This one’s a doozy. Tl;dr: China’s breakneck economic growth this past decade doesn’t necessarily mean they’re our new overlords yet.

“国进民退.”

For several years Chinese entrepreneurs have been throwing this phrase around to describe the direction of China’s economic policy. Pronounced “guo jin min tui,” the phrase means “the state advances, the private sector retreats.” It encapsulates the dominance of Chinese state-controlled firms over the private sector and has left many Western thinkers wondering whether free market capitalism is still king. The combination of China’s meteoric rise in the past decade and the recent financial downturn — caused by irresponsible free market behavior, no less — has placed the supremacy of free capitalism in question and compelled many to look to China’s state capitalism as a better engine of economic growth. Is it time for the United States to take a metaphorical page from China’s book and consider a form of planned economy? The Middle Kingdom’s rise is impressive at 7.8 percent growth[[1]][1], certainly no small feat in this current economic climate; however, Americans should not be so quick to abandon free market capitalism and cower in fear for our new Chinese overlords as the Middle Kingdom’s economic growth hides an ugly underbelly beneath its shiny veneer.

While China’s growth rates have regularly beaten the United States’ since the beginning of the century, Americans must not forget the looming threat of an overheated economy and a bubble burst. China’s bubble is about to burst; signs of economic deceleration are already evident. As China posted 7.8 percent growth in gross domestic product (GDP) in 2012[[2]][2] while the United States eked out a paltry 2.21 percent[[3]][3] in comparison, many Americans just see one number is larger than the other and wonder how China does so well in a still-recovering global economy. It is important to note that a healthy GDP growth rate is between 2 and 4 percent, which puts the U.S. in a good range. In contrast, China’s 7.8 percent growth and its series of double-digit growth for most of 2003-10[[4]][4] signal the threat of an overheating economy. If China does not take steps to increase inflation and/or increase the Renminbi’s valuation against the U.S. dollar, China’s 1.3 billion inhabitants will find plenty reason to become restless and riot, creating an unsafe climate for foreign investment, which is important for continual growth. Furthermore, evidence of an economic slowdown is already apparent as the Montreal Gazette reported in November 2011: “The Chinese stock market is near its two-year low; third-quarter GDP growth slowed to 9.1 per cent, a continued deceleration after years of double-digit gains; and the government’s stockpiling of foreign-exchange reserves has been slowing to a crawl.”[[5]][5] And GDP growth rates have dipped a bit since its 5-year high of 10.4 percent in 2010, so it seems like Beijing has cooling its economic engine down. Yet, Jim Chanos, head of the world’s largest investment fund devoted exclusively to shorting, warns of a dangerous pattern: “Promoters find a different investment hype, a story, to get people excited. In the 1990s, it was the Internet, and now it’s China. Unbridled growth.”[[6]][6] As Sir Isaac Newton would opine: what goes up must come down, and China’s economy must slow down or risk overheating.

All the glamour surrounding China’s rising wealth belies the truth about where the new wealth is actually going, aggressive GDP growth does not show the deep chasm between the rich and the poor. Increased incomes have brought prosperity to the country but not equally, not to everybody. According to the CIA’s World Factbook, China had a Gini coefficient of 0.415 in 2007 while the U.S. had 0.45 the same year (0 means perfect equality in income distribution, 1 means perfect inequality).[[7]][7] In a more recent article from the BBC, China’s Gini coefficient was at 0.47 in 2010[[8]][8], reaching, if not surpassing, the Gini coefficient of the United States last year. (Different groups calculate the Gini index various nations in different years, each producing varying numbers.) That same year, rural citizens had an annual average per capita disposable income of $898 while the same statistic for urban residents stood at $2,900.[[9]][9] Income disparity is a large problem in China, undermining political stability, and cracks have already begun to show. Surging food costs and property values have caused simmering discontent among citizens, bringing the widening income gap to the forefront of Chinese agendas. “Mass incidents, everything from strikes to riots and demonstrations, doubled from 2006, rising to at least 180,000 cases in 2010,” says Sun Liping, a professor of sociology at Beijing’s Tsinghua University, the nation’s top academic institution.[[10]][10] One university student voices his anguish: “China is a rich country, yet food prices are sky high. We can’t afford to buy property, yet all the corrupt officials gamble our money away in Las Vegas.”[[11]][11] Naturally, he opted to remain anonymous due to fears of detainment and/or incarceration by police. It is worth noting that such restive sentiments about income inequality echo similar feelings behind the Arab Spring demonstrations. If China does not close the wealth gap, civil unrest can threaten to derail all its recent growth.

