US study tracks huge state role in China economy

• State sector controls economy despite major reforms
• China has detailed blueprint for state dominance
• Chinese state behavior seen behind trade friction

WASHINGTON (Reuters): China’s state-guided capitalism guarantees state sector dominance of the country’s economy -- a recipe for further friction with key trade partners, said a U.S. research report published last week.

The study conducted for the U.S.-China Economic and Security Review Commission by the Washington consulting firm Capital Trade Inc says firms under various forms of Chinese state ownership control 50 percent of China’s economy -- with huge impact on economic policy and trade outcomes.

“The current economic direction of China is ‘commanding heights’ state capitalism, with the Chinese government picking the winning industries of tomorrow and developing state- owned national champions that are prominent at home and abroad,” said the report.

The study acknowledges that China’s private sector has seen explosive growth since the country initiated economic reforms 30 years ago, and notes that data show that private firms are more productive than state-owned enterprises (SOEs).

But for ideological and policy reasons, China’s state sector will remain dominant even if its share of total output shrinks, said the study.

“If anything, China is doubling down and giving SOEs a more prominent role in achieving the state’s most important economic goals,” it said.

“For some U.S. firms whose participation in China’s economy facilitates the government’s goals, China will continue to be a profitable market,” the report said.

“For others, especially those in strategic and emerging industries that the government is targeting, the Chinese market may become far less hospitable,” it warned in language heard increasingly often from foreign businesses in China.

China’s economic policy dictates that “strategic industries” will stay wholly or largely under government control, “pillar industries” will feature the state as the major player and emerging industries will be the domain of “national champions” that likely will be state firms.

Strategic industries include defense, electric power, petroleum and petrochemicals, telecommunications, coal, civil aviation, and shipping. Pillar industries are equipment manufacturing, auto, information technology, construction, iron and steel, nonferrous metals and chemicals.

U.S. regulatory filings by Chinese state entities show Chinese state firms enjoy “preferred access to bank capital, below-market interest rates on loans from state-owned banks, favorable tax treatment, policies that create a favorable competitive environment for SOEs relative to other firms, and large capital injections when needed,” the report said.

The the Chinese state’s role in practices that trigger trade disputes with the United States and other countries has drawn increasing attention and criticism from U.S. officials.

“Many of these troubling policies reflect China’s strengthening of state control over its economy and a retreat from its initial strong push to liberalize markets in the first years after its World Trade Organization accession,” Deputy U.S. Trade Representative Demetrios Marantis told a U.S. House of Representatives hearing on China on Tuesday.[ID:N1E79O131]

The USTR echoed that language in an official review of China’s first 10 years of WTO membership.

“Frequently, trade frictions with China can be traced to China’s pursuit of industrial policies that rely on excessive, trade-distorting government intervention -- including the widespread use of subsidies -- intended to promote or protect China’s domestic industries and state-owned enterprises,” said a statement issued in Geneva, headquarters of the WTO.