Recapitalization of Chinese Economy
Professor Zhang Jun
Professor of Economics and Director of China Center for Economic Studies, Fudan University.
An article appearing on Wall Street Journal more than a year ago tries to compare Chinese growth with Indian growth in the last decade. The authors find there is no big growth difference between China and India in the past 10 years, though China grows a little faster. The big difference between these two big countries, before anything else, is that India lacks hard infrastructure for fast growth and China lacks soft infrastructure for efficient growth.
India has relatively well-developed financial market, but China hasn't. China has a national saving rate of 40% that is almost two times that of India. Not like China, India rarely takes in foreign direct investment (FDI). Every year China targets FDI and tries all the best to reach the targeted amount, because FDI engines the growth, but the national saving doesn't. Observers of China economy are always puzzled by the continuously rapid inflow of FDI to China. Why does China need FDI so much though China has the saving rate that is comparable to that of South Korea and Singapore in 1970s and 1980s? When I was repeatedly asked such question, my answer has been quite obvious: FDIs are much more productive than Chinese savings.
Why are Chinese savings not so much productive as FDI? Because it is the governments, not Chinese entrepreneurs at all, who control and allocate the national savings via the state banking system. Under the state controlled allocation, Chinese savings are injected into state sector which consists of both Chinese state enterprises and government-sponsored capital intensive projects every year. The efficient and dynamic Chinese domestic entrepreneurs are not allowed to get access to the huge money. Because of the nature of Chinese financial system, Chinese savings are not really something more productive and profitable, simply, are not something called capital at all.
Market capitalization is not simply money but an ability to make more money through enhancing productivity. Economics teaches nothing but explains how to distribute the factors in an efficient way. Nobody can control labor productivity but the owners of labor themselves, and who control the money factor makes great difference to money productivity. Only in the market is it possible for highly productive people to meet the amount of money they wanted. Banking system has no such mechanism to screen out the entrepreneurships. That's why the development of capital market has been so important to economic growth.
Chinese economy has been growing fast in the past 2 decades but the capital hasn't grown. The market capitalization of Chinese enterprises only accounts for less 1% of its GDP, and this ratio is dropping. In stock markets, the capitalization has been downsizing from over 200 billion yuan two years ago down to something like less 50 billion yuan today. The 98.7% of financing is through banks today. Last year Chinese GDP increased by 650 billion yuan, but the saving increased by 3.9 trillion yuan. How to capitalize the huge amount of savings is the big challenge to Chinese financial system. China needs financial transformation.
Capitalization of firms, or the ability to make more money, must be privately owned. In this sense, the financial transition from banking-based to market-based is a legal transition process away from governments dominance over property rights on to the pervasive protection of private property rights. Market capitalization is the recognition of private property rights over decision-makings in production and productivity growth. Without clearly defined private property rights, capitalization is not well developed, so are Chinese private businesses--though Chinese economy has been growing, but not its enterprises.
