Hu’s Economic Policies: Liberalizing the Economy or Promoting Special Interests?

Publication: China Brief Volume: 7 Issue: 16

While widely recognized as holding conservative ideological and political views, the Hu Jintao leadership has been given reasonably high marks for pushing forward economic reforms first initiated by the late patriarch Deng Xiaoping. According to World Trade Organization provisions, the Chinese Communist Party (CCP) has opened up an unprecedented number of sectors for foreign equity participation. Yet, the authorities have at the same time tightened control over other aspects of the economy. This has resulted in the truncation, if not atrophy, of thousands of private firms. The latter are in danger of being edged out by powerful monopolies and oligopolies that are controlled either by the party-and-state apparatus or by senior cadres and their offspring.

Officially, the leadership under President Hu and Premier Wen Jiabao has been committed to further expanding the non-state sector, which has grown exponentially due to high levels of foreign direct investment—$69.5 billion in 2006—as well as to the massive outlays of gumin, a reference to the millions of “stocks-crazed” Chinese who have opened securities-related investment accounts with banks and brokerages [1]. Yet it must be noted that the sector that has benefited most from what pundits call the “preliminary stage of capitalism with PRC characteristics” consists of the so-called “aircraft carrier-type” enterprise groupings under the CCP and government apparatus. These giants are supervised by the powerful State Council agency, the State-owned Assets Supervision and Administration Commission (SASAC). While nearly all of these quasi-governmental behemoths, including the three oil and gas monopolies, the energy and electricity groups, airlines and telecoms, and most of the major banks, are now publicly-listed companies, government ministries or State Council entities control up to 50 percent of their shares. Moreover, most of their top executives are appointed by the CCP Organization Department in consultation with the SASAC. These privileged “red businessmen” carry the official ranks of ministers or vice-ministers.

Last year, total assets of these 160 or so state monopolies and oligopolies amounted to a stunning 12.20 trillion yuan ($1.6 trillion), or about 57 percent of the country’s GDP. In addition, they generated 720 billion yuan ($95 billion) in earnings, half of which were made by the three oil giants alone. Up to 80 percent of the year-on-year increase in profits realized in 2006 by all Chinese enterprises were attributable to longduan or monopoly firms in the areas of oil and petrochemicals, electricity, coal, and metals (People’s Daily, January 6; Xinhua, March 18). Thanks to their cartel-like powers, these firms are also least affected by the rise in costs of raw materials or energy. Equally controversial is the fact that their CEOs and senior executives are earning up to 10 million yuan a year ($1.3 million). While China is still a putatively socialist country with egalitarian values, the paychecks of these top managers are up to 27 times those of their employees. For an administration that is committed to “putting the masses first,” it does not help that a number of the bosses of the longduan firms are the sons and daughters of party elders. The children of former Premier Li Peng, for example, are running two of the electricity monopolies. This has prompted even the state media to decry the rise of “special privileges” and the emergence of a “new class of monopoly state capitalists” at a time when friction among disparate socioeconomic groupings is threatening to tear apart the social fabric. Even the official Xinhua news agency recently ran a commentary decrying the fact that “the high earnings of longduan sectors have posed a challenge to social harmony” (Xinhua, May 18; People’s Daily, July 25).

Beijing has consistently denied that it is protecting the big groupings—reminiscent of the keiretsu in Japan and chaebol in South Korea—while constricting private economic entities. Two years ago, the State Council unveiled a set of “36 regulations on the non-state economy,” which in theory extended “national treatment” to the non-government sector. Private firms were allowed to venture into areas such as finance, electricity, telecommunications, railways, civil aviation, oil and natural gas. In 2005, when 14 private airlines went into business, it was hailed as a high-water mark for non-state firms’ debut in the transportation sector. Most of these private airlines, however, are now in dire straits due to a number of reasons, including difficulty in securing loans from big banks.

