Tuesday, 06 March 2012 00:00 GFP Columnist - Basil Venitis
Offshore oil bewilders China. Japan and China have locked horns over islands in the East China Sea, and Vietnam, Philippines, and other nations have challenged China over claims to islands of the South China Sea.

China shares its land border with 14 countries; it used to make sense that a country in such a position maintains strong conventional forces. But in this nuclear age, it does not really make sense that China continues to build up its military at such a pace.

China's real total military outlays in 2012 are $250 billion, which makes it the world's second-biggest defense spender after the United States. There's no doubt China's new hardware has important symbolic value and important coercive value. The American navy has to think twice now before getting too close to China's shores!

China is the world's second largest economy after Uncle Sam. It is the world's fastest-growing major economy, with average growth rates of 10% for the past 30 years. China is also the largest exporter and second largest importer of goods in the world. China became the world's top manufacturer in 2011, surpassing USA.

China is facing a burst bubble, and the shock will provide a useful lesson in the limits of authoritarian rule. Monolithic government and state-directed investment can be effective in pulling countries out of poverty, but not in building a middle class or in reaching the ranks of the world's wealthy nations. Economic troubles will spur China's 1.3 billion people to demand more freedom and more of a voice in the way they are governed.

The private sector hardly dominates the Chinese economy. If anything does, it's the state again. Derek Scissors points out there have been important changes in the state sector. It has shrunk and operates very differently than it did just 15 years ago. During the 1990s, state assets were sold off, sometimes replaced by genuinely private firms.

Scissors notes privatization met serious political opposition. In response, during the 2000s, state-owned enterprises (SOEs) were instead converted into shareholding entities, many of which sold stock in Shanghai, Hong Kong or elsewhere. These shareholding firms took on some characteristics of true commercial businesses.

Those seeing a dominant private sector often mix up such shareholding firms with private firms. Neither specifying shareholders nor selling stock necessarily alters the fact of state control. The large majority of firms listed on domestic stock markets are state-owned.

Scissors asserts that restructuring was specifically crafted to change SOEs while steering far clear of privatization. This goal was driven home earlier this year by Wu Bangguo, second in the Communist Party hierarchy, who scorned privatization as almost as unacceptable as another party holding office.

The vast majority of mixed firms are designated as limited liability corporations. The term implies privatization, but the subcategories — wholly state-owned and non-wholly state-owned — indicate that the incorporation has not automatically ended state ownership.

Scissors points out SOEs enjoy some amazing advantages over truly private firms. In 2006, China's Cabinet identified sectors where the state must lead, a powerful guarantee. Included were power, telecom and aviation. And in practice, the state dominates many other sectors, including banking, railways and media.

Image Courtesy of the Rocky Mountain Institute

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