Season 3 - Rethinking Asia: The State Strikes Back: The Diminishing Role of China’s Private Sector

Pacific Exchanges

In this episode of our series Rethinking Asia, we sat down with Nick Lardy, senior fellow at the Peterson Institute for International Economics. Nick is one of the world's most prominent analysts of China's economic development and the role of its private sector in generating growth.

We sat down to discuss Nick’s new book, The State Strikes Back: The End of Economic Reform in China? Nick walked us through some troubling statistics about the Chinese private sector’s diminishing role as measured from a number of data sources and qualitative indicators of slowing economic reform. Key takeaways from the discussion include:

• The role of the private sector has been significantly diminished over the last decade as indicated by a wide range of data related to access to credit and share of investment, and sector-level growth.

• China’s state sector has undergone a massive amount of consolidation, with the number of state-owned enterprises (SOEs) declining by roughly 50%, while at the same time state-owned assets grew five-fold. Despite this consolidation—or perhaps because of the implied reduction in competition it brings—the efficiency of SOEs continues to lag that of private companies by a wide margin.

• While Chinese President Xi Jinping has recently indicated the banking sector should direct more funds to the private sector, it remains to be seen whether this state-oriented growth pattern will reverse any time soon.

• Should China continue down this path of diminishing support for private sector activity, the implications for long-term growth, employment, and innovation could be substantial. On the other hand, a future downturn in the Chinese economy could make Chinese leadership more receptive to reform-minded economists that argue for better policy support for the private sector.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.