Where would your cell phone, your car, your gasoline, your savings account and the TV station you watch all have one thing in common?
Called state capitalism, 45% of the Chinese economy is owned or controlled by the government. With 655 million wireless subscribers, China Mobile, a government controlled firm, is the largest telecommunications firm in the world. You could be driving a General Motors car but in China, General Motors is a minority owner of joint ventures with car companies controlled by the government. Similarly, the Sinopec Group, yes, controlled by the Chinese government and the 5th largest firm in the world would have provided your gasoline.
You see where this is going. And it does not stop with the 121 very large SOEs (state owned enterprises) and state controlled enterprises. Beyond that hundreds of thousands of businesses receive favorable treatment from the Chinese government through “preferential access to capital and forced technology transfer from foreign firms.” For more of a complete discussion, you can listen to NPR’s Planet Money podcast or read this excellent U.S. government report on China.
Our bottom line? Next week a report written by the World Bank and “government insiders” will look at the sustainability of China’s state capitalism and conclude that to continue its vibrant growth, it has to change. More next week on the report.
The Economic Lesson
First explained by economic thinker David Ricardo, comparative advantage optimizes worldwide efficiency when each nation produces goods and services for which it has a low opportunity cost. Chinese subsidies provided through state capitalism distort the beneficial impact of comparative advantage.
An Economic Question: On a traditional supply/demand graph, illustrate the impact of a government subsidy to a manufacturing firm.