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A Look into China's Emergent Political Economy

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China, often referred to as a nation whose businesses are governed by a capitalist structure, is dominated by state-owned enterprises (SOEs) that produces roughly 60% of China's GDP. China's industries can be sorted into three tiers that make up China's economic structure.

The first tier, which consists of the large SEOs or other central-government controlled firms, primarily exist in sectors that have some degree of natural monopoly or market power. The first tier also includes industries that are vital to national security, which include the aluminum, auto manufacturing, aviation transport and manufacturing, construction, banks, electric power, petrochemicals, rail, steel and telecommunications industries. In 2010, three Chinese companies were on Fortune's Global Top Ten, while only one was listed in 2009 and none any year prior.

Control of Tier One industries is consolidated in the State-owned Assets Supervision and Administration Commission (SASAC). As of 2007, 153 firms are controlled by the SASAC, and that number hopes to be reduced to 80-100 by the end of 2010. This is the case because the larger firms in the SASAC generally absorb the small, less viable ones.

While ownership of parts of Tier One firms is private, the government remains in control. Because of this system, firms can raise private capital while remaining under government control, without becoming overly tied to market priorities and time-lines, or the state risking asset looting as was seen in Russia.

Managers of the larger firms in this tier are appointed directly by the Chinese Communist Party (CCP) and actually have ministry-level standing, while the remaining managers are appointed by SASAC. In total, these firms earned more than 4-percent of China's GDP in 2007. To compare, Exxon's record profit, which occurred in 2007 as well, was only 0.3-percent of U.S. GDP. The responsibility of SASAC is to manage these firms in the public interest, which can even consist of managing competition between firms.

The second tier of industrial firms in China consists of medium-sized firms that exist in competitive markets. They can originate from the state sector or ensuing management buy-outs, foreign investment, or domestic start-ups. Tier Two consists of the most dynamic group of firms, but can sometimes cause confusion as industries, such as the auto industry, can overlap across tiers one and two. Firms in this sector range from telecommunications and networking equipment manufacturers, microwave production firms, piano producers, and "white-goods" producers. All firms in this sector are global economic players and have achieved quite a degree of success and growth.

The major production facilities in China are all relatively new and are all well capitalized. This allows China's firms to utilize leading equipment and methods as opposed to holding on to old production methods because of sunken costs. Such reticence to let go of old investments plagued the U.S. steel industry and led to its subsequent decent. The comparable newness of Chinese firms makes it difficult for the companies of other countries to adapt to Chinese competition. This is reflected in China's "Go Out" leadership challenge that encourages Chinese firms to attack companies overseas in their own markets as a way of defending themselves from foreign competition. Thus far, China has identified 22 firms that they intend to make global competitors.

Tier Three consists of mostly town/village enterprises (TVEs) that have been privatized, and are small-scale sector firms. Most of these firms are relatively low-tech, with little government intervention. Despite the size of the individual firms, when examining the industry they comprise, you can see the power of their collective nature. For example, roughly 700 companies located in Wanzhou represent the source of 70-percent of the world market for lighters. By clustering these industries, high levels of competitive efficiency are achieved and innovation must be fast in order to compete.

Foreign direct investment (FDI) equates to about 4-percent ($60 billion) of China's GDP over recent years, compared to 0.5-percent in Japan and Korea. Foreign-invested enterprises created 58-percent of China's total exports in 2005, and 88-percent of its high-tech exports.

Unfortunately, in the U.S. this has led to workers becoming less skilled, the loss of initiative to innovate and to manufacture new high-technologies such as solar and auto-battery power, massive job losses, and the loss of health care and pension benefits as well. EconomyinCrisis.org recently ran an article that dealt with this same issue with regard to Foxconn, a contract manufacturer in China that has more employees than Apple, Dell, Microsoft, HP, Intel, and Sony combined.

The bottom line on all of this is that China's economic system, built up by its manufacturing base and its wide creation and expansion of firms, has had severe consequences for both U.S. workers and its economy. From welcoming China's "capitalist" transition 31 years ago, we are now witnessing the deterioration of America's middle class.

Unfortunately, China's transition is far from complete. As hundreds of millions wait in rural areas as potential workers, China's government has committed to developing the economies of those areas, but this time with more experience and trillions of dollars just waiting to be invested.

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Writes for EconomyinCrisis.org. Attends school at The Ohio State University, part-time, earning a BS in Business Finance.
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