Importing China's Economic Model

March 26, 2012

American business leaders have sometimes pointed to the big-government methods of China as a seemingly efficient way to bring about rapid change and modernization.  The fast-acting Chinese government is often extolled while it is contrasted with the gridlocked and malaise-laden U.S. federal government.  However, deeper examination of fundamental indicators in China should give business leaders pause, says Ying Ma, a policy advisor at the Heartland Institute.

First, closer examination should be undergone of China's infrastructure, which American private-sector leaders often praise as far exceeding America's commitment.

  • China's extensive high-speed rail system, long a symbol of its infrastructure dominance, was found to be fraught with corruption when its architect, Minister of Railways Liu Zhijun, was fired and arrested in February 2011 amid accusations of bribery amounting to $155 million.
  • The rail system suffered further setback when two trains collided in July 2011, killing 40 and injuring more than 170 passengers
  • Similarly, infrastructure received massive government support during the financial crisis, when Beijing allotted 45 percent of its $586 billion stimulus package to infrastructure.
  • Much of this spending and accompanying loans has subsequently been found to be poorly invested in ways that will yield meager results.

Second, further consideration should be given to the financial health of businesses in China and their freedom to operate.  Specifically, the enormous power that is granted to state-owned enterprises dominates the market and limits business freedoms.

  • According to a report issued in April 2011 by the Unirule Institute of Economics, the average return on equity of state-owned industrial enterprises in China was much lower than that of their non-state counterparts between 2001 and 2009.
  • The real return on equity falls further when preferential government treatment is taken into account, pegging it as low as -1.47 percent.
  • Moreover, 70 percent of all net profits made by China's centrally-owned enterprises in 2009 came from only 10 companies that had been bestowed heavy market advantages by the state.

A host of additional problems plague businesses in China:

  • China allows rampant theft of foreign intellectual property.
  • The government actively favors the public over the private sector.
  • Protectionist measures are increasingly implemented in the country.

Source: Ying Ma, "Importing China's Economic Model," Defining Ideas, March 22, 2012.

For text:

http://www.hoover.org/publications/defining-ideas/article/111806

 

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