Macroscope | As the state tightens its grip on the economy, will China reject capitalism again?

Joe Zhang says Beijing has turned decisively towards more state control of the economy in the past decade, and public support for tighter regulations means capitalism may be in trouble

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A Shenzhen resident rests in front of a poster of Deng Xiaoping in November. In December, China marked the 40th anniversary of reform and opening up, launched by Deng in December 1978, which has catapulted the country to the status of the world’s second-largest economy. Photo: AFP

Published: 11:30am, 2 Jan 2019Updated: 10:32pm, 2 Jan 2019

China has just celebrated the 40th anniversary of its economic liberalisation. While everyone praised Deng Xiaoping again for his vision and leadership, one of his famous sayings, “Let some people get rich first”, was conveniently not mentioned. Amid widening inequality in China, that slogan just doesn’t feel appropriate now.

If China were to hold a referendum today on increasing or decreasing state controls, chances are that the public would vote overwhelmingly for increasing them. Capitalists and liberals in the country must be relieved that holding a referendum is not a common occurrence in the Middle Kingdom.

Capitalism is not new to China. After the last emperor was removed from power in 1912, China flirted with capitalism for 37 years until the communists took over in 1949. The feudal version of capitalism proved disastrous on many fronts, but it was the glaring inequality that really dug capitalism’s grave.

Will China reject capitalism once again? And, if so, how? I do not know the answers but the truth is that, in the past decade or so, the pendulum has swung from capitalism to greater state control. This may not have happened by design, but the cumulative effect has been striking.

First, the state budget expenditure as a percentage of GDP has risen from 18 per cent in 2004 to 25 per cent in 2017. More significantly, hidden taxes through the printing press and thus inflation are a crucial feature of state controls. Endless flows of subsidised credit go directly to state-owned enterprises, diluting the interests of everyone else. Four decades on, China’s outstanding credit is as big as that of the United States and European Union countries combined at the current exchange rates.

Second, SOEs have become more dominant in all sectors except for the internet and, even there, “Big Brother” has boosted its oversight of content and licensing requirements. Large numbers of SOEs have sold minority stakes in the stock markets, in telecoms, aviation, ports, airports, roads, banking, insurance, oil and real estate. But their governance has hardly changed. And, even in sectors where the state maintains a minority interest, there is no doubt who calls the shots.

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