Lin Min

    WHEN Premier Wen Jiabao last week blasted banks for making easy money from “monopoly,” his remarks were applauded by private businesses, many of which have been denied bank loans as lenders favor State-owned enterprises (SOEs).

    Yet, Wen’s remarks should not be interpreted simply as a populist appeal. Rather, the premier’s latest call provides a great opportunity for public discourse over the role of the State in the economy as the country is at a crucial juncture searching for a model of sustainable development.

    China’s banking sector, dominated by four behemothic banks which remain under State control even though they have all gone public, is the epitome of what some economists call “State capitalism.” During the market economic reforms of the past three decades, particularly in the past 10 years, the State sector has miraculously gone from strength to strength. Some industries, such as banking, railways, telecoms and oil, remain dominated by a few State-owned “oligarchs.”

    Advocates of a strong State-controlled economy say the rapid growth of SOEs in the past 30 years makes the case for their continued dominance. However, “State capitalism” has given rise to a litany of problems for not only the economy, but also society.

    With close ties to different levels of government, SOEs enjoy various privileges, stifling innovation, undermining fair play and suffocating free competition, which results in high prices and poor services. Chinese consumers and businesses have to suffer from high fuel prices partly because of the oligopoly by Sinopec, PetroChina and CNOOC. Banks comfortably rake in net interest margins of over 3 percent and set fees arbitrarily because of the lack of competition, at the cost of corporate and individual borrowers.

    “State capitalism” is also a fertile ground for nepotism, cronyism and corruption. Bai Peizhong, chairman of the State-owned Shanxi Coking Coal Group, was sacked late last year after cash and valuables worth nearly 50 million yuan (US$7.89 million) were reportedly looted by thieves from his home. Wang Yi, former vice chairman of China Securities Regulatory Commission, was sentenced to death with a two-year reprieve in 2010 for receiving 11.96 million yuan in bribes when he was vice president of China Development Bank.

    Like fallen government officials, disgraced SOE executives had been able to pocket huge sums of illicit gains due to the lack of effective checks and balances, as well as the government-business collusion.

    The string of corruption and abuse of power scandals in high-speed railways is also clear evidence of a sick system. Exorbitant bills for bathroom fixtures on new bullet trains will ultimately be footed by passengers and taxpayers. Rushed construction of some high-speed railway projects under reckless former Railways Minister Liu Zhijun may eventually lead to the loss of lives.

    The monopolistic position of SOEs also aggravates the alarming income gap. The average annual income of PetroChina reached 134,300 yuan in 2010, about 260 percent higher than average Chinese wage earners (excluding employees of private firms), which was 37,147 yuan according to the National Statistics Bureau. The incomes of many SOE executives seem to be catching up with Wall Street capitalists, with PetroChina president Zhou Jiping raking in 1.01 million yuan in 2011, and Jiang Jianqing, chairman of the Industrial and Commercial Bank of China, pocketing 1.11 million.

    After three decades of robust growth, China’s economy is slowing down, with the country facing Herculean challenges