September 14, 2011
by John Lee
Membership has its privileges, particularly in China where it's proving to be a prerequisite for climbing the social ladder. The Forbes China 400 Rich list revealed a record number of 146 U.S.-dollar billionaires this year, compared to 128 in 2010. The growing ranks of the mega-rich in China are unsurprising in an economy that doubles in size every eight years. However, the fact that over 90% of the 1,000 richest people tracked by the Hurun Report are either officials or members of the Chinese Communist Party (CCP) is a troubling sign. A closer look at how wealth is actually created and distributed in China completely dispels the notion that its authoritarian model is beneficial for the majority of Chinese people.
In 2001, then-President Jiang Zemin stunned many observers when he announced that the CCP would welcome entrepreneurs as members for the first time since the Party's founding in 1921. What has been less apparent is Beijing's efforts to reassert control over the economy from the mid-1990s onwards--a policy that was a direct result of countrywide protests that had threatened the Party's grip on power in 1989.
The most important and lucrative sectors of the economy have been reserved for state-owned-enterprises (SOEs) through preferential policies and support that leaves private domestic firms at a heavy disadvantage. For example, during much of the past decade, around two-thirds of the country's formal finance (mainly bank loans) was reserved for SOEs at discounted rates, rising to an astounding 90% from 2008 to 2010 before settling back to its current 80%.
The result has been the rise of the corporate state consisting of around 150 central and 120,000 local SOEs, controlling the lion's share of the country's wealth. About four million privately owned corporations, and tens of millions of small, informal businesses have been left to fight for the scraps. Consider the amazing statistic that the 150 centrally managed SOEs owned two-thirds of all fixed assets in the country, while their revenues amount to about half of the revenues generated by all Chinese firms each year.
Although many SOEs are publicly listed, the government still retains at least half and up to two-thirds of the equity in those companies. SOEs are under the control of the ministerial-level State Assets Supervision and Administration Commission (SASAC). The boards of directors and senior management are appointed by the SASAC in consultation with the CCP's Department of Organization. Not surprisingly, over two-thirds of board members, and three quarters of senior executives of SOEs are either CCP officials or members.
The problem with this state-led approach is that entrepreneurs and other businesspeople need the support of the Party, or better still, CCP membership to get ahead. This means that the country is divided into a relatively small group of well-connected insiders benefiting disproportionately while around one billion people have little prospect of sharing in the fruits of the country's economic growth. A rarely noted fact is that 80% of China's poverty reduction actually took place during the first ten years of reform from 1979 to 1989--before the Chinese corporate state reasserted its grip on the economy.
Since the rise of the corporate state, China has gone from being the most to the least equal society in all of Asia in terms of wealth distribution. By any internationally accepted measurement, inequality in China is worse than India, the U.S., and possibly even countries such as Brazil. The net incomes of over 400 million people have stagnated over the past decade, and absolute levels of poverty have actually increased over the same period. While SOEs have increased their revenues by 20 to 30% each year, mean household income has increased by a paltry 2 to 3%.
Almost all of China's richest people have made their money in state-dominated sectors, such as property and construction, resources, other heavy industries and telecommunications. This could be through preferential access to the best land (often seized illegally from citizens) for property developers, privileged access to below market rates of capital, or special access to raising capital or equity in listed SOEs. In almost all cases, those benefiting are CCP officials or members. It's no wonder that there are now 85 million card-carrying CCP members with another 80 to 100 million on the waiting list to join.
The role and size of the Chinese corporate state--unprecedented in history for any modern economy--needs to be wound back to allow the hundreds of millions of people in private businesses fair access to economic and business opportunities. But this is unlikely to happen because the CCP is unwilling to loosen its grip on the levers of economic power and influence. One of the keys to the Party's power base is that it retains control of material, career and professional opportunities. This may be good news for the growing ranks of the mega-rich but not the majority of the Chinese people who can't get a foothold on the social ladder.
John Lee is a Hudson Institute Visiting Fellow and an Adjunct Associate Professor and Michael Hintze Fellow for Energy Security at the Centre for International Security Studies, Sydney University. He is the author of Will China Fail? (CIS, 2008).
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