The Socialist Market Economy

One of the leftovers of the old command-and-control economy in China is the Communist Party secretary. In formerly state-owned companies that have been privatized, the secretary has his or her office next door to those of top managers.

"He helps us with a lot of our problems," grinning managers say during the introduction, which is normally made during the first visit to the company. But one rather gets the sense that the older man or woman, typically dressed in rumpled clothes, is actually a source of more problems than solutions.

More and more companies in China are run by professional management teams that insist their top priority is to maximize profit, not to obey government directives. Does that mean China has become a market economy, one where the private sector is the main engine of industry as the importance of state-owned firms declines?

In the U.S. and most major developed economies, governments establish and enforce a regulatory framework under which industry is free to decide how to operate. Laws and regulations are adopted after consultations via a variety of channels.

In China, either because there are fewer laws or because laws are not strictly enforced, companies don't face as many operating restrictions as in the U.S., says Thomas M. H. Chan, head of the China Business Center at Hong Kong Polytechnic University. CBC conducts research on China's economy, advises foreign companies, and provides management training to Chinese managers and government officials.

On the other hand, Chan says, when it comes to influencing laws before they're adopted, there are few avenues for Chinese companies. Chambers of commerce and industry associations do not act as lobbyists because they mostly have been established by the government. Some companies' voices are heard, but they are those of giant conglomerates--companies like Sinopec (China Petroleum & Chemical Corp.) or the large multinationals doing business in China.

Chan says the Chinese version of profit-seeking capitalism is one that is more raw, more "barbaric," than in the West. In the U.S. and other Western countries, he says, the government seeks to satisfy public interest by imposing limits on market forces in an effort to achieve balance.

He says the current leadership in China--the team led by President Hu Jintao and Premier Wen Jiabao--is keener than previous ones in trying to establish that balance. But the central government's efforts are often ignored by lower governments, particularly in the area of pollution controls.

Chinese companies, nonetheless, are subject to close oversight by the government, as it owns major shareholdings in most of them. This includes tens of thousands of companies that have been privatized--"corporatized" is more accurate, Chan says--in all industrial and service sectors.

This ownership explains why the central government in Beijing continues to issue detailed five-year development plans involving thousands of companies. Managers' main jobs may be to earn their companies as much as possible, but they can be fired if they fall afoul of their controlling shareholder, the government.

One would expect that partial state ownership would help a company influence policy as it is shaped or assist the company in obtaining government approvals for projects. But this is far from being the case. Approvals and policies are the result of decisions by a great variety of bureaucrats, and it is impossible to have a meaningful relationship with more than a few of them, Chan says. And a company may be able to influence local officials but have no influence at the provincial or national level.

Separate from the "corporatized" companies, there is a true entrepreneur-driven private sector that has emerged in China over the past 20 years. This new breed of company, which includes numerous chemical and pharmaceutical firms, could hasten China's transition to a market economy, but Beijing is mostly ignoring them.

One reason, Chan says, is that they are concentrated in Zhejiang province, far from the capital. Beijing is not discriminating against the province, but neither is it pandering to it. Frustrated by their inability to interest the government in removing bureaucratic obstacles their companies face, Zhejiang entrepreneurs are moving away from their core businesses and becoming real-estate speculators, Chan says.

David S. Jiang, president of the Beijing-based consulting firm Sinodata, says the spate of antidumping investigations launched by the Chinese government against imported chemicals illustrates how the lack of channels for accessing public officials harms smaller companies. He explains that the probes followed petitions by a handful of Chinese firms, many of which are subsidiaries of giants like Sinopec or PetroChina. But the import restrictions harm the larger interest of the many users of the chemicals that have no access to officials.

China is on its way to becoming a market economy, but it remains a work in progress. Company managers are both shackled by government interference and too free to pollute or ignore workers' safety. The foundation on which this economic progress is achieved needs to be strengthened.