The spectacle of businesses begging to be beggared

Robert Loh’s 1962 memoir, Escape from Red China, recently became available again as a low-priced ebook, and it deserves to be more widely read–and perhaps particularly so at this moment in Chinese history. It is a rare portrait of the early years of the People’s Republic, describing in vivid detail the progress of the Communist Party’s escalating political campaigns (Loh’s book is frequently cited in Frank Dikotter’s history of the period, The Tragedy of Liberation: A History of the Chinese Revolution 1945-1957).

While there are many memoirs of the later Cultural Revolution period from people who experienced it as children or adults, first-person accounts of the previous decade are much rarer. Loh’s account is particularly valuable since he was a family friend of the famous Shanghai “red capitalist” Rong Yiren, and worked for him managing flour mills (Rong is thinly disguised under the pseudonym “J.P. Chan” in the book, but his identity is obvious). Loh thus had firsthand experience of how the Communist Party dealt with private business in this period.

A particularly interesting section of the book is his account of the build-up to the nationalization of private businesses after 1956. Rather than simply expropriate private firms at a stroke, the Party gradually put ever more pressure on them to place themselves in public hands:

The softening-up became apparent in late 1954 when the first pilot projects for Joint State-Private Enterprise were inaugurated. One or two firms from each branch of trade were chosen. The pilot projects were always the best equipped and most profitably operated firms. The State acquired part ownership of these firms by taking over the shares of such “counter-revolutionary elements” as the big investor T. V. Soong, by taking shares in lieu of the fines assessed under [the] Five-Anti [campaign], and even, in a very few cases, by actual investment.

These pilot Joint State-Private Enterprises were given every possible advantage. Their assets were evaluated fairly. The tax levies were just. Government low-interest loans were easily available. Adequate quantities of raw materials were supplied promptly. Labor problems were solved without bother or friction. Priority was given to these firms’ distribution and transportation facilities. In fact, the government saw to it that the pilot projects operated smoothly and showed a healthy profit.

In short, the capitalists who had the State for a joint partner did very well indeed. Each of them was made into a rosy picture of socialism’s glorious future.

On the other hand, the horrors of “free” private enterprise were depicted even more graphically. We “national capitalists” whose firms were not chosen for Joint State-Private Enterprise were “softened up” by being denied all of the advantages given to the pilot project owners.

My experiences at the flour mills were typical. The contempt and animosity I had been receiving from the mills’ Party Secretary became worse. The amount of wheat sent to us by the government had not been enough to keep our mills operating a quarter of the time; now we were sent less. Moreover, the fees paid for our work were reduced. Our losses therefore became even greater. We were still not permitted to go out of business, but bank loans became even harder to get. And, of course, the workers were made to demonstrate more frequently and violently against me.

Later, Loh describes how Mao decided to accelerate the rollout of this model of “joint” enterprises to all private companies. There was enormous pressure to make this appear to happen voluntarily, with local businesspeople handing in their “applications” for state partnership in public celebrations.

All the Chinese Communist propaganda at the time emphasized the “miracle” of businessmen happily surrendering their enterprises. The inference was that they clamored for socialism because its benefits had been proven to them by the patient, kindly, generous, always truthful, meticulously honest and infinitely wise Communists. People in the Communist bloc and the more naïve in the neutralist nations accepted this explanation without question. I have gathered that the Westerners, however, have been confused ever since by the picture of businessmen begging to be beggared.

It is true that the Chinese businessmen did exhibit wild enthusiasm, but they acted out of fear. Each had been made to understand that his future depended on his contribution during the “high tide of socialist transformation.” Once he had given up his enterprise, he knew that his sole means of livelihood would depend on the whim of the Communists. In short, he was struggling with almost hysterical intensity simply for survival.

Moreover, he knew he would not survive at all if he refused to apply for Joint State-Private status. Of the 165,000 firms in Shanghai, I knew of only one whose owner did not make the application. He was an elderly man whose enterprise was a medium-size paper mill. I spoke to him and attempted, for his own good, to make him change his mind. He was too panic-stricken, however, to face the future without the possession of the enterprise which, throughout his life, had been his sole means of security. He quickly lost his possession, of course; immediately after the campaign the government cut off his source of raw materials and refused to place further orders with him. The bank refused him loans. Within two months, he was bankrupt. He was sued by his employees’ Trade Union and by the Tax Bureau. He was arrested and sentenced to the work gangs of labor reform.


