5.Bamboo capitalism

China's economy

Bamboo capitalism

China’s success owes more to its entrepreneurs than its bureaucrats. Time to

bring them out of the shadows

Mar 10th 2011 | from the print edition

FEW would deny that China has been the economic superstar of recent years. Thanks

to its relentless double-digit annual growth, it has become the world’s second-largest

economy and in many ways the most dynamic. Less obvious is quite what the secret

of this success has been. It is often vaguely attributed to ―capitalism with Chinese

characteristics‖–typically taken to mean that bureaucrats with heavy, visible hands

have worked much of the magic. That, naturally, is a view that China’s government is

happy to encourage.

But is it true? Of course, the state’s activity has been vast and important. It has been

effective in eradicating physical and technological obstacles: physical, through the

construction of roads, power plants and bridges; technical, by facilitating (through

means fair and foul) the transfer of foreign intellectual property. Yet China’s vigour

owes much to what has been happening from the bottom up as well as from the top

down. Just as Germany has its mighty Mittelstand, the backbone of its economy, so

China has a multitude of vigorous, (very) private entrepreneurs: a fast-growing thicket

of bamboo capitalism.

These entrepreneurs often operate outside not only the powerful state-controlled

companies, but outside the country’s laws. As a result, their significance cannot be

well tracked by the state-generated statistics that serve as a flawed window into

China’s economy. But as our briefing shows, they are an astonishing force.

First, there is the scale of their activities. Three decades ago, pretty much all business

in China was controlled by one level of the state or another. Now one estimate—and it

can only be a stab—puts the share of GDP produced by enterprises that are not

majority-owned by the state at 70%. Zheng Yumin, the Communist Party secretary for

the commerce department of Zhejiang province, told a conference last year that more

than 90% of China’s 43m companies were private. The heartland for entrepreneurial

clusters is in regions, like Zhejiang, that have been relatively ignored by Beijing’s

bureaucrats, but such businesses have now spread far and wide across the country.

Second, there is their dynamism. Qiao Liu and Alan Siu of the University of Hong

Kong calculate that the average return on equity of unlisted private firms is fully ten

percentage points higher than the modest 4% achieved by wholly or partly

state-owned enterprises. The number of registered private businesses grew at an

average of 30% a year in 2000-09. Factories that spring up alongside new roads and

railways operate round-the-clock to make whatever nuts and bolts are needed

anywhere in the world. The people behind these businesses endlessly adjust what and

how they produce in response to extraordinary (often local) competition and

fluctuations in demand. Provincial politicians, whose career prospects are tied to

growth, often let these outfits operate free not only of direct state management but

also from many of the laws tied to land ownership, labour relations, taxation and

licensing. Bamboo capitalism lives in a laissez-faire bubble.

But this points to a third, more worrying, characteristic of such businesses: their

vulnerability. Chinese regulation of its private sector is often referred to as ―one eye

open, one eye shut‖. It is a wonderfully flexible system, but without a consistent rule

of law, companies are prey to the predilections of bureaucrats. A crackdown could

come at any time. It is also hard for them to mature into more permanent structures.

Cultivate it, don’t cut it

All this has big implications for China itself and for the wider world. The legal limbo

creates ample scope for abuse: limited regard for labour laws, for example,

encourages exploitation of workers. Rampant free enterprise also lives uncomfortably

alongside the country’s official ideology. So far, China has managed this rather well.

But over time, the contradictions between anarchic opportunism and state direction,

both vital to China’s rise, will surely result in greater friction. Party conservatives will

be tempted to hack away at bamboo capitalism.

It would be much better if they tried instead to provide the entrepreneurs with a

proper legal framework. Many entrepreneurs understandably fear such scrutiny: they

hate standing out, lest their operations become the focus of an investigation. But

without a solid legal basis (including intellectual-property laws), it is very hard to

create great enterprises and brands.

The legal uncertainty pushes capital-raising into the shadows, too. The result is a

fantastically supple system of financing, but a very costly one. Collateral is suspect

and the state-controlled financial system does not reward loan officers for assuming

the risks that come with non-state-controlled companies. Instead, money often comes

from unofficial sources, at great cost. The so-called Wenzhou rate (after the most

famous city for this sort of finance) is said to begin at 18% and can even exceed 200%.

A loan rarely extends beyond two years. Outsiders often marvel at the long-term

planning tied to China’s economy, but many of its most dynamic manufacturers are

limited to sowing and reaping within an agricultural season.

So bamboo capitalism will have to change. But it is changing China. Competition

from private companies has driven up wages and benefits more than any new

law—helping to create the consumers China (and its firms) need. And behind

numerous new businesses created on a shoestring are former factory employees who

have seen the rewards that come from running an assembly line rather than merely

working on one. In all these respects the private sector plays a vital role in raising

living standards—and moving the Chinese economy towards consumption at home

rather than just exports abroad.

The West should be grateful for that. And it should also celebrate bamboo capitalism

more broadly. Too many people—not just third-world dictators but Western business

tycoons—have fallen for the Beijing consensus, the idea that state-directed capitalism

and tight political control are the elixir of growth. In fact China has surged forward

mainly where the state has stood back. ―Capitalism with Chinese characteristics‖

works because of the capitalism, not the characteristics.