The Chinese leadership, headed by President Xi Jinping, is sending out conflicting messages about economic liberalisation and state enterprise reform, says a veteran China economist.
Nicholas Lardy, a senior fellow at Peterson Institute for International Economics, in Washington, also warned that the tepid progress of state sector reform was now the “the biggest risk to China’s economy”.
Whether Beijing is committed to a free market economy, or one that is heavily regulated and dominated by state players, is a question of great importance for the future of the world’s No. 2 economy.
However, Xi, the most powerful Chinese leader in decades, is not giving a clear-cut answer to that, according to Lardy, who has studied the Chinese economy for more than three decades.
The ruling Communist Party announced a sweeping reform plan three years ago to reshape the economy towards one that was market driven, including making state-owned enterprises more efficient. But Xi, also the General Secretary of the party, has called for the party to strengthen its “leadership” role in state businesses.
“The signals sent by Xi are confusing and inconsistent,” Lardy said in an interview with the South China Morning Post in Beijing earlier this month.
For the world to gain a clearer picture about China’s future economic policy trajectory, “we have to wait and find out exactly who will be in the Standing Committee of the Politburo”, he said.
Lardy, whose recent books include Markets over Mao: The Rise of Private Business in China, and Sustaining China’s Economic Growth after the Global Financial Crisis, said he was confident that
China would embrace market-oriented reforms “ultimately”, despite disappointments and doubts about the leaders’ resolution in living up to the commitment made three years ago.
“There are always trade-offs between maintaining state control and liberalising markets,” Lardy said. “At most junctures, the leadership over the decades has chosen to liberalise more.
“But they only did that when there was a consensus that trying to maintain control was going to lead to much slower growth.”
Lardy said the slow progress of state sector reform was the “the biggest risk to China’s economy” and that Beijing’s continuing strategy of merging state companies to create larger entities was unlikely to improve efficiency.
“I am surprised to see the new wave of merger activities in the last year and a half,” Lardy said. “Those mergers have not improved efficiency. Competition is reduced and it has [had an] adverse effect on sustaining economic growth,” Lardy said.
China’s leadership had shown an obsession with creating “the bigger the better” state conglomerates, he said. In September the State Council approved the merger of Wuhan Iron and Steel Group and Baoshan Iron and Steel Group to create the world’s second biggest steelmaker, called China Bao-Wu Steel Group.
The process of merging state businesses began during this century’s first decade – during the time in office of former president Hu Jintao and former premier Wen Jiabao – and have continued under Xi.
During the Hu-Wen period, the number of industrial enterprises that were under the direct control of the central government fell from 200 to 114 as a result of mergers.
China’s state assets watchdog is now trying to reduce that number to below 100.
Lardy said most of China’s mergers had taken place as a result of “top-down” decisions, rather than bottom-up business needs.
“They didn’t sell off anything,” Lardy said. “As they did more and more mergers, the profitability or the return on assets declined dramatically.”
Data from the Ministry of Finance showed that the assets of SOEs reached 129 trillion yuan (HK146 trillion) at the end of September – nearly two and half times the gross domestic product.
But the return on the assets – an indicator of how profitable a company is relative to its total assets – fell to 1.3 per cent at the end of September compared with 1.9 per cent at the end of 2015.
Beijing’s bloated state sector has become a drag on the country’s economic performance, sucking in credit and accumulating debts so that the Chinese government is now again is trying to cut the state sector debt burden by swapping debts into equities.
However, Lardy expressed his concern about the real effects of such measures and said it would not prove to be a major solution to the problem.
“What is clear and important is [it takes time to see] how the government] goes through with the promises [of non-intervention].” he said.