I wouldn’t want to overdo the historical parallels with the present moment. But it’s true that the Communist Party is still a master of getting private companies to do what it wants, mainly by demonstrating how difficult life for them can be if they don’t.

The most obvious recent example is the crackdown on a group of high-flying private conglomerates, led by Wang Jianlin’s Wanda Group, which were pressured into abandoning overseas investments and selling billions of dollars of assets. “Wanda will respond to the state’s call,” Wang told Caixin when asked for an explanation of the sudden change of business strategy.

Another very interesting recent story is the reported desire of the government for big internet companies to “offer the state a stake” so that it can have a more direct role in managing social media and online commerce. It is hard not to hear some echoes of that 1950s push for companies to make voluntary applications to the state to take them over.

Thoughts prompted by an interview with CKGSB

Along with many other worthies, I was interviewed for a long article on state-owned enterprises in the Cheung Kong Graduate School of Business magazine. One of the questions that I was asked, which is one of the ones people always ask, is: aren’t SOEs bad for China’s growth?

Given that profitability and productivity is systematically lower in state firms compared to private firms, it seems like the answer should be yes. Yet it’s fairly clear that in China’s case, growth is higher than it would be otherwise, precisely because SOEs have maintained very high rates of investment spending. So the growth numbers are probably not where the economic effects of SOEs are most obvious. But I suggested that they can still be seen if you take a broader view:

“Having a large share of economic activity controlled by state-owned enterprises means larger potential for corruption, lower potential for innovation and a smaller range of opportunities for people to pursue different careers and lifestyles,” says Batson. “There are a lot of effects on how the economy is structured that make a difference to people aside from the effects on the growth rate.”

For me, the broader point that came out of this discussion was this: the question of whether China’s economy should be organized around a large role for SOEs is ultimately not a technical question about growth maximization but one about values, what kind of society is desired. As long as the costs are not overwhelming–as they were during the 1990s, when the entire state sector was losing money–the government can continue to pursue its socialist values. And so far the costs have indeed been manageable.

Which Chinese provinces are most dominated by state-owned firms, updated

One of my earlier and wonkier posts on this blog was a way to score China’s provinces by the relative size of their state-owned enterprise sector. While anyone who has been to China can tell that some places are more state-dominated than others, the goal was to add some discipline to those kind of impressions. The underlying data for that exercise was a bit patchy, so I’ve updated the scores with more consistent data for 2015.

Below are the results; there’s not a huge amount of change, so I thought it would be more interesting to present the actual scores rather than a map (there’s one in the previous post). The score is computed by standardizing and summing the SOE share of fixed-asset investment, the SOE share of industrial sales, and the ratio of local SOE assets to GDP; the underlying data comes from Chinese statistical yearbooks.


Note that these are relative scores not absolute ones–the highest-scoring province gets a 1, which doesn’t mean the provincial economy is 100% state-dominated. A few interesting things to point out:

  • The poor western provinces have by far the most state-dominated economies. In part this is because their economies are small, in part it is because SOEs are one of the main channels through which regional redistribution happens in China. Poor western provinces get more state-sponsored infrastructure and investment projects. For instance, in Tibet 76% of fixed-asset investment spending is by SOEs, compared to a national average of around 32%.
  • The four provincial-level municipalities, Beijing, Shanghai, Tianjin, Chongqing, also have very high levels of SOE activity. Beijing in particular stands out with a very high score on all three components, despite the fact that, unlike Gansu or Yunnan, it has very substantial amounts of foreign investment and domestic private-sector activity, particularly in high tech. I think this is not a size effect since the municipalities have economies and populations larger than many provinces. In part I think it reflects their political importance and clout, which means more state activity.
  • It’s interesting that the three northeastern provinces have relatively moderate scores despite being generally portrayed as the bastions of state enterprise. My guess is that the northeast has not gotten the kind of infrastructure spending boost that the western provinces have, which is the main thing driving their scores so high. The assets/GDP metric also only covers local-government-controlled SOEs, where the northeast in fact ranks very low; they are home to more central-government-controlled SOEs which are getting missed by this metric. So, the score is not a perfect tool.
  • While there’s not a simple correlation between the SOE influence score and income levels or growth rates, it’s nonetheless true that most of the action in the Chinese economy happens in places that are not so state dominated. The four big coastal provinces–Guangdong, Jiangsu, Shandong, Zhejiang–are all at the bottom of the list, and account for a bit more than 25% of China’s GDP. The dozen most state-dominated provinces combined are still smaller than that: the four municipalities account for about 11% of GDP, and the other eight provinces that top the list account for about 10% of GDP.

