Sugar-coated Re-nationalization

Burgeoning public policy discussion in China.
Public participation in policymaking is an important development in China. (Photo: CIPE)

2009 marked China’s successful navigation of the global downturn. As the Chinese media reflects on the events of this past year, however, it is becoming increasingly apparent that the economy is in the midst of a new wave of nationalization—known locally as Guojinmintui, or “the state advances as the private sector retreats”—raising serious concerns over property rights.

State-owned enterprises, infused with government stimulus dollars denied to their disadvantaged private sector counterparts (see my previous blog article), have gone on an aggressive shopping spree to take control over a number of thriving private enterprises. State-backed firms have absorbed or undercut private industry in vital sectors as diverse as real estate, air travel, petrochemicals, consumer goods, and metals. Their acquisitions of promising private enterprises have ranged from the takeover of Mengniu, the country’s largest milk producer, to the purchase of Rizhao Steel, one of China’s largest private steel companies. Not only has this furthered the state’s already tight grip over the economy, but also signals the advancement not of a market economy but of crony communism, whereby the state exploits its dominance of the economy to the benefit of the privileged and well-connected.

Chiming with this broader trend over the past year, the Shanxi provincial government recently enacted a coal mine consolidation policy that effectively mandates the closure or forced sale of hundreds of small and medium sized coal mines to dramatically reduce the number of mining operations from 3,000 to 1,000. This policy has proved popular among the public, which views the coal bosses as cruel fat cats that seek wealth at the cost of environmental degradation and worker safety while exacerbating corruption. Consequently, the province’s official mouthpiece claimed the policy will decrease the number of illegal mines and ensure better compliance with safety standards to prevent the catastrophic coal mine accidents that have occurred over the past few years.

Many in the business community and business press, however, believe this to be an excuse that masks the hostile intentions of the state in an attempt to further propagate the wave of nationalization. Both the Financial Times and Nanfang Daily point out that large state-owned mines are far from immune from accidents; the deaths of over a hundred workers in Heilongjiang province this past November, for instance, occurred in a mine operated by a large state-owned group. The stereotype of the wicked mine owner is also overblown. Most small-scale mines are owned not by a single fat cat but financed by groups of private investors and entrepreneurs who now face ruinous economic loss. With the government’s lack of respect for property rights depriving them of any real negotiation power, investors have been forced to sign transfer contracts under severe political pressure, typically at less than half of face value. The transfer of mines from private entrepreneurs to inefficient SOE’s signals a further step away from an effective market economy and promises to result in inevitable long-term economic detriment.

The extralegal forced acquisitions and closures of private enterprises mirror the government’s epidemic land grabs in the rural regions. Both phenomena significantly impede the development of markets and entrepreneurship. This backlash against market reform in the coal industry and elsewhere is rooted, above all, in the essence of crony communism; the authorities repress private enterprises in order to provide more room for state-owned or state-favored monopolies and protect excessive profits via under-the-table arrangements lubricated by widespread corruption. Contrary to popular belief, China continues not on a path to a market economy but has taken a dramatic u-turn backed by a wave of re-nationalization. History and basic economics demonstrate that this course is not sustainable; prosperity demands the protection of small and medium enterprises and the receding influence of the state in the economy.

Published Date: December 23, 2009