Politics, Moderate

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Politics

Why China clings to state capitalism

Robert J. Samuelson on

WASHINGTON -- American officials traveled to China this week in an effort to end the bitter trade war between the two countries. The main obstacle to a settlement is natural rivalry: The United States is trying to protect its position as the most important superpower; and China is serving notice that it covets that status for itself.

What further complicates matters is a clash of economic systems. China practices state capitalism; the government owns many large firms and decides which industries will receive subsidies, protected markets and favorable loans. In the United States, private markets and firms mostly determine which companies grow or shrink.

The result is a stalemate. Many Chinese policies and practices (rules that coerce the transfer of new technologies or business plans to Chinese businesses, or that discriminate against foreign companies) make perfect sense in the context of state capitalism. But to Americans and other private investors, they violate the norms of open competition and fairness.

This makes negotiations exceedingly difficult. For China to abandon its policies would mean, in effect, scrapping its whole economic model. Politically, this would be hard to swallow. Similarly, for the United States to condone China's state capitalism would legitimize a system that puts U.S., foreign and private investors at a permanent disadvantage.

The contradictions are inescapable. If an agreement is possible, it may skirt the central differences between the two countries and concentrate on limited Chinese pledges to buy more U.S. imports.

Interestingly, the conflict is of recent origin. In a new book -- "The State Strikes Back: The End of Economic Reform in China?" -- economist Nicholas Lardy of the Peterson Institute of International Economics argues that, until a few years ago, China seemed to be moving gradually toward a system of private enterprise.

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In 1978, when Deng Xiaoping launched China's present economic reform, state-owned firms dominated the economy. Now, according to Lardy's estimates, private firms account for roughly 70 percent of the country's output (gross domestic product).

The reversal came after Xi Jinping assumed leadership of the Communist Party in 2012 and, later, the presidency. He changed course, favoring state-owned firms, as Lardy shows by citing loans to businesses.

In 2013, 57 percent of loans went to private firms and 35 percent to state-controlled firms. By 2016, there had been a stunning reversal; state firms received 83 percent of loans, compared with 11 percent for private firms. Much of this lending came from state-owned banks.

This relates to a larger issue: the ferocious debate, mostly among economists, over China's future economic growth rate. In the decade leading up to the 2007-09 Great Recession, GDP growth averaged 10 percent annually. Since then, it has dropped to a 6 percent to 7 percent range, and some economists predict it will ultimately fall to a 2 percent to 4 percent range.

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