Chinese government economic policy

If This is Chinese Corruption, Give Me More!

All governments favor local businesses. Some do it better than others. China is among the best. The system of government support in China is more extensive, more fair and less prone to corruption than elsewhere. Surprised? Many will be, since they operate on the false, though comforting,  assumption that everything Chinese officials do is the result of bribe-taking.

The thing about corruption is, most of it, everywhere, is hidden from view. There is no real empirical basis to assess which countries have the highest corruption. Instead, everyone tends to fall back on the “Corruption Perceptions Index”  reports generated by a group called Transparency International. It does what it can to measure the unmeasursable. Its results get skewed by relying rather heavily on Western businessmen’s own perceptions about where bribery is most rampant. For many of these people, China fits the Western stereotype of a country whose officialdom seems rotten from top to bottom.

The reality is rather different. Look, I’m not saying China doesn’t have a corruption problem. It manifestly does. The country’s own leadership is frequently heard denouncing the problem of corrupt officialdom. Indeed, China’s outgoing Communist Party boss, Hu Jintao, warned this week that if not tackled, official corruption would  “cause the collapse of the party and the fall of the state.”

My point here is to discuss the productive, above-board and even-handed ways government in China, at every level, provides useful and valuable support to companies. Here, the comparison with the US is very stark indeed. Government favors in the US are mainly, and explicitly, sold to the highest bidder. It’s what drives much of the billions of dollars “invested” every year by companies, unions, lobbyists and individuals in political campaigns. You help a politician win, and he helps you then get a tax-break, a loophole, a sweetheart government contract, a loan guarantee, a no-bid contract, a regulatory exemption, an R&D grant, a zoning change.

In the US, the system of favors-for-money is so widespread, so deeply woven in the grain of the political system, that Americans don’t even bother to talk about it much. It’s as American as apple pie.

Let’s look at China. Buying off politicians is less visible, and outcomes are different, than in the US. China’s tax code is not the unwieldy monster it is in the US. It isn’t the product, as America’s is, of an anybody-want-to-buy-a-taxbreak system. In the US, General Electric can get away with paying no income tax despite billions in profits because it’s very good at working the system and buying the favors required to create tailor-made tax loopholes. In China, I know of no instance where a big and profitable company, including some very powerful SOEs,  pays no tax.

Big companies, especially SOEs, do get many special favors. One example:  the government tends to be very relaxed in its role as controlling shareholder. It seldom demands an SOE turn over a large percentage of its after-profits in the form of dividends. The Chinese system generally dings companies once, through profit tax, rather than twice.

Where China’s system of political favors works better than elsewhere is in spreading the perks far more widely and equitably. So, both state-owned giants and small entrepreneurial companies can both partake.  In the US, Europe or Japan, the system of political favors is “pay to play”. In China, it’s more a matter of maintaining a modest level of employment (probably above about 50 workers) and paying at least some of the taxes you nominally owe. Do that and the government will make available a wide assortment of grants and benefits, from land at low concessionary prices,  to investment credits and tax holidays to free infrastructure upgrades.

Again, what is most notable, and commendable, about the system of political favors in China is how much more inclusive it is. You don’t need to pay off a local official, or put his kid through college in the US. That sort of stuff may happen, and may for all I know bring even larger benefits. But, a payoff is not a prerequisite for a government favor or handout. In fact, the most valuable forms of government support I’ve heard of go to companies that successfully IPO. Nothing else. They don’t need to take government contracts or employ the mayor’s nephew. Companies are rewarded by the government for going public — which, by the way, given high IPO multiples in China,  is enough of a reward in itself. One reason companies get rewarded for going public is because it also is a big boost to local officials’ careers. In today’s China, a key metric used to evaluate local government officials’ job performance is how many local companies have IPO’d.

These newly-public companies are often, if not always, sold a piece of land to build a new headquarters on. The price of that land will almost certainly be sold to the newly cash-rich IPO company for a fraction of its market value.  I’ve also seen cases where a local government gives a plot of land, at a very low price, to a local company that successfully raises PE.

A case of rich getting richer? Perhaps. But, note, this valuable land is not sold to the guy offering the valise filled with untraceable $100 bills. It is a reward for achievement, not a backhander. I prefer this kind of businessman-to-politician transaction to what routinely goes in the US, or UK, where political parties, in return for donations,  sold knighthoods and other titles.

But, the land-for-IPO deals are a very small part of a very large whole, making up the totality of government favors and support available to businesses in China. The government in China has far more power and far more wealth at its disposal than anywhere else I’ve lived. In other words, it has complete discretion, as well as more prizes to dole out. The remarkable thing is how evenly they do try to spread their help around.

In the US, a small businessman is told by the newly-reelected President he is a “millionaire and billionaire”, and should cough up half his income in taxes, with little special in return. The same scale businessman in China pays less punitive rates and is rewarded by government with favors that help his business grow, and his profit margins increase. If this is corruption, give me more!



China’s government — an example for the world on competent economic management

Yuan Dynasty blue-and-white porcelain vase

China’s government is managing very ably the global financial crisis, and continuing to deliver to its people a better standard of living. Yes, the economy in China is growing more slowly than it has over much of recent history, at around 7%-8%. But, overall, the country continues to bustle as nowhere else does. People still have spring in their step, and the same sense of boundless potential.

This is a measure of just how many things the Chinese government has done right economically. It’s a fact that’s too rarely remarked upon outside China, where the major talking points about China’s economy tend to be pollution, corruption and what’s seen to be the artificially-low level of the renminbi. This does a huge disservice to what’s been highly successful and competent management by China’s economic policy-makers. 

How good a job has the Chinese government done? Consider this: the country has managed, with relatively limited economic dislocation, the huge contractions in China’s export markets over the last year. Yes, factories have closed and workers have lost their jobs. This is a familiar enough boom-and-bust story in every country where manufacturing plays a big part in the overall economy. But, not long ago, most of China’s economic well-being was tied to its manufacturing exports. There was little other fuel for economic growth. 

China today is a very different place, economically, than it was even three years ago. The domestic market, not exports, is now the locomotive that’s pulling 1.4 billion people down the track. This shift was managed so deftly by the Chinese government that it’s hardly even been noticed outside China – and often inside as well. I run into a lot of Chinese who still believe that the fate of the nation is determined by the output of its assembly lines. Exports and manufacturing are still important, hugely so. But, they matter less than they did just a while back, and in the future, they will matter less. 

This shift away from manufacturing has caused huge ructions in other countries – just think of the endless labor strife in France, or Britain on the 1970s, and the persistent high unemployment in most other European countries. They have stumbled along, economically, as their competitive advantage in manufacturing was lost. 

In China, it’s a very different – and better – picture. There is so much economic opportunity here that people can, with far less disruption to their lives than in Europe, find new places to work and build a future. The Chinese government creates the circumstances that allow all this economic opportunity to occur. Again, the contrast with Europe is particularly marked. In Europe, economic activity is stifled by excessive regulations that set out who can do what, where, for how much. In China, the government, wisely, takes a much lighter approach to regulation, always with an eye focused on creating circumstance that will lead to new jobs, more activity, and more competition in most sectors of the economy. 

China’s government, rightly, does get credit internationally for the economic changes over the last 30 years that have lifted some 500 million people out of poverty. This is, unquestionably, the most important economic achievement of the last century, if not the last millennium. 

But, the policies that are generating China’s continued prosperity — the uplift that is carries as many Chinese into the middle class as were taken out of poverty — is much less well-followed and less-praised. That’s wrong. Arguably, it’s no less significant an achievement.