doesn't make sense to me.