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China’s Economy a Party Plan

John Lee

Australians are realizing that the Dutch disease rarely ends well for any economy when the demand for commodities inevitably slows. The government’s ‘Australia in the Asian Century’ white paper, due mid-year, is all about ensuring that we are more than just a world-class quarry and the world’s most dynamic economic region does not leave Australia behind. Although not yet written, the white paper will certainly recommend that Australia deepen and diversify its economic relationship with China to include more trade in high-end manufacturing and services sectors in addition to selling commodities to the world’s fastest growing economy. Sensible as it is, getting formal Chinese buy-in for the eventual conclusions of the white paper will be challenging. But actually securing Chinese market access for Australian companies will be the really difficult part.

Some experts believe that our security alliance with the United States, reaffirmed last year during Barack Obama’s visit, will be the main stumbling block. This is not correct. China is the largest trading partner for Japan, South Korea, Taiwan, Vietnam, Singapore and Australia. It is the largest Asian trading partner of the United States and India. As this has occurred, strategic relations with all of these countries have deteriorated over the past decade. There have been no significant instances of China ‘punishing’ countries—large or small—for their strategic decisions. The clear lesson is that despite sometimes aggressive rhetoric, the Chinese remain the ultimate pragmatists in economic matters.

The real stumbling block is Chinese politics, and in particular, Beijing’s still somewhat ‘Leninist’ worldview of economics. To appreciate this, one needs to go back to the countrywide protests in 1989 which brought the Chinese Communist Party (CCP) to its knees, and the fall of authoritarian regimes in the Soviet Union and Eastern Europe. Over the next few years, Chinese leaders and scholars spent an enormous amount of time and resources analyzing the causes of authoritarian vulnerability. In addition to maintaining an extensive and well-funded coercive and monitoring apparatus, the CCP realized that the future well-being of the urban middle classes needed to be intricately tied to the future of the country’s one-Party system, which in turn needed to become the driving force of the modern Chinese economy.

The response was a deliberate plan to retake control over the levers of economic power and granting of privilege, a plan which was gradually cobbled together from the mid-1990s onwards. Although the Chinese private sector expanded in size and number from the 1990s onwards, around one dozen of the most lucrative and important economic sectors were reserved for state-owned-enterprises (SOEs) to compete in. While foreign-direct-investment was encouraged in the export-manufacturing sectors, SOEs were deliberately positioned to dominate key sectors.

The sectors nominated included banking and finance, insurance, construction, infrastructure, chemicals, media, information technology and telecommunications. In the recently announced 12th Five Year Plan (2011-2015), it was also announced that ‘national champions’ (read SOEs) are to take the lead in further ‘strategic sectors’ such as renewable energy, healthcare, biotechnology, high-end equipment manufacturing, energy-efficient vehicles and emerging IT platforms. The Plan is for the government to channel state capital into these industries through the formal fiscal budget, but more importantly, loans from state-owned banks. The point is that it is explicit policy for SOEs to dominate every existing and emerging sector of any note in the domestic Chinese economy.

The size and importance of Chinese SOEs in the domestic economy is unprecedented for any modern economy. For example, SOEs received over three quarters of all formal finance in the country. All but 100 of the 2037 firms listed on the two Chinese stock exchanges are majority owned by the government or SOEs. In 2009, two SOEs—China National Petroleum and China Mobile—made more profits than the top 500 private firms in China combined. Indeed, the revenues of the top 20 centrally managed SOEs amount to more than 50% of China’s GDP each year.

The link between the CCP and SOEs is also difficult to exaggerate. Senior managers of all central and local SOEs are almost all senior members of the CCP. The three most senior positions of SOEs are appointed directly by the CCP’s Central Organization Department. Almost all appointees are CCP members, and in many cases, the CEO and Party Secretary within the company is the same person. The appointments of all remaining senior executives are made by the CCP controlled State-owned Assets Supervision and Administration Commission which reports directly to the State Council.

Given the conflation of political and corporate structure, personnel and activity, market dominance in key sectors by SOEs is an essential pillar of CCP power and relevance. On the other side of the coin, ceding market share to foreign firms is seen as a dilution of the Party’s power and relevance.

To be sure, there will be lucrative opportunities for Australian firms in those niche areas where SOEs require foreign technology or know-how. But just ask some leading regional and American firms that have already tried—getting good actual access to the best bits of the Chinese domestic economy can be next to impossible. When the white paper is eventually released, recommendations for deeper economic engagement with China should reflect the reality that political priorities of the Party will almost always comes first.

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