Statistics in support of reform are compelling. Though blocked from many sectors, and largely unable to get bank financing, Chinese private enterprise accounts for 90 percent of new jobs, 65 percent of patented inventions and 80 percent of technological innovation. Meanwhile, Chinese consumption is 35 percent of GDP versus 63 percent in Brazil and 54 percent in India. China is also facing what economists call "the middle-income trap," a stage when low-cost labor and easy technology adoption max out as competitive advantages. Without domestic consumers to offset export decline and drive growth - typically through innovation - the emerging economy will languish. The World Bank says that that in 1960 there were 101 middle-income economies. By 2008, only 13 of them had reached high-income status. The reason is that those enriched during the developing state are often entrenched and able to block change.
China's first decade of WTO membership and simultaneous return to favoring SOEs has been lucrative for SOEs. A June 2011 study by the Unirule Institute of Economics, an independent Chinese policy research center, detailed how SOEs are eating the fruit of reform. Unirule estimated that SOEs had accumulated some RMB 5.8 trillion in profits from 2001 to 2009. But if the discounted land, cheap utilities, lowball interest rates and other subsidies unveiled by Unirule are deducted from SOE profits, the real average return on equity for the period is negative 6.29 percent. As of 2010, only 2.2 percent of SOE profits were turned over to the state.
The past decade has been China's version of America's Robber Baron Era and Gilded Age - compressed, compounded and intensified. Previously, the party seemed to operate under an unspoken "don't ask, don't tell" adage. The party aristocracy could use influence to accumulate family assets, but they were supposed to keep it low-key. According to a Bloomberg study, the wealthiest 70 members of the National People's Congress now have a combined worth of $90 billion.
A window into the use of SOEs to harvest wealth and undergird party power was cracked open by the March detention of Politburo member Bo Xilai for "serious discipline violations" and the arrest and later conviction of his wife, Gu Kailai, for killing a British businessman. After Bo's detention, reporters dug up public records showing that his brother under an assumed name was vice chairman and the holder of $18 million in stock options of a Hong Kong-traded SOE. Bo's sister-in-law was found to be serving on the board of more than 20 companies.
Less than three months after Vice Premier Zhang Dejiang was dispatched from Beijing to replace Bo as Chongqing city party secretary, the government announced RMB 350 billion worth of contracts involving several dozen central SOEs to boost the Chongqing economy and revitalize support for the party - investments worth nearly $12,000 per Chongqing resident.
The most challenging reforms will be fixing the hukou, or housing registration, system enacted in the 1950s to prevent peasants from flooding into the cities. The government estimates that more than a quarter of urban residents in major cities lack an urban hukou. This population includes some 160 million migrant workers who lose access to health care, education and other social services once they leave their countryside homes. Just over 50 percent of the Chinese population now lives in cities. With 13 to 15 million migrating to the cities annually, this is expected to reach two-thirds by 2030.
The good news is that hukou reform could transform 10 million migrant workers annually into the next wave of urban consumers, forming a "potential new global market of unprecedented size" that would boost the world economy, according to DRC economic planner Liu He.
The Party mouthpiece People's Daily was bellicose after President Barack Obama criticized China in November 2011 for "gaming the system" of international trade. The paper responded that the US should realize that "Smart people move with the times, conceited people are eliminated by history."
That's solid advice for China.
