Markets over Mao
The case that private firms drove the growth miracle.
Summary
Nicholas Lardy of the Peterson Institute argues against the view that China's growth is driven by its state sector and that the state has been advancing at the expense of private firms. His method is to assemble Chinese official data on output, employment, investment, credit and profitability, disaggregated by ownership, and to show what it says.
The findings run against the state capitalism thesis as it stood in 2014. Private firms had come to produce the large majority of manufacturing output and to generate almost all net employment growth. State enterprises' share of industrial output, investment and employment had fallen steadily. Private firms earned substantially higher returns on assets than state firms across almost every sector. Bank lending to private firms had grown faster than lending to state firms, contradicting the standard claim that credit is reserved for the state sector. Lardy also argues that the 2008 stimulus, often cited as the moment the state advanced, produced a temporary rather than a lasting reversal.
The book is a data argument and stands or falls on the reliability of Chinese statistics and on the ownership classifications, both of which Lardy discusses carefully. Its conclusion has been substantially overtaken: Lardy himself published The State Strikes Back in 2019, arguing that the trend reversed under Xi Jinping. The two books should be read together, and the pair is a useful demonstration of an economist changing position in response to data.
Key takeaways 7
- Private firms produced the large majority of Chinese manufacturing output and essentially all net new employment by 2013.
- State enterprises earned substantially lower returns on assets than private firms in almost every sector.
- Bank credit to private firms grew faster than credit to state firms, which contradicts the claim that lending is politically reserved.
- The 2008 stimulus produced a temporary rather than a permanent expansion of the state sector's share.
- Lardy argues that China's growth since the 1990s is explained by the expansion of the private sector rather than by state direction.
- Ownership classification in Chinese statistics is ambiguous, and Lardy's conclusions depend on how mixed-ownership firms are counted.
- Lardy's own later work reverses this conclusion for the period after 2013, which makes the book a snapshot rather than a settled finding.
Who should read it
Investors in China who want the data-based case that private enterprise drove growth, read alongside the author's later reversal.
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