The 1917 October Revolution lives on in China

Here in late October 2017, I am reading a lot about the centennial of the 1917 revolution in Russia, and a lot about the 19th Communist Party Congress in China. It seems strange to me that the connection between these two events is not being discussed more.

Surely it is obvious? The most consequential and long-lasting geopolitical legacy of the 1917 revolution in Russia has to be that in 2017 China is still governed by the Communist Party. And yet this fact is glossed over in a lot of the current discussion about the meaning and legacy of the October Revolution. I was struck by the fact that, in Sunday’s special issue of the New York Times Book Review on the revolution, not one book about China was reviewed.

In Russia today, the 1917 revolution hardly seems like a live issue. Shaun Walker has a nice piece in The Guardian pointing out how ambivalent the current government is about embracing the October Revolution, and how it is not being officially celebrated:

Putin has been equivocal in his statements on the revolution but has made it clear that his main issue is the violent seizure of power undertaken by the Bolsheviks. Putin has fetishised the sanctity of statehood, however distasteful the ruling regime may be: whether it be in modern-day Kiev or Damascus, or in tsarist Russia.

“When we look at the lessons from a century ago, we see how ambiguous the results were, and how there were both negative and positive consequences of those events,” said Putin this week, coming back to a thought he has expounded on many times before. “We have to ask the question: was it really not possible to develop not through revolution but through evolution, without destroying statehood and mercilessly ruining the fate of millions, but through gradual, step-by-step progress?”

This, ultimately, is the key message from the Kremlin as the anniversary approaches. Monarchists and the ultra-Orthodox are free to idolise Nicholas II; communists and nostalgics are free to look back on the Bolsheviks as the harbingers of a new civilisation, but state collapse and violent protests are always to be condemned.

Cut to China, where the government is sponsoring the publication of a nice new edition of Lenin’s Collected Works to commemorate the centennial of the revolution, and the government is proudly wrapping itself in the flag of socialism.


Top propaganda official Liu Qibao in September gave a fascinating speech to a meeting commemorating the anniversary of the 1917 revolution, which has recently been officially translated into English. I actually think the whole thing is worth reading, but here are a few excerpts to give a taste:

The October Revolution brought Marxism-Leninism to China. After the First Opium War (1840-1842), China was gradually reduced to a semi-colonial and semi-feudal society and the Chinese nation was plunged into deep suffering. … The October Revolution ignited a new hope for realizing national independence and people’s liberation.

… A century ago, China was poor and weak, and it was bullied by big powers. Since then, our country has gone through many setbacks and hardships before rising up and achieving glory. The Chinese nation has undergone unprecedented changes — from standing up to prospering and strengthening to establishing its position amongst nations of the world.

Never in history have we been closer to the goal of the great renewal of the Chinese nation, and never in history have we had greater confidence and capability to realize this goal. This tremendous change is attributed to the fact that we have chosen the path of socialism which was opened up by the October Revolution…

The epoch-making historical feat of the October Revolution and the major achievements of the Soviet socialism system cannot be negated by dissolution of the Soviet Union. The reasons behind the Soviet breakup are many, including rigidity and conservatism; yet, the root cause was its turning away from Marxism-Leninism and from the socialist path created by the October Revolution.

China’s Communist Party is therefore saying, in so many words, that because of the failure of the Soviet Union, the true legacy of the 1917 revolution today is to be found in China. This of course is propaganda, but it is also in some sense actually true.

It may be even more true than the Party would like to admit. Although the Soviet Union officially recognized the Nationalist government during China’s civil war, it also quietly put its thumb on the scales to support the Communists during their campaign to capture Manchuria. And it was fear of provoking the Soviet Union that kept the US from intervening more decisively to support the Nationalists. Arguably, the Communist victory in the civil war would have been impossible without this implicit backing of the Soviet Union (see my previous post on this history for more detail).

Because of China, it seems like the question of the legacy of the 1917 revolution is still very much a contemporary one, rather than something that can be relegated to the history books.

