China's Economy Is Teetering Between the Public and Private Sectors

In order to raise funds, China's leadership is planning to sell more state-run companies. But are they willing to give up control?
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HONG KONG -- Good communists that they are, China's leadership would surely admit that they are only human. And like all humans they tend to want it all: Continued control of the economy, but the opportunity to raise billions of dollars selling minority stakes in state-owned companies to foreigners.

Compared with the orthodox communism in place from the 1949 founding of the People's Republic of China until 1978, this kind of "market socialism" is radical stuff. The problem is, foreign investors want more. For the most part, they are not getting it.

China's economy was once 100% state owned. That is no longer the case. Even though the bulk of agriculture is now in private hands, the ownership structure in businesses that investors would want to buy into is less clear cut.

"At the end of the millennium, China's economy hangs in the balance -- half public, half private. It is an open question as to which half will determine the future," according to the Hong Kong-based

China Economic Quarterly's

second-quarter report.

While few in number, there are some hopeful signs that China's markets are maturing. This week, the Hong Kong arm of China's biggest shipping company,

Cosco Pacific

, called off a plan to buy a stake in one of its parents' businesses after shareholders complained it was a bad deal. Routine stuff on Wall Street, but revolutionary for China.

Yet, for every positive development, there is a negative one. In 1996, after a number of Chinese companies trading in Hong Kong were caught using the proceeds of stock offerings to lend to other companies or just play the market, investment in stocks by listed companies was banned. Now the ban has been lifted in an attempt to boost the stock markets and raise more money for state companies.

The problem that fundamentals-driven investors have with China is that most of the companies on offer are those in the sclerotic, state-owned sector. And even if the government decides to step up a lot of stock offerings in the country's fuzzily defined "collective" sector, you shouldn't get your hopes up. Collective companies "as a statistical group have shown themselves to be hooked on the steroids of state-mandated credit just like the formal state sector," said

CEQ

.

At this time last year, the picture was more hopeful, as Premier

Zhu Rongji's

market-based reform program steamed ahead and state companies were pruned mercilessly. Then, earlier this year, rumblings eminated from Beijing that reform was on hold and Zhu was weakened politically.

With the 50th anniversary of the People's Republic looming, a

Communist Party

statement talked of plans to revive the state sector, even while saying the government wanted to sell more stakes in state companies.

The reason the government needs to sell stock is the oldest one out there: China needs the money.

"Last year was the first time in 20 years that the share of investment resources flowing to the state sector actually increased. It is the least productive part of the economy and the least efficient in generating new jobs," says analyst Nicholas Lardy of the

Brookings Institution

.

Money and ideology aside, there is a still-more-important reason the leadership is reluctant to turn off the credit taps to the state sector. The private industrial and service sectors simply do not employ as many people as the mostly money-losing state companies do. More unemployment and no social safety net makes for unhappy, violent people, who cannot exactly look to the ballot box to air their grievances.

Market socialism may have a funny ring to it, but dictatorial capitalism hardly sounds much better.