The State Strikes Back
The same author documenting the reversal towards state control.
Summary
Nicholas Lardy published this five years after Markets over Mao, in which he had argued that private enterprise rather than the state was driving Chinese growth, and he reverses that conclusion for the period after 2012.
His evidence is the data he assembles on the relative position of state and private firms since Xi Jinping took office. Credit allocation shifted back toward state enterprises after 2013, with private firms' share of new bank lending falling sharply. State enterprise share of investment rose. Party committees were strengthened inside private firms and mixed-ownership reform brought state capital into private companies rather than the reverse. Regulatory and campaign actions against private entrepreneurs, particularly in technology and property, removed the security that had made private investment attractive.
His analytical argument is that this matters because state enterprises earn substantially lower returns on assets than private firms across almost every sector, so directing credit toward them lowers aggregate productivity growth. He estimates the growth cost. He also argues that the reversal is a policy choice rather than a necessity, and that reversing it would restore growth. The book is short and data-based, and its most useful quality is that Lardy publicly changed his position in response to evidence. The events since publication, including the property sector's collapse and the technology sector campaigns, have strengthened rather than weakened his case.
Key takeaways 7
- Credit allocation in China shifted back toward state enterprises after 2013, reversing the trend Lardy had documented earlier.
- State enterprises earn substantially lower returns on assets than private firms across almost every sector.
- Directing credit toward lower-return state firms reduces aggregate productivity growth by a quantity Lardy estimates.
- Mixed-ownership reform brought state capital into private companies rather than private capital into state ones.
- Party committees inside private firms were strengthened, which changed the security of private control.
- Lardy argues the reversal is a policy choice rather than a necessity, and that it could be reversed.
- Lardy publicly changed his own published conclusion in response to new data, which is rare and worth noting.
Who should read it
Investors in China who want the data on the state sector's advance and its measured cost to growth, from an economist who reversed his own earlier position.
Where it sits in the reference 2
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