For two decades,in the 1980s and 1990s,China pushed forward a series of economic reforms that came at a vast cost,exceeded only by their vaster rewards. Now,as the financial crisis sweeps across the world,those reforms are going into reverse. It is a sign of how hard governments find it to shake off the habit of ownership.
When China began to extract production from the hands of the state,big firms were broken up,reconfigured or closed. Ever so slowly,the government began to privatise its largest industries,selling slices of companies in public offerings on foreign exchanges,and making them adopt at least the pretence of modern governance.
How far China has gone in transforming its economy is a matter of debate. Unarguably,it remains a place where companies face heavy direct and indirect state control. But in places there has also been dramatic change,and China has prospered as broader economic freedoms contributed to growth. Outright criticism of the shift was muted,even among bureaucrats opposed to the new approach. But over the past year this reticence has begun to wane,as the crisis in the West has led to intense criticism of capitalism and one domestic industry after another has,as in the West,gone back to the government for support.
In December China Investment Corporation,one of the country’s many sovereign-wealth funds,acknowledged buying shares of Chinese banks on the open market. Other government-backed funds are thought to have been buying as well,which may explain why the banks’ share prices have held up even as banks elsewhere totter. Meanwhile,the state-controlled China Development Bank is said to be negotiating a takeover of Shenzhen Development Bank,one of the few financial institutions controlled by foreigners.
It is a similar story in aviation. In the late 1980s the government created three gigantic carriers — Air China,China Eastern,and China Southern to provide competition and service where there had previously been none. The carriers have succeeded in a limited way,dramatically expanding coverage across China,but management has undergone frequent shifts and none of the airlines has a good reputation. All three operate at a loss,and two of them,according to the Chinese state-run press,have received large capital injections from the central government in recent months. A broad,government-driven reorganisation is expected in the next 18 months.
Similarly,five big power-generation firms were split out of a single company in 2002 to foster competition. Any sense of true operating independence was badly undermined last year,however,when the government imposed price caps on electricity,even as the utilities grappled with rising coal and oil prices. Those prices have since fallen,but so has demand. On February 20th the Chinese press reported that the government was injecting $13 billion yuan ($1.8 billion) into the companies,indirectly boosting its stake.
Even China’s car industry,which is alive with competitors,is coming further under the government umbrella. More than 10 billion yuan in subsidies is being paid to carmakers,and billions of yuan more are being granted to encourage car sales. Various deals are being mulled between Chinese firms and distressed foreign brands,and these too would need financial support from the government. Beyond that,Chinese newspapers report that a broad restructuring is in the offing,which would reorganise the industry into four state-controlled giants.
In the West the prospect of nationalisation causes companies’ share prices to collapse,but the opposite often occurs in China,and share prices rise instead. In a state-controlled system,it is good to have the state’s explicit endorsement and protection. But it comes at a cost. The reason China initially backed away from state control was because companies were inefficient and corrupt,and ultimately people suffered. In today’s panic,perhaps,that is a secondary concern. But times will eventually change for nationalised firms in China and for those in the West,too.
© The Economist Newspaper Limited 2009