China’s Xiconomics: The Comeback of State (and Crony) Capitalism

I haven’t been actively posting lately as I have been shopping mall hopping and writing private my observations to my clients.

Anyway, in the past, I have been a skeptic on the trumpeted liberalization reforms by the Chinese government. For instance, I wrote then, “However, implementation will mark the difference from rhetoric”

Also I have been saying that the so-called anti-corruption campaign has been nothing more than consolidation of power by the incumbent government by jettisoning the old political order: “anti corruption campaings have usually been euphemism for or disguise on political persecution”

The Chinese government has been exhibiting a multitude of actions that have been  anti-market; as I recently noted:  “The Chinese government has launched “targeted easing” last June, has resorted to selective bailouts of firms which almost defaulted last July, imposed price controls on stock market IPOs last August, injected $125 billion over the last two months and announced the schedule of the Hong Kong-Shanghai stock market link on November 17, 2014”

I also noted then that current statistical growth targets have been channeled through state owned enterprises: “And part of the Chinese government’s selective bailout on the economy has been to use State Owned Enterprises to take on the slack abandoned by private developers, take for instance current developments in Guangzhou, where “China's state-backed developers are making unprecedented investments in Guangzhou, as the private firms that have dominated the wealthy southern city for decades grapple with tight liquidity and Beijing's corruption crackdown. The waning fortunes of the "Guangzhou Five Tigers" - the city's big private developers - are giving state-owned enterprises the chance to muscle in on one of China's most prestigious property markets for the first time.

I guess all these have become so obvious that the mainstream has seen it too.

From Nikkei Asia (bold mine)

As Beijing's deeper involvement in economic affairs suggests, pundits were wrong to assume that Chinese leadership would let market forces transform the country's economy. On the contrary, China seems eager to leverage the scale of its government-owned enterprises to snag lucrative orders overseas.

China CNR's ascent is a case in point. The company said on Jan. 26 that it signed a 4.11 billion yuan ($660 million) contract to supply railway cars to Boston's subway system. Japan's Kawasaki Heavy Industries also bid for the U.S. contract, but could not compete against the low price offered by the Chinese rival.

Under Beijing's approval, state-controlled China CNR struck a deal to merge with another state-owned rival, CSR. The merged entity, which will effectively control the domestic market, will dwarf its global competitors in sales. Armed with its massive scale, the new company is expected to bid for a high-speed railway project in California.

The comeback of state and crony capitalism

At a meeting held in January, Premier Li Keqiang made clear the government's intent to help infrastructure-related companies land order overseas. In fact, Li has been jetting around the world promoting China's high-speed rail systems, nuclear power plants and other infrastructure.

Li was a leading advocate of economic reform based on market principles. Overseas news media dubbed his vision of market-led economic growth "Liconomics." Judging by the premier's recent comments and actions, however, the policy to unleash more market forces has been wound back.

During the third plenary session of the Chinese Communist Party's Central Committee, in autumn 2013, leaders agreed on a plan to tap the power of the private sector to reform an economic system centering the government and state-run enterprises. The centerpiece of this reform was to bring private competition into areas dominated by state-owned companies.

But in reality, Beijing has been allowing the birth of bloated state-owned enterprises through mergers.

What seems isn’t what has been. 

It was initially believed that Xi shared the same reform-minded vision as Li. The president's crusade against corruption had been interpreted as part of reform efforts. By getting rid of vested interests within state-owned enterprises, especially in the oil, electricity and coal industries, Xi has also weakened political rivals who draw power from those businesses. This gives the president more power to dismantle state-owned monopolies and pave the way for reforms, or so the thinking went.

That Beijing has been allowing large state-owned corporations to combine and become even bigger, however, suggests that was not his intention at all. It seems Xi's economic policy is more aligned with his oft-stated vision of realizing the great revival of the Chinese people, rather than introducing more market forces.

Instead of privatizing state enterprises and pursuing higher productivity, Xi appears to be aiming to expand China's influence in the world. If this in fact is his vision, "Xiconomics," in essence, is about using state capitalism to cultivate overseas markets and make up for slowing domestic growth. Such a policy puts China on a crash course with developed countries not only in the political and military realms, but in economics as well.

Market based reforms, where?

Xiconomics has all been about political power. In the context of economics, it is the equivalent of jumping the frying pan and into the fire.