China’s Missed Opportunities

I remember the meeting of the Asian Development Bank’s board of directors way back in the spring of 1992 very well…

Representing the United States during a review of a Chinese finance sector loan, I asked what I thought was a straightforward question, “Isn’t it time for China to begin privatizing state-owned banks and companies?”

After a pregnant pause, the attack from the other board members began.

“Why is America always so impatient?”

“These things have to be done slowly and carefully.”

“The Chinese will develop a privatization plan that suits their needs and culture.”

Dealing With the Consequences

Well, here we are, more than 20 years later, and China remains a semi-market state at best. There’s still too little market and too much state.

Half the Chinese work for the Chinese government or for state-owned or controlled companies. One quarter of state-owned companies are unprofitable, but state-owned companies grab 90% of bank lending. The top five state-owned banks control 80% of total bank lending.

The country has had so many lost chances:

China had the choice to set itself on a path to sustainable growth, but instead chose a strategy of over-dependence on investment and exports.

China had the choice of balancing growth with protecting the environment, but instead chose growth at all costs.

China had the choice of using trade surpluses to provide a safety net, so that rural Chinese could avoid saving 30% of their household incomes, but instead chose to let its reserves grow to $4 trillion.

China had the choice to put in place basic institutions – such as an independent judiciary, a transparent process to transfer power, a free press, and bankruptcy laws to support growth – but instead avoided any reforms that might weaken the authority of its party leaders.

China had the choice to – like Singapore – take a hard line on political corruption, but instead looked the other way as business and politics became one and the same.

China had the choice to open its markets and become a champion of free trade, but instead chose a policy of state mercantilism – welcoming foreign capital and know-how – but protecting access to markets.