EDEN BUILDING TO STOCK EXCHANGE

Published: 01:30 AM, 13 September 2020

https://dailyasianage.com/news/241154/xinomics-having-a-mixed-role-of-state-and-private-sector

Xinomics having a mixed role of state and private sector

M S Siddiqui Chinese economic policy is under the scan of economists of all the disciplines. Looking at the key party document after the Third Plenum of the 18th Communist Party of China back in 2013, which committed to a "decisive role" for markets and implied a decline in state intervention. Experts throughout the world on China expected that China would expand the role of the market following this key party document. In contrast, President Xi Jinping while enters his second term in office in 2018 with a tighter grip on the economy than each of his two predecessors, The observers find the emergence of a "hybrid" economic model in China, which is now branded as "Xinomics". This is a significant change from three years ago when Xi presided over the 3rd Plenum. While that document, released after the 3rd Plenum, also talked about the state's role in the economy, this was viewed as secondary to an enlarged role for markets. Either there will be no major decision on the macro-economy or any major decision by a significant company can establish without the party's approval or party stakeholders being at the table. President Xi Jinping has disappointed those advocating wholesale reform of markets and state-owned companies. Since 1995 China's share of world GDP at market prices has risen from 2% to 16%, despite waves of western skepticism. Silicon Valley chiefs dismissed Chinese tech firms as copycats. Wall Street short-sellers said ghost towns of empty apartments would bring a banking crash. Statisticians worried that the GDP figures were fiddled and speculators warned that capital flight would cause a currency crisis. China has defied the skeptics because its state capitalism has adapted, changing shape. Twenty years ago, for example, the emphasis was on trade, but now exports account for only 17% of GDP. In the 2010s, officials gave tech firms such as Alibaba and Tencent just enough space to grow into giants and, in Tencent's case, to create a messaging app, WeChat, that is also an instrument of party control. By this time WeChat is banned by President Trump. This has been borne out through the strengthening of party committees in private companies and tighter central control of state-owned enterprises. The aim is to increase the role of market forces in order to force firms to become more efficient. There will not be a free market for the control of companies and assets. The state will retain a strong role and there will be no privatization per se. The observers thought that Xi is trying to take China is a funny hybrid, where market forces play a big role in the allocation of resources, but the party plays the determinative role in it and name this as "Xinomics". His economic agenda is designed to increase order and resilience against internal and external threats. For good reason. Public and private debt has soared since 2008 to almost 300% of GDP. The Xinomics has three distinct elements. First, tight control over the economic cycle and the debt machine. Banks have been forced to recognize off-balance-sheet activity and build up

buffers. More lending is taking place through a cleaned-up bond market. The days of supersized fiscal and lending binges are over. The second element is a more efficient administrative state, whose rules apply uniformly across the economy. China has constructed a commercial legal system in the mainland that is far more responsive to businesses. The third and final element is to blur the boundary between state and private firms. State-run companies are being compelled to boost their financial returns and draw in private investors. Xinomics involves the partial privatization of state-backed companies and deregulation of consumer-facing sectors, but an overall tightening of Communist Party control over economic decision-making. Meanwhile, the state is exerting strategic control over private firms, through party cells within them. For example, Unicom, the second-biggest mobile phone company has a mixed ownership that reflects the reforms of China. It could serve as the template for future reforms of large-scale central SOE's. While the acquisition of 35% of Unicom's Shanghai-listed arm by a total of 10 private and state-affiliated companies would at first blush appear to be directed at improving the market efficiency and corporate governance of the telecoms giant, the government continues to retain primary control. Instead of indiscriminate industrial policy, such as the "Made in China 2025" campaign launched in 2015, China is shifting to a sharp focus on supply-chain choke-points where China is either vulnerable to foreign coercion or where it can exert influence abroad. Veteran economists in the west observed that with mixed-ownership reforms of state-owned enterprises actually expanding the economic role of the state, and pushing for stronger party committees in the private sector. Beijing is not following the Soviet states with the mass privatisation of state companies, but will instead retain tight control of the economy and pursue selective privatisation." The aim is to selectively increase the role of market forces in order to force firms to become more efficient," as told by the other economist. There will be a blend of a free market for control of companies and assets but the state will retain a strong role and there will be no privatisation per se. It has been reported in the media that Xinomics has performed well in the short term. The build-up of debt had slowed before COVID-19 struck and the twin shocks of the trade war and the pandemic have not led to a financial crisis. State-run firms' productivity is creeping up and foreign investors are pouring cash into a new generation of Chinese tech firms. The real test, however, will come over time. China's economy was harmed less by the tariff war with the USA than expected. It has been far more resilient to the COVID-19 pandemic. IMF forecasts the growth of China @1% in 2020 compared with an 8% drop in the USA. It may be noted that Shenzhen is the world's best-performing big stock market this year, not New York after the COVID-19 scenario. One thing is obvious that America and its allies must prepare for a far longer contest between open societies and China's state capitalism. Unlike the Soviet Union, China's huge economy is sophisticated and integrated with the rest of the world. Instead, the west needs to build up its diplomatic capacity and create new, stable rules that allow co-operation with China in some areas, such as fighting climate change and pandemics, and commerce to continue alongside stronger protections for human rights and national security. The strength of China's $14trn state-capitalist economy cannot be wished away. Xi Jinping is truly reinventing state capitalism in the 2020s. His new economic agenda is to make markets and innovation work better within tightly defined boundaries and subject to all-seeing

Communist Party surveillance. It is an innovative mix of control of party, technology, and dynamism and is expected to propel growth for years. The Xinomics is no not a funny hybrid but a new economic policy. It can face the challenge of competition and hostility from the free economy under the leadership of the USA. The writer is a legal economist. Email: mssiddiqui2035@gmail.com