Further anecdotal evidence tells of less than glamorous tactics behind China’s great growth. In May 2009, officials in the province of Hubei were ordered to smoke Hubei-branded cigarettes to boost the local economy and prevent layoffs. Those who failed to meet the quota or smoked another brand were fined.[[12]][12] Never mind the health risks of smoking or that Beijing officially sponsors a national anti-smoking campaign. Again, the focus on pure GDP growth and nothing else hurts China in the long term.

Finally, perhaps most importantly, is the fact that private business rather than state-controlled firms have powered much of China’s growth. Indeed, it is the private sector that powers GDP growth, providing the “capitalism” in “state capitalism.” Out of the 43 million companies in China, 93 percent are private, employing 92 percent of the country’s workers.[[13]][13] Furthermore, non-state-controlled companies comprised two-thirds of China’s industrial output and 75 to 80 percent of profits in Chinese industry. The average return on equity for private firms stood at 14 percent. In contrast, state-controlled firms are not nearly as profitable, bringing in only 4 percent.[[14]][14] What these figures mean is that a vast portion of Chinese growth stems from private transactions, not state-owned firms. Capital for all this private activity comes not from public banks but from mystery sources of which the Politburo has sparse records. Little paper trail exists as most transactions are completed in cash. The lack of official records and shadowy exchanges for private entities owes in large part to businesses’ fear of persecution by state authorities. This fear forces businesses to fly beneath the radar. Too much success attracts attention from authorities that will shut them down. Officially, the Chinese government does not prohibit private enterprises; however, the myriad legal double standards and confounding bureaucracy deters many entrepreneurs from braving the process. Seeing as unofficial private activity accounts for so much of Chinese growth, state capitalism actually stunts more than it facilitates economic expansion. This point is most important in this critique of China’s growth. For all those supporters of state capitalism and planned economies, the fact that private companies power so much of China’s growth demonstrates the power of free market forces. If the Chinese government did not impose such harsh restrictions on private activity and let them run with increased freedoms, no doubt China would see even more growth. Unfortunately, the state only places a chokehold on the wild mustang of capitalism.

Proponents of state capitalism might argue that the biggest advantage of state capitalism is the government’s ability to execute big, complex decisions quickly[[15]][15]. Under one political party, it is easier for the leadership to coordinate large projects and pass time-sensitive legislation with greater efficiency. In trade and economics, this is crucial and the Wall Street Journal offers praise for such a centralized system: “It’s a model with a track record of getting things done, especially at a time when public faith in the efficacy of markets and the competence of politicians is shaken in much of the West.”[[16]][16] Compared to the political polarization and gridlock common in the U.S. Congress, China’s nimble policies are to be envied, as evidenced in its efficacy during industry crises.

In 2008, China was suffering from a shortage of polycrystalline silicon, the main material required for the construction of solar panels. Prices were up tenfold from the previous year to $450 a kilogram.[[17]][17] Beijing quickly scrambled to address this issues and poured money into domestic polycrystalline silicon manufacturing. State-owned companies and banks gave money to manufacturers to build new plants. All the permits and legal paperwork to do with constructing new plants were given expedited approval. Production started within 15 months and GCL-Poly Energy Holding Ltd. was born. Just to be safe, China’s sovereign wealth fund bought 20 percent of GCL-Poly Energy Holding to bolster the company’s finances. Today GCL-Poly Energy Holding is one of the world’s largest polycrystalline silicon manufacturers and, through its 20 percent stake, China controls nearly half the global market for solar power equipment and manufactures about 25% of the world’s polycrystalline silicon.[[18]][18] This is a great success story for state capitalism in China. All Beijing had to do was state that the production of polycrystalline silicon was a national priority and all ensuing actions went unhindered and unquestioned. Yet this same streamlined approach to the process is also one of state capitalism’s biggest flaws, as seen in the Three Gorges Dam project.