More importantly, SASAC published a contravening set of policies last year, which said that seven sectors, including military equipment, electricity, oil and petrochemicals, telecommunications, coal, civil aviation and shipping, must be either entirely controlled, or dominated by state firms. “Domination” means that the three biggest companies in a longduan sector must be SASAC-affiliated firms. Moreover, regulations governing private companies entering state-protected sectors are deemed even more stringent than those for multinationals. For example, non-state companies that want to break into the field of finance must team up with a qualified foreign strategic investor. Those that are interested in doing wholesale or retail oil business must have registered capital of at least 30 million yuan ($4 million), plus oil-storage capacities of up to 10,000 cubic meters. With these regulations in place, a sizable number of private oil retailers in Chongqing, Henan and Shenyang were left with no choice but to sell their businesses to the three oil oligopolies (Wen Wei Po, July 18).

Yet another form of monopolistic practice—in the form of high-growth real estate and infrastructure development—has been a direct result of the massive corruption in the rapidly growing cities along China’s east coast (Xinhua, April 28). The detention of former Shanghai party secretary Chen Liangyu last September, as well as the arrest of rags-to-riches speculator Zhou Zhengyi in 2003—and again in 2007—have exposed how dozens of companies that enjoyed the patronage of senior Shanghai cadres have made billions of yuan in profits. Chen, for instance, authorized companies set up by his relatives and cronies to dig into the municipal government’s social security funds to underwrite highway and other infrastructure projects. And Zhou made his millions thanks to choice—but cheap—land concessions that he had secured through bribing numerous municipal officials (Wen Wei Po, August 1).

Private firms that have tried to set up footholds in sectors dominated by either lungduan state firms or companies with sterling political connections are relatively large operations with assets well over 10 million yuan ($1.3 million). On the other hand, the fate of small and medium-sized enterprises (SMEs), including getihu or “individual enterprises” that employ no more than eight individuals has been less fortunate. While SMEs are energetic, market-oriented dynamos that were once considered the soul of a new-style Chinese capitalism, they have been relegated to a diminishing role in the Chinese economy. From the late 1990s to 2005, individual enterprises were shrinking at the rate of more than 1.3 million a year (People’s Daily, December 8, 2006). The reasons include the failure to obtain low interests loans and the ever-rising energy and raw material costs.

Indications are that as the Wen cabinet gets even more serious with its “macro-economic adjustment and control” policies—designed to cool down high-growth sectors such as the stock and real estate markets—private firms of all sizes are going to see even harder times. While excessive investments by the longduan behemoths are a major reason behind the overheating, these firms have powerful lobbyists in the party and government. The political influence of private corporations has expanded in the past decade, with dozens of executives having been appointed to legislative and consultative bodies such as the National People’s Congress and the Chinese People’s Political Consultative Conference. The clout of the non-state sector, however, is still much smaller than that of the “red tycoons” running oligopolies.

Government departments are also set to tighten their control over the economy owing to the numerous scandals regarding Chinese products as well as environmental pollution. Hu and Wen have been hard hit by the recent spate of unhealthy and even dangerous food products, toys and other merchandise that have been returned to the country by angry importers in the United States and numerous other countries (Newsweek, July 15;, July 25). The culprits, in most cases, are non-state firms that have tried to cut corners by using illegal and other questionable raw materials. Internally, the drastic deterioration of the water quality of the famous Tai and Dongting Lakes is due in large part to the discharge of waste by privately run factories and mills, including getihu as well as township and village enterprises.

On a macro-level, the overall decline of Beijing’s control over the economy is mainly caused by the increasing assertiveness of “warlord cadres” in rich coastal provinces and cities. In the run-up to the pivotal 17th CCP Congress, however, Hu and Wen are anxious to project central-level authority—and to avoid taking the blame for the side effects of overheating, particularly inflation. With the Consumer Price Index projected to hit 5 percent or more later this year, the party-and-state apparatus seems to have no choice but to reemploy state fiats now that market-oriented tools, such as repeatedly raising interest rates as well as the capital-adequacy ratios of banks are not working. Take, for example, the extensive efforts that officials—from Premier Wen down to mayors and county chiefs—have used to cut the price of pork, which has risen more than 70 percent in the past year (Xinhua, July 17). Measures taken have ranged from government subsidies to warnings to the media not to “sensationalize” inflation-related reporting. This is in spite of the fact that the large-scale reappearance of state intervention, as much as the alarming decline of the role of private firms, runs counter to the free-market principles that underpin Deng’s market reforms.


1. China’s overall FDI inflow levels in 2006 are based on figures reported by the U.S.-China Business Council, available online at: