China’s entrepreneurial state has lessons for the West

The drive to reform eventually spread to SOEs under premier Zhu Rongji (1998-2003), whose mantra was ‘grasp the large, release the small’. Tens of thousands of failing SOEs were liquidated or privatised, with 40 million workers redirected into the booming private economy in a brief five years period. Many surviving SOEs were restructured and often listed on the stock exchange.¹ Unlike free market fundamentalist ‘shock therapy’, Zhu Rongji’s approach ensured continuous economic growth and social stability despite tens of millions losing their jobs.

Today’s SOEs are fewer and much bigger, so much so that western corporates quake at their approach. There are two categories. First, ‘national champions’ in banking, defence, energy, mining, telecommunications, transport and utilities. Three of these giant corporations, China National Petroleum, Sinopec and State Grid, are on the list of the world’s ten largest companies, and all with assets equivalent to entire countries. The oil giant Sinopec, for example, disposes of only slightly less revenue than the Australian government.

Below them are many more local and provincial SOEs, often in sectors like automobiles, IT, hotels and restaurants.² While many SOEs are lackluster performers, there are many that do innovate, albeit in unsexy areas like viscose thread, affordable TV sets, and hot coil boxes in steel works.

Nonetheless, it is often said that SOEs are a pernicious drag on China’s economy, often by westerners who regard them as an obstacle to their own market penetration. While China’s SOE’s generate 16% of all jobs, and a third of industrial output, they also soak up a third of all loans, thereby contributing to China’s unsustainable domestic debt.

There has been constant talk of reform of SOEs but much of it is the equivalent of shuffling a pack of cards to give the illusion of activity. The November 2013 Third Plenum of the 18^th Central Committee decreed: “we must ensure that the market has a decisive role in the allocation of resources”, albeit within a system still based on “the dominant position of public ownership” and “the leading role of the state-owned sector”.

Private sector investment in SOEs was encouraged. But private investors were reluctant to risk becoming involved in bloated enterprises, where the men with a red Party telephone on their desks call the shots following the instructions – and priorities – of Beijing.³ The Party may order continued loss making over-production to guarantee local jobs, or suddenly cut back coal or steel production as happened earlier this year, to head off a trade war. Increasingly corporate rearranging of the chairs replaces more hard-nosed structural reform.

The thinking seems to be that through sheer scale, these companies can force their way onto the world stage, especially if they digitalise production and supply chains. As in life, so in industry, marrying one fat slob with another rarely produces an entrepreneurial genius.⁴ Most recently, there has been a further ‘statist’ resurgence, with the levels of private sector investment declining to a mere 0.3 times that of the state.⁵

Which brings us to the current era dealt with by Mazzucato. Conventional Chinese SOEs are unlikely to create the 15 million jobs a year China needs, 8 million of them graduate positions, and they are yesterday’s news in terms of the advanced sectors the Party wishes to see flourish.

In the most advanced industries, Chinese companies are rapidly catching up in purely innovative terms, and clichés about copycats and espionage no longer hold. China is in the lead, for example in next generation technology which will merge on and offline worlds through face or voice recognition technology, while Da Jiang Innovations makes 80% of the world’s commercial drones.

The catch-up rates are striking. TenCent ($405 billion), which owns WeChat, is more valuable than Facebook ($399 billion), and Alibaba ($437 billion) is closing on Amazon ($459 billion). Together with Baidu, hence the acronym BAT, these giants finance start-ups in cities like Shenzen, which has eclipsed Hong Kong’s ‘old’ economy of finance and property and is now where Californian techies seek out cutting edge innovations. To hedge their bets, the Chinese invest in San Francisco and Indian start-ups too.

China’s government plays a major role in innovation, although having a huge population which readily adopts new technology also helps – the Chinese spend $790 billion using their phones, eleven times more than is spent by people in the US.

The government has boosted the number of graduates from one to seven million over the last fifteen years, with a further 11 million attending technical and vocational colleges. 188 million Chinese school children, including those in remote rural areas, will soon find themselves being individually taught by AI-enabled ‘teachers’ which recognise their faces.

The Chinese state has encouraged partnerships with leading universities and the Academy of Sciences and industry. It encourages competition between cities and regions to grow their economies and to attract talent. It has no inhibitions about people becoming incredibly rich, provided corruption is not involved, which may explain why so many western trained Chinese techies are heading back to the motherland.

Through central plans, the government sets priority – currently electric vehicles, robotics, quantum computers, biomedicine and new materials. It sets tight deadlines for when China has to achieve global dominance in solar panels, 3-D printers, drones and robots. It does this through subsidies, tax breaks, loans and cheap inputs like electricity and low rents, not to mention an R&D budget that will reach 2.5% of GDP by 2020. If needs must, China can simply buy interesting European companies, as Midea in Guangdong did with Germany’s Kuka robotics. The Chinese state is driving innovation, and with it, economic growth.

Although, contrary to Mazzucato’s claims about the state doing the breakthrough research, much of China’s R&D budget is devoted to late-stage research, rather than the fundamental research which still absorbs most western R&D spending.

But China’s government also knows when to leave things alone, which is why data management, privacy and commercial rights issues are omitted until after tech champions like Tencent are up and running, another reason why China is ahead in exploiting freely available big data.

One final thought. Mazzucato felt obliged to write a book on the entrepreneurial state, while a Chinese scholar didn’t, precisely because ideological wrangling is so pervasive here. This debate is incomprehensible in China. The Chinese just look at the functionality of the cat, rather than its ideological coloration, and that may well be why they will be the innovative power in decades to come.

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Michael Burleigh is an historian and commentator on world affairs. His 12 books include The Third Reich: A New History (Samuel Johnson Prize 2001) ; Moral Combat; Small Wars and Faraway Places and The Best of Times, Worst of Times: The World As It Is which appears in November.

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