The Three Gorges Dam, China’s largest construction project since the Great Wall, is a monumental feat that would take an eternity for Congress to approve if the U.S. were to undertake such a project. Congress could not even keep the government running this year without resorting to partisan brinksmanship, and the resulting compromise is more of a Band-Aid than a solution. By the same token, however, China’s “ability to execute big, complex decisions quickly” for the sake of constructing the Three Gorges Dam has forcibly relocated 1.2 million people and failed to foresee what big environmental disaster the whole project would turn become.[[19]][19] The government, in pursuit of fulfilling war hero Sun Yat-sen’s dream for a hydroelectric dam at the Yangtze River, did not invite independent engineers to review the environmental costs of building the dam, which would have avoided the debacle. Having a single point of rule, while it expedites execution, does not improve the quality of the idea. Indeed, it is prone to the pitfalls of individual decision-making such as misperception and bias, which contribute to large fiascos like this. These pitfalls affect all governmental leaders and bodies everywhere of any ideology; however, the chances of falling into such pitfalls increase greatly with a one-party government like China’s.

Another major point raised by supporters of more regulation and governmental involvement in trade is that since American free market forces caused the 2008 financial downturn, why continue subscribing to such a model? How do you justify free market model in the face of the recession? Why not move toward more regulated economies like that of China’s? After all, is China not still posting strong quarterly growth despite the recession?

First, while it is true the United States’ subprime mortgage crisis sparked the recession, this is the case of “hating the players” and not the game. True, the players of the free market game grew greedy, and, as a result, made unwise decisions in pursuit of wealth. As Ira Glass, Alex Blumberg and Adam Davison reported on NPR’s This American Life, “the CDO [collateralized debt obligation] industry was facing the same pressures everyone else was at every other step of this chain. To loosen their standards.”[[20]][20] This loosening of standards was not a reflection of the free market model but of Wall Street culture. Regardless of the economic model, if its players intend to allow greed and foul play into the system, then an economy will fall no matter how robust.

Second, China might have avoided the brunt of the recession but it, too, is experiencing symptoms of a bubble about to burst. A painful property bubble has been pushing property values up beyond what most citizens can afford. UBS economist Jonathan Anderson estimates that “property construction alone accounted for 13 percent of gross domestic product in 2010, twice the share of the 1990s,” illustrating China’s dependence upon real estate to power its growth. If China’s property bubble does indeed implode, it would be even worse than the American bubble, making this issue an even bigger worry for the Politburo. Even while state capitalism is supposed to create a more stable area for businesses to grow, things like a red-hot property bubble can still occur, showing that none are immune to such things.

To see exponential economic growth in a democracy, one only need look at China’s neighbor, India. India has largely paralleled China’s GDP growth trends since 2003 (albeit at 2-3 points below China)[[21]][21] and avoided the effects of the recession. That said, India has its problems, such as rampant corruption, but the very fact that India has kept up with China’s GDP growth without the implementation of state capitalism indicates that there are more suitable, less extreme alternatives to Beijing’s governmental interference in business.

Despite its phenomenal growth rates, China still has some issues to address before state capitalism becomes a true challenger to free market capitalism as the primary model of economic growth, if at all. The Middle Kingdom’s prioritization of economic growth has opened up numerous ethical transgressions, as seen in the Three Gorges Dam project and Hubei’s smoking quotas, and led to an overheating economy that the government is now frantically trying to cool down. Furthermore, on the surface, China’s rise seems to be driven by the development of state firms, but closer examination reveals that much of it is owed to unlisted private firms. The latter only bolsters the argument that Americans should not fear China’s rise and believe in the supremacy of free market forces.

When recalling the quote “国进民退” (“the state advances, the private sector retreats”), we must remember it is only true in terms of increased governmental involvement with business, but false when we realize the state only hinders the private engines of China’s economy. The Chinese, however, have always had a knack for condensing complex ideas, puns and double meanings into concise aphorisms, and there’s a reason Chinese entrepreneurs chose the four characters of “国进民退.” Translated literally, the latter half of the phrase takes on a second meaning: “The state advances,** the common people** retreats.” In other words, China’s economy has expanded at the expense of its own people, and a government that prioritizes economic growth over its citizens’ welfare will never survive in the end, regardless of how fast it gets there.