SDR inclusion as commitment device

Chinese central bank governor Zhou Xiaochuan recently gave an interview to Caijing magazine, on the occasion of the first anniversary of the renminbi’s inclusion in the currency basket for the IMF’s Special Drawing Right, or SDR, alongside the dollar, euro, pound and yen. This obscure piece of financial infrastructure improbably dominated the headlines for a while, as China waged a public campaign for inclusion. But most people could not figure out why SDR inclusion meant so much to China, and in the end the world seemed to decide that it was mostly a symbolic victory in China’s quest for global status. We haven’t heard much about the SDR since.

Zhou, though, still seems to think that SDR inclusion was a big deal. And since he has for decades been one of the main figures driving the modernization of China’s financial system, his track record is not that of someone who just pursues empty pieces of symbolism. Zhou is already past the normal retirement age and probably will not be in office this time next year, so SDR inclusion is part of his legacy. In the long interview (Chinese text here), he gives what I think is quite a revealing justification:

The entry of the renminbi into the SDR basket will produce a “ratcheting effect” for China’s opening up. This is like the ratchet on the rope in a volleyball net; when the net is tightened the ratchet latches on to the rope, so once it is set in position it cannot go back, cannot reverse. In English there is an expression, “past the point of no return.” Of course, in economics and society there is no absolute “ratchet,” I don’t mean that it’s absolutely impossible for there to be a reverse, just that it is very difficult.

In China’s reform and opening up process, whether in attracting foreign investment, liberalizing foreign trade, reforming the exchange rate, entering the WTO, etc, there were often some small reversals in the middle, or kind of a stop-and-go. But once we took that step, it was very difficult to go back.

After the renminbi entered the SDR, both international institutions and financial markets are using the renminbi more and more; international investors are using the renminbi to invest in the domestic financial market; laws and regulations have been revised; traders and exporters are all using new procedures. If you want to go backward, it is difficult, and the costs are high.

Perhaps another way of putting this is that SDR inclusion is a commitment device. In addition to the practical concerns raised by Zhou, there would also be reputational costs to reversing exchange-rate and capital-account reforms. Since SDR inclusion is contingent on the IMF’s determination that the renminbi is “freely usable,” it could conceivably be reversed if the currency were to stop being freely usable. What future Chinese central bank governor will want to see headlines screaming “IMF expels renminbi from SDR”?

Of course, China over the past year has in fact been de-facto tightening capital controls by stepping up scrutiny of overseas M&A and slowing down approval of foreign-exchange transactions. But it has done so largely by using its regulatory discretion rather than changing formal rules. So perhaps the commitment device is working some.

It is telling though that this justification for SDR inclusion is about consolidating and defending past reforms, rather than advancing new ones, though Zhou clearly wants to see those as well.


Christine Lagarde and Zhou Xiaochuan in 2016


Hong Kong’s war of attrition against street hawkers

I enjoyed Christopher DeWolf’s Borrowed Spaces: Life Between the Cracks of Modern Hong Kong, the latest installment I read in the Penguin Hong Kong series. It’s a nice piece of reportage that helps fill in the little-known (to me anyway) history of street life and informal urban structures in Hong Kong.

The book is particularly good at providing an alternative perspective on how Hong Kong’s government actually works. To anyone who has spent time in Hong Kong, the idea that it has the world’s freest economy (as the Heritage Foundation perennially tells us) is just patently, obviously untrue. But even so I was fairly shocked to discover that the government has for decades been actively trying to get rid of the small-scale retail entrepreneurs known as street hawkers:

For years, activity in the streets of Hong Kong was only loosely regulated, but by the 1970s, the government decided it was time to assert more control. The theory at the time was that, as cities transitioned from “third world” to “first world,” such informal uses of urban space would dwindle as the economy developed and people became wealthier. One day, the reasoning went, there would no longer be any need for hawkers, dai pai dong, squatter villages or anything of the sort.

In light of this argument, the Hong Kong government opted for a policy of elimination through attrition. Squatter villages were frozen in place, their residents prohibited from expanding their homes until they could be replaced with public housing estates. Street hawkers were licensed and regulated.  …

The catch was that, while hawkers were still allowed to ply their trade, their licenses were made exceptionally hard to transfer. Even today, when a licensed hawker dies, his or her license can only be transferred to a surviving spouse. The intent was to eventually eliminate all street hawker stalls, and this 1970s-era policy is now well on its way to achieving that goal. In 2015, there were just 6,133 licensed hawkers in Hong Kong; another 1,440 work illegally.

