If the old doesn’t go, the new won’t come.
As discussed in the last post, central to solving China’s debt problem is the reform of a system that keeps state-owned zombie enterprises on life support, while new, innovative companies are denied the privilege.
Here’s a nice idea by Michael Schuman, a Bloomberg view columnist, and one that I always thought of writing, but he did it better than I previously conceived in my mind.
Look at what Korea did with its Chaebols, copy/adopt it. I say this, not just because, or maybe partially because I’m from South Korea.
1. Break the tripartite relationship between Government-Corporations-Banks
South Korea has followed state capitalism model for development, starting from rule of the military dictator Park Jung-hee (father of the current president) whereby policymakers directed credit to strategic industries, and ordered major business leaders to focus on them. The result was dramatic growth.
But by the ‘90s, these chaebols, so central to the growth miracle, had become just like what China’s SOEs look like: bloated, inefficient, hoarding resources that can go to those with better business plans.
Notably though, it did take a crisis for this status-quo system to unravel. The ’97 Asian Financial Crisis. Massive restructuring took place.
Banks were freed from state reins, became well more efficient and held to more stringent standards. Everything from the way window customer services were conducted to loan decisions were revamped to distribute resources more efficiently and as quick as possible.
And chaebol affiliates won’t be able to make loans to each other to survive. Off the dole they were, as Schuman puts, and once on their own, they began to, well, behave more like corporations in a normal capitalist economy. For them, it meant “streamlining their business by cutting staff and selling assets”. This happened to a lot of other firms too, if they weren’t forced to go bankrupt or go through mergers. There were many suicides.
Can we call it necessary evil?
Now, Samsung is just second to Apple in smartphone productions, although not the most well-known, Hyundai cars are being sold the world over, etc. It’s a miracle to see corporations from a nation of 50 million that has risen from the ashes of war just 50 odd years ago to be shouldering with the world’s top corporations. Did I say I was South Korean?
As a caveat, I have to mention that it took a financial crisis to urge Korean corporations transform themselves into what they are now. Debates are still ongoing as to possibilities of a hard-landing, but China has a stunningly solid macroeconomic environment, as the World Economic Forum report has pointed out, making a crisis very unlikely. Lest, the government deliberately lets one happen. But that’s highly unlikely, for the ruling Communist party will surely lose all credibility.
Where has China got too? As Schuman points out, China is nowhere near doing this.
About 80% of all loan so to state-owned companies whose returns are only a third of private firms. Beijing has shown balls of steel in radically restructuring state-owned firms back in 1990s. But as of now, I’m not sure what’s holding them back, but local governments for sure are continuing to funnel subsidies to these state-owned zombies. Why? They used to be biggest tax contributors. Their local growth may depend on these firms, which often are the biggest employers especially in heavy industry regions like the Northeastern provinces, Shanxi, and Inner Mongolia. And also they fear social unrest if mass layoffs happen all too quickly. According to China Labour Bulletin’s monitor, number of labour related protests have perceptibly gone up since 2013.
But Caixin has argued that there is a new economy up and coming to absorb the pain from scalping away the old. Just need to give more gas to the younglings? However, I do think that especially in areas like Manchuria where there is little sign of the new economy, things are looking quite bleak. More on that later.