The State of China’s Economic Miracle

What are the sources of China’s breathtaking economic growth since the late 1970s? The answer is encapsulated in the title of Nicholas Lardy’s most recent book, Markets over Mao: The Rise of Private Business in China. It’s the private sector. In 1978, state-owned enterprises generated three quarters of China’s industrial output. Today they account for only one quarter. Besides displacing state firms in terms of industrial output, private firms now produce nearly 90% of the country’s exports, are far more profitable than state firms, and employ a growing share of the urban workforce. Markets over Mao methodically combs through over three decades of government statistics to demonstrate, with empirical confidence, the remarkable expansion of China’s private economy.

Lardy provides a valuable service to those daunted by how to triangulate among internally inconsistent sets of official Chinese data, with their shifting categories of firm ownership and reporting practices. The third chapter of Markets over Mao is especially instructive in delineating the seven major types of firms, including explanations of the five subcategories of private firms. Of particular interest, Lardy alerts us to enterprise lending data released by the People’s Bank of China starting in 2011, which identifies the majority or dominant ownership stakes in limited liability companies and shareholding limited companies. Some are primarily owned by state entities, while private shareholders have majority or dominant stakes in others. Yet private shareholder-dominant companies are not typically included in calculating the size, economic contributions, and financial indicators of the private sector. Hence, a recurring cautionary message in Markets over Mao is that relying on official registration status in statistical yearbooks underestimates the true scope of China’s private economy.

Markets over Mao goes beyond serving as a statistical roadmap for number crunchers, however. The book boldly argues that China should not be regarded as state capitalist. This claim rests on three main observations. First, the private sector is growing and outstrips state firms in multiple performance indicators, including return on assets. Second, China’s private sector is not as credit-constrained as most people think. Third, and relatedly, the bulk of the government’s 2008–9 stimulus funds were not disproportionately invested in the state sector. The first observation is uncontroversial. Economists and other dedicated observers of China’s political economy agree that the private sector is more dynamic and profitable than the state sector, even as state-owned giants grab news headlines. The second and third claims, however, warrant further reflection.

Readers may be surprised by the book’s argument that most accounts of China’s private sector exaggerate its financing challenges. Lardy points out that the preponderance of investment in reform-era China has been financed by retained earnings rather than by bank credit or equity markets. During the 1990s, about 40% to 50% of investment in nonfinancial corporations came from retained earnings; and the ratio reached an average of 71% during 2002–8. The private sector has been particularly reliant on retained earnings due to its higher rates of productivity and “more limited access to bank credit” (p. 97). However, Lardy quickly discounts the latter issue by contending that the private sector receives more bank loans than normally recognized—and actually received a growing share of bank loans during the stimulus years. He estimates that in 2012, 44% of all loans outstanding went to the private sector, an increase from 35% in 2009. As detailed in “Appendix A: Alternative Measures of Private Sector Credit,” this calculation includes not only loans to private firms and individual businesses but also business loans to rural households, consumption loans to households (including mortgages), and firms where the dominant shareholder is private. Including these additional loans shows that between 2010 and 2012 private firms accounted for 52% of new lending, whereas state firms received only 32% (p. 104).¹ Markets over Mao states decisively, “Chinese private firms now enjoy better access to credit than in any previous period in the reform era” (p. 108).

Why, then, does the conventional wisdom persist that private businesses in China face a structural financing gap relative...