Command Versus Market: Chinese Capital Markets At A Crossroad

China’s state capitalism is a messy mix of market, plan, and one-party rule. Less than half of the economy is directed by the state; the rest is private and market driven. Except for infrastructure and other nontradables, both Chinese economies operate in the world economy. Although not well known, China’s rapid growth derives primarily from private companies, despite the state policy of “state advance, private sector retreat.” The new leadership that takes command at the end of 2012 must decide whether to liberalize and privatize the state sector as advised by the World Bank’s China 2030 programs or bow to the entrenched interests of the state sector. How they decide will determine China’s long term growth.

China’s battle between plan and market is fought day by day on many fronts. What appears to be a minor dustup between the Ministry of Finance and the Securities Regulatory Commission over accounting practices for publicly traded companies is illustrative of the war between market and plan and between the private and state sector.


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Four Shocks That Could Change China

 

In the past four months, the Chinese Communist Party (CPC) has experienced four shocks that could materially affect, if not eventually end, its “leading role” in Chinese society.

First, on December 13 of last year, a mob of villagers forced out local party leaders and the police and took control of the town of Wukan. Enraged by illegal land grabs and police brutality, the villagers installed their own representatives after gaining concessions from national authorities. The Wukan uprising is symbolic of the two hundred thousand mass protests reported for 2010.

The Chinese people are fed up with the corruption, indifference, and incompetence they encounter from local government.

Second, on February 27, a key government think tank issued its China 2030 report in conjunction with the World Bank. Rapid growth could only be sustained, the report argued, by giving free rein to the private sector and ending the preferential treatment of the state economy: The role of the government “needs to change fundamentally” from running the state sector to creating a rule of law and the other accoutrements of a market economy. A month later (on March 28), the state council approved a financial reform pilot experiment to legalize private financial institutions and allow private citizens to invest abroad.

China 2030 is an open warning that China’s vaunted state capitalism model cannot sustain growth and usher China to the next level. A faltering economy would pose an imminent threat to the CPC’s claim to its leading role.

Third, on April 10, charismatic regional party leader, Bo Xilai, was fired as party boss of Chongqing and expelled from the Politburo. Bo Xilai embodied the party faction favoring state-led economic development and Maoist ideology. Bo’s status as the son of one of China’s “Eight Immortals” did not save him from charges of political deviation and corruption. Bo’s influential wife was arrested under suspicion of murder of an English business associate.

The ringleader, cheerleader, and most visible practitioner of China’s party-led state capitalism is no longer a power broker.

Fourth, on April 27, blind dissident and noted civil rights lawyer, Chen Guangcheng, evaded the security guards guarding his house in his home village and made it to Beijing, where he gained refuge in the U.S. embassy. Guangcheng’s escape shows the sophistication, dedication, and coordination abilities of the dissident community and is an embarrassment to the CPC and its security forces.

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Dr. Gregory's latest book can be found at Amazon.com.