Why China clings to state capitalism
Many theories have been advanced to explain this shift. After years of fast growth, it's said, China has exploited most existing technologies. It will now act more like a "normal" economy. Or: China has too much debt, limiting expansion. Or: China's population is rapidly aging, hampering labor force growth.
Lardy dissents. He attributes the slowdown mainly to two factors: a declining trade surplus and the misguided decision to favor state-owned firms, which he regards as monstrously inefficient. He reports that the profitability of private-sector firms is more than double that of state-controlled companies.
"The real [explanation] of the underperformance of state-firms vis-a-vis their private counterparts [is] insufficient profit-maximizing behavior, including corruption, on the part of the senior management of state firms and a large misallocation of capital [investment funds] by Chinese financial institutions, especially banks."
The irony is inescapable. If Lardy is right -- and his conclusion will likely be challenged -- the decision to favor state capitalism will weaken China's future economic growth. But growth may not be the main reason that Xi has acted as he has.
Even Lardy concedes that economic reform "must force into bankruptcy more long-lived zombie firms, mostly state-owned, that now survive by borrowing ever increasing amounts from state-owned banks."
It is a specter that cannot please Xi, who may fear that "social unrest, unemployment, [and] financial instability" will weaken the Communist Party's grip on power, as Lardy notes. The main motive for protecting state firms may be political, more than economic. And that's why it may be so hard to change.
(c) 2019, The Washington Post Writers Group