[1] Wang, Aileen, and Kevin Yao. “China’s Third-quarter GDP Growth Fastest This Year, but Outlook Dim.” Reuters. Thomson Reuters, 18 Oct. 2013. Web. 03 Nov. 2013. <http://www.reuters.com/article/2013/10/18/us-china-economy-gdp-idUSBRE99H02T20131018>.

[2] “GDP Growth (annual %).” GDP Growth (annual %). World Bank, n.d. Web. 03 Nov. 2013. <http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?page=2>.

[3] Ibid.

[4] Ibid.

[5] Taylor, Chris. “China’s Bubble Might Burst Next.” Editorial. Montreal Gazette 1 Nov. 2011. The Montreal Gazette, 1 Nov. 2011. Web. <http://www.montrealgazette.com/business/China+bubble+might+burst+next/5635870/story.html>.

[6] Daly, John. “Chanos Calls China Syndrome – The Globe and Mail.” The Globe and Mail[Toronto] 29 Sept. 2011. Home – The Globe and Mail. The Globe and Mail, 29 Sept. 2011. Web. 03 Nov. 2013. <http://www.theglobeandmail.com/report-on-business/rob-magazine/chanos-calls-china-syndrome/article2183539/>.

[7] “DISTRIBUTION OF FAMILY INCOME – GINI INDEX.” Welcome to the CIA Web Site — Central Intelligence Agency. Central Intelligence Agency. Web. 03 Nov. 2013. <https://www.cia.gov/library/publications/the-world-factbook/fields/2172.html>.

[8] Tobin, Damian. “Inequality in China: Rural Poverty Persists as Urban Wealth Balloons.” BBC News. BBC, 29 June 2011. Web. 01 Nov. 2013. <http://www.bbc.co.uk/news/business-13945072>.

[9] Ibid.

[10] “Wen Pledges to Curb Graft, Income Inequality as Police Head Off Protests – Bloomberg.” Bloomberg – Business & Financial News, Breaking News Headlines. 28 Feb. 2011. Web. 03 Nov. 2013. <http://www.bloomberg.com/news/2011-02-27/china-police-blanket-planned-jasmine-protest-sites-in-beijing-shanghai.html>.

[11] Ibid.

[12] Foster, Peter. “Chinese Ordered to Smoke More to Boost Economy.” Telegraph.co.uk. 4 May 2009. Web. 02 Nov. 2013. <http://www.telegraph.co.uk/news/newstopics/howaboutthat/5271376/Chinese-ordered-to-smoke-more-to-boost-economy.html>.

[13] “Entrepreneurship in China: Let a Million Flowers Bloom.” Editorial. The Economist 10 Mar. 2011. The Economist – World News, Politics, Economics, Business & Finance. The Economist, 10 Mar. 2011. Web. 02 Nov. 2013. <http://www.economist.com/node/18330120>.

[14] Ibid.

[15] Fukuyama, Francis. “U.S. Democracy Has Little to Teach China.” Financial Times. 17 Jan. 2011. Web. 01 Nov. 2013. < www.ft.com/cms/s/0/cb6af6e8-2272-11e0-b6a2-00144feab49a.html>

[16] Dean, Jason. “China’s ‘State Capitalism’ Sparks a Global Backlash – WSJ.com.” Business News & Financial News – The Wall Street Journal – Wsj.com. Dow Jones & Company, Inc. Web. 03 Nov. 2013. <http://online.wsj.com/article/SB10001424052748703514904575602731006315198.html>.

[17] Ibid.

[18] Ibid.

[19] Hvistendahl, Mara. “China’s Three Gorges Dam: An Environmental Catastrophe?: Scientific American.” Scientific American 25 Mar. 2008. Science News, Articles and Information | Scientific American. 25 Mar. 2008. Web. 02 Nov. 2013. <http://www.scientificamerican.com/article.cfm?id=chinas-three-gorges-dam-disaster>.

[20] “The Giant Pool of Money.” This American Life. Natl. Public Radio. WNYC, New York. 29 May 2008.  Radio

[21] “GDP Growth (annual %).” GDP Growth (annual %). World Bank, n.d. Web. 03 Nov. 2013. <http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG/countries/IN-CN-1W-US?display=graph>.

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