The biggest markets are thriving, including the always busy meat, seafood, fruit and vegetable stalls around Nelson Street and Canton Road, but many of the secondary markets are withering away – not for lack of business, but because the government is actively relocating stalls and buying back hawker licenses in order to clear the streets. Between 2013 and 2015, a total of 481 hawkers surrendered their licenses. …

It is hard not to notice that shrinking opportunities in this part of the economy have coincided, at least, with the general decline in entrepreneurship and social mobility:

The crackdown on informal life isn’t necessarily responsible for the persistent inequality and decline of social mobility in Hong Kong, but there’s a case to be made that it has exacerbated the situation by denying people access to affordable products and the ability to become entrepreneurs.



The great stagnation of Hong Kong

In Hong Kong recently I picked up a stack of the books in the new Penguin Specials series on Hong Kong–which despite being nicely featured in local bookstores are not yet readily available outside the city, or getting much promotion from the publisher. I don’t think they have to be read in any particular order, but I started with Simon Cartledge’s A System Apart (mainly because Simon is an old friend), which is an excellent short overview of Hong Kong’s recent political and economic situation.

The argument, simply put, is that Hong Kong is suffering from severe economic, social and political stagnation:

Hong Kong is stuck, with remarkably little change to show for the last two decades. Its economy is still dominated by a handful of companies, most of them run by ageing tycoons. No new business has risen up to challenge or replace them. No major new industry has been established. The city remains and finance and business center. But its intermediary role has declined in importance over the last twenty years. Across the border, China has created a host of inventive internet and technology giants; Hong Kong cannot point to a single success in these areas.

It is not a place that has failed, but it is one of lost opportunity, of diminished expectations and modest ambition. Despite living on the doorstep of the world’s most dynamic economy of the last two decades, and despite having played a crucial role in that economy’s initial opening and development, Hong Kong has gone sideways.

A further contention is that all these forms of stagnation are interrelated, and trace their origins to the arrangements put in place after Britain’s handover of Hong Kong to Chinese rule. Hong Kong’s peculiar institutions were intended above all to maintain continuity, but in fact resulted in a significant change for the worse:

When China drafted the Basic Law, one of its key aims to put in place machinery to ensure the economy continued running in the same way as before. The obvious way to do this, it seemed, was to allow businesses a big say in policy – hence the decision to make Hong Kong’s first chief executive a businessperson, and to pack the committee which would choose future chief executives with business figures. …

Under colonial rule, the administration, while undeniably pro-business, had always been separate from business itself. The governor was sent from Britain, and the top posts were filled with career civil servants – also all from the UK, until shortly before the handover. While these officials were friendly to business, they were not of business. They may have favored business interests before those of other parts of society, and they also co-opted leading local business figures into government bodies. Nevertheless, to the end, Hong Kong’s colonial rulers maintained strict control over their political power. The Basic Law changed this balance, opening the way for cronyism and corruption and preventing the kind of changes needed that would allow the city to maintain its economy dynamism. …

In the decades after the Second World War, Hong Kong successfully reinvented itself twice. For the first time in the 1950s, after American and United Nations embargoes on trade with China led to it becoming one of the world’s largest makers of light industrial goods. For the second, in the 1980s and 1990s, when it took advantage of China’s opening up to the world, in order to end its reliance on manufacturing and become a services economy centered on trade and finance. Since 1997, despite receiving its worst economic battering in more than half a century, it has undergone remarkably little change.

This economic stagnation, and the accompanying phenomena of slow growth and widening inequality, are clearly related to the increased extremism and polarization in local politics. But as Simon notes, Hong Kong is not exactly the only place in the world to have experienced these kind of political changes:

Many people seem to feel that they are not in control of their lives, and that those running Hong Kong are out of touch with their needs and interests. The senitments are broadly the same as those that to Britain’s Brexit vote and many Americans choosing Donald Trump. In Hong Kong, they manifested themselves in the one-fifth share of the vote for localist and independence candidates in the 2016 Legislative Council elections.

Hong Kong in fact seems to fit well into a common global trend (in high-income societies at any rate) of collapsing support for established political institutions and a rise in the influence of what used to be more marginal movements. So you could question whether Hong Kong’s peculiar institutions are really the cause of its deepening political divide, when places with quite different institutions are suffering from similar problems. The counter argument would be that Hong Kong had much more potential to escape stagnation because it is part of fast-growing China, and yet that potential largely has not been realized.