[Trapped in the Chinese Economy]⑨ Long-term Growth Difficult Without Shift from 'State-led to Market-led' Policy

Xi Jinping: "We Will Not Drive Out Private Enterprises"... Putting an End to the 'Guojin Mintui Controversy' (September 2018)

China's Li Keqiang: "We Will Develop Both State-Owned and Private Enterprises"... Easing Fears of 'Guojin Mintui' (September 2020)

China, Facing Slow Economic Recovery, Says "Private Enterprises Are a Vital Source of Vitality"... Signs of Shift Away from 'State-Owned Preference - Private Neglect' Policy (July 2023)

These are headlines that have appeared in the media over several years. 'Guojin Mintui' means state-owned enterprises advance while private enterprises retreat. China has maintained the Guojin Mintui policy line but has repeatedly made declarations like these whenever its side effects were anticipated. China instrumentally utilizes market economy and capitalism, but ultimately aims for a transition to socialism, which is an inevitable aspect of this approach.

Although China is often evaluated as "effectively capitalist," the ruling class, including the Chinese Communist Party, still adheres to socialism. The goal remains to build a socialist power by around 2050, the 100th anniversary of the founding of the People's Republic. The "Common Prosperity (共同富裕, everyone prospers together)" emphasized by the Xi Jinping administration is a long-term objective to be pursued.

However, looking at the economic development history of countries worldwide, in the early stages of economic growth, the state can lead the economy in a planned manner, but the 'factor input economy' based on labor and capital inputs eventually reaches its limits. Without the activation of private autonomy and creativity to improve productivity, the national economy cannot grow further. This is the so-called "middle-income trap."

China still maintains the Guojin Mintui policy line and emphasizes the role of state-owned enterprises. Whenever the economy faces difficulties, it tries to dispel concerns about Guojin Mintui, but these are only supplementary policies. Experts believe that if China does not change this policy line, sustained economic growth will be difficult. If the Chinese government is pragmatic, it will change this policy line; otherwise, it will continue to maintain it and face difficulties.

From Minjin Guotui in the 2000s to Guojin Mintui after Xi Jinping's Rise to Power

After joining the World Trade Organization (WTO) in 2001, China pursued the privatization of state-owned enterprises toward a market economy. However, during this process, high-ranking party, government, and military officials engaged in corruption for personal gain. Therefore, when Xi Jinping became president in 2012, he had to enforce strict anti-corruption reforms, which highlighted the importance of state-owned enterprises and led to the emergence of the Guojin Mintui phenomenon.

As a result, Xi Jinping's "Document No. 9" in 2013 reportedly included a statement that Western institutions unsuitable for China would not be adopted. The 2008 global financial crisis, triggered by the greed of financial companies under the American-style market system, also led to skepticism in China about the problem-solving ability of mass democracy and market systems.

In particular, in September 2018, columnist Wu Xiaoping posted online that the private sector had fulfilled its historical mission to support state-owned enterprises and that it was time for it to begin disappearing. Afterward, as President Xi inspected private enterprises and mentioned their roles, the controversy subsided somewhat, but private enterprises inevitably felt a sense of crisis.

In China, the Communist Party controls the economy through state-owned enterprises, and private companies cannot escape the Party's influence. Anbang Insurance founder Wu Xiaohui was arrested in June 2017 and sentenced to 18 years in prison in 2018. Subsequently, strange incidents occurred: in July 2018, Wang Jian, co-founder and chairman of HNA Group, died from a fall at a French resort, and earlier in January 2017, Xiao Jianhua, chairman of Mingteng Group, suddenly disappeared from a Hong Kong hotel.

The management rules for listed companies enacted in October 2018 included a clause requiring listed companies to provide conditions necessary for the formation and activities of Party committees (Party organizations) in accordance with the Communist Party constitution. Their opinions must be heard during major decision-making. Furthermore, Western companies joint-venturing with Chinese state-owned enterprises were required to grant explicit decision-making roles to internal Communist Party cells (core Party members).

Concerns over 'Guojin Mintui' Persist... "Without Private Autonomy and Creativity, Sustained Growth Is Difficult"

In October 2020, during Xi Jinping's second term, Alibaba founder Jack Ma publicly criticized the government. Ma likened Chinese banks to pawnshops that only demand collateral and guarantees, calling "the pawnshop spirit of Chinese finance the most serious problem," and directly criticized, "China is strong in regulation but lacks supervisory capability." He also said, "You cannot manage an airport like a train station; you cannot manage the future with past methods," delivering a direct blow to Chinese financial authorities.

Subsequently, Chinese authorities moved to suppress Jack Ma. In November of that year, the planned Hong Kong and Shanghai stock listings of Ant Group, Alibaba's fintech affiliate, were abruptly canceled. In April 2021, Alibaba was fined 18.2 billion yuan (about 3.37 trillion won), the largest penalty since China introduced its anti-monopoly law in 2008. The "Jack Ma incident" marked the start of China's crackdown on big tech influence. For various reasons, huge fines were also imposed on major tech companies like Meituan and Tencent. Online education companies were caught in the crackdown under the pretext of suppressing private tutoring.

However, recently, as China's economic recovery has been slow despite the lifting of the "Zero COVID" policy and reopening, and facing sluggish domestic demand and a real estate downturn, it announced measures to promote the growth of private enterprises, guaranteeing protection of private property rights and equal treatment with state-owned enterprises.

On July 19, the Chinese Communist Party and the State Council released the "Opinions on Promoting the Development and Growth of Private Enterprises," stating, "State-owned, private, and foreign-invested enterprises should be regarded equally and treated fairly. We will improve the institutional framework for fair competition." They also emphasized, "Excessive seizure of private enterprise property will be prohibited," and "Private enterprises are a source of vitality for advancing Chinese-style modernization."

Regarding this, Kim Han-kwon, professor and director of the China Research Center at the Korea National Diplomatic Academy, said, "So far, it seems more like a conciliatory measure toward private enterprises or a supplementary means to utilize private creativity to enhance the competitiveness of companies and the nation overall, rather than a fundamental change in policy direction. Of course, depending on how the Chinese economy develops, there could be a fundamental policy shift, but it does not seem to be the case yet."

Professor Sung Tae-yoon of Yonsei University's Department of Economics said, "I am not well-versed in political diplomacy, but economically speaking, if private autonomy and creativity are not activated and the economy is government-led, sustained growth is impossible." When asked if China's technological rise and innovation could be a breakthrough for growth, he said, "Did the Soviet Union collapse because it lacked science and technology? No matter how advanced the technology is, government-led growth has limits, and a more advanced stage of the economy is only possible through the power of the private sector and the market."