The China Track 与中国接轨

From Nouns to Adjectives: The 3rd Plenum Communique

Since Party plenums are closed-door events with nothing emerging except what the leadership wants us to hear, we are still reduced to tea-leaf reading and old-school Zhongnanhai-ology. And although Xi Jinping has been praised for using more flowerly language and shows genuine emotion, the communique issued at the end of the 3rd Plenum of th 18th Party Congress is a bland document. This is the kind of thing you would introduce your students or family to if you wanted them to never be interested in Chinese politics and leave you alone. 

I drank some strong coffee, pulled out my highlighter, and opened my dictionary. What did I find? A document that potentially heralds substantial reforms, but leaves a lot, perhaps too much, to the imagination.  

Communiques from previous Party plenums that signaled major policy changes introduced new nouns to the ideological lexicon. The "commodity economy," "socialist market economy," etc. Perhaps the key word from yesterday's communique is "decisive," as in having "the market place the decisive role in resource allocation." That is not as big a change in direction as was ushered in at the 3rd Plenums of the 11th, 13th, or 14th Party Congresses. By focusing on an adjective and not a noun, the Party is now trying to clarify and sharpen the direction it wants China to go, not set a fundamental new course.

I say "perhaps the key word" because the summary provided by Xinhua at the end of the text did not focus on that point at all. It definitely is significant because it goes beyond previous statements of markets playing a "basic" role in allocating resources. But is it the most important thing in the document? No one can say for sure.

There were other significant elements.

On the positive side of the ledger:

1. It looks like we will see a lot of experiments and new national policies in a wide variety of areas, including general government administration, further price liberalization, central and local government finances and budgets, cadre assessment, property rights and land ownership, taxes, environmental protection, the judicial system, household registration, greater access to capital and industries for private and foreign industry, and ensuring competitive markets.

 2. There was a clear sense on the need to nationalize and unify policies, including reducing inter-regional barriers and standardizing government administration across the country. 

 3. The word innovation was used several times, including with regard to science and technology, but the adjective "indigenous" (自主) never appeared. This continues Li Keqiang's pattern of never saying "indigenous innovation," in contrast to Wen Jiabao and Hu Jintao, and portends a more liberal approach to sci-tech policy.

 4. There will be a creation of a national security council. It's unclear precisely what its job will be, but it could potentially operate like the US's NSC and help coordinate foreign and security policy across the ministries. This could help alleviate inconsistent signals and bickering we see between the PLA, Ministry of Foreign Affairs, MOFCOM, the PBOC, and other ministries.

 5. There was no mention of border disputes, the South China Sea, the island dispute with Japan, or cybersecurity. Any emphasis on a threatening external environment could be used to justify greater defense spending or a more aggressive international posture. We did not see that. 

On the negative or unclear side of the ledger:  

1. There could have been more details about specific kinds of reforms. Instead, there were lots of hints -- and hints are often critical -- but the more detail would have provided less wiggle room to opponents.

 2. There was a strong emphasis on the continued importance of the public, state-owned economy. Not only are SOEs important in "pillar" (支柱) sectors, but they are supposed to raise their overall competitiveness in the entire economy. That may be the politically safe thing to say, but it suggests genuine constraints on reforms in these sectors and walling off SOEs to standard rules regarding competition policy, market access, and financial markets. On the other hand, it is possible that this means SOEs will be pushed to be much more efficient, to hand over a much larger percentage of their earnings, to standardize their internal governance, and to compete more head-to-head with private and foreign companies. We just don't know, but the vagueness is not reassuring. 

 3. The creation of a Leading Small Group to Deepen Reform could be a way to get around the gridlock that exists in the standard policymaking process and the special interests within the Party, government, and SOEs that oppose change. This could help speed up adoption and make implementation go more smoothly. But its creation may also signal that there is significant opposition and making headway will be quite difficult.

4. Aside from emphasizing the need for judicial reform and genuflections toward democracy, human rights, and other standard elements of the constitution, there was very little new that would give one confidence the Party is willing to accept systematic constraints on its authority, either rules governing how it operates or ways it and the government can be held accountable. For those who think greater political space is needed for markets to work well and for state-society relations to be genuinely stable, this document does not openly provide a lot of hope. 

5. There was no mention of family planning policy despite signals it would be an important reform. Just the day before the state press ran stories to this effect. We will need to wait to see if the one-child policy is adapted further into an essentially two-child policy. 

China's Corporate Landscape: From Economic Capital to Political Capital

China's corporate landscape is continuing to evolve in ways unexpected and expected. I recently came across what looks like same very boring data on the number of companies and their registered capital from the State Administration of Industry and Commerce. The data from 2013 is fascinating, but even more cool is what happens when you compare it to the same data from 10 years ago.

First, the 2013 data, summarized in the table below. 

I draw a few conclusions from this data. Just in terms of the numbers of companies, the private sector dominates the scene. There are 11.6 million private firms (私营企业) and over 42 million smaller individual proprietorships (个体户). China has lots of SOEs, but far more private firms.

However, SOEs have a far larger combined amount of capital than private firms. Although only 4.1% of firms are SOEs, SOEs account for 46.6% of registered capital. This translates into very different average firm size, with SOEs being larger than private companies by a factor of 6. SOEs still tower over private companies literally and figuratively.  

Finally, there are a large number of foreign-invested firms in China, over 440,000 at last count. It is possible that a significant chunk of these are Mainland Chinese firms who have registered in Hong Kong and then re-invested back in the Mainland in order to receive special benefits, but my guess is the proportion of firms using this trick is declining as the advantages of being an MNC in China drop. In any case, the average MNC in China has over RMB 27 million in registered capital, 50% more than SOEs and 9 times more than the average private firm. Think Walmart vs. the local grocer, Hilton vs. Home Away Motels.

When the corporate landscape is viewed over time, though, things take on a different look. 

Over the last decade the number of SOEs has been cut in half,while the number of private firms has increased over three-fold, the number of propreitorships and foreign-invested firms have almost doubled. 

When you look at registered capital, the story shows a smilar pattern of change in the direction of the private sector.

SOEs' share of total registered capital has fallen from 62.3% to 46.6%, while that for private firms has risen from 14.9% to 38.0%. If you include smaller proprietorships, the private sector now accounts for over 40% of all registered capital, just under the amount for SOEs. At the same time, the share belonging to MNCs has dropped, from 21% to 13%. MNCs are on average much larger than private companies, or even SOEs, but their share of overall registered capital is dwindling. 

The next conclusion that jumps out at me as that although SOEs' share of the overall registered capital has dropped, their average size, measured by capital, has jumped six-fold, while the increase for others has been more modest. Many SOEs have died off, but those that remain are on average larger and more powerful. They are hard to be displaced by their competitors. 

In sum, the private sector is growing, in absolute and relative terms, while SOEs are shrinking in numbers of companies but growing in terms of average size. And multinationals are on average large, but their relative significance in the economy is dropping. 

How do trends in economic capital translate into policy or political capital? Beijing is clearly trying to protect SOEs and their role in certain segments of the economy, particularly strategic sectors. At the same time, the private sector is gradually being allowed to expand its footprint across regions and in previously blocked sectors, and we can expect such policies to be gradually widened still further.

And finally, the situation for MNCs is clearly changing. They constitute a smaller share of registered capital than in the past. This may explain why special privileges they enjoyed have been eroded. From another perspective. It could also help explain why they appear to be under attack more from the bureaucracy and the media. There are now domestic competitors ready to take their place in just about every area of the economy. Regardless of whether the changing status of MNCs is fair or not, if economic capital translates into political capital, we shouldn't expect their treatment, relative to SOEs and private companies, to substantially improve.

Of course, that assumes a straightforward correlation between economic and political capital. Since I'm no Marxist, I know that is not entirely accurate. (I'm a liberal, so I know there is some truth to this.) MNCs are well organized, are represented by powerful governments, and have a large swath of global media in their corner. So despite all the problems they are facing, no one should count them out by any means. MNCs are in China to stay. 

 

 

 

The Leadership Transition and SOEs

Conventional wisdom has it that we are unlikely to see a highly aggressive economic reform agenda adopted by the new leadership that comes to power in a couple weeks. One of the main reasons given is the lobbying power of state-owned enterprises (SOE). Commentators highlight the strong ties between the leadership and SOEs, for example, highlighting that Zhou Yongkang spent so much time at China National Petroleum Corp. that he is essentially the oil industry's advocate on the Politburo Standing Committee. And once he retires, he could be replaced on the Politburo by Su Shulin, formerly a general manager at Sinopec and now governor of Fujian.

Certainly these ties are not insignificant, but we ought not make too much of them. The trend, in fact, is a decline in direct ties between leaders and SOEs. I collected data on all of the Politburo members for the 15th Central Committee (1997-2002), 16th (2002-2007), and 17th (2007-2012), and then made my best guess on the likely composition of the upcoming Politburo. I then culled their bios for work experience in SOEs. The data are surprising:

The biggest reason for the decline in SOE experience is the larger number of Politburo members who have worked their entire careers in the Communist Party and government. This is particularly true for those who have worked their way up through the Communist Youth League. They, of course, owe their rise to Hu Jintao. 

SOEs are not well represented anywhere in the official political system. Here is how things break down on the current National People's Congress, China's legislature: 

SOEs are certainly over-represented relative to private companies, of which there are far more, but a 9% share of seats is quite small. The NPC is dominated by government and Communist Party officials, not SOE executives. 

The Central Committee data show the same results. There are a very small number (less than 10) of SOE managers who are alternate members of the Central Committee, but none are regular members. 

This situation may change, but those looking for SOE influence don't make that argument. 

So where does SOE power likely come from? 

1) The government's ownership and control of SOEs, which gives offiicaldom a stake in making sure SOEs do well. If the financial sector is liberalized and administrative monopolies shrunk, that will hurt SOEs. 

2) The above data only focuses on officials themselves and not their family members. It is likely that just about every single member of the Politburo and Politburo Standing Committee has at least one family member who works in an SOE. 

3) Even if officials don't overly care about SOEs or have family members in SOEs, it is likely they have friends and colleagues who work in SOEs. Officials are socialized to believe that SOEs are natural and important parts of China's social fabric, and they shouldn't be penalized. 

4) SOE senior executives share the same administrative rank or have an even high rank than many of the bureaucrats who are supposed to regulate them. That makes SOEs difficult to control. 

The above discussion shows reasons why we shouldn't overstate SOE influence but why we should expect them to still have significant power. My own view is that despite being highly influential in a variety of ways, if the leadership wants to institute substantial reforms that hurt SOE interests, they could, and they would not pay a steep political price for doing so. There are a variety of ways the leadership could manage this kind of opposition, including rotating or firing SOE managers, implementing changes gradually, and compensating SOEs with other kinds of benefits. The question is, does the leadership want to do this? We'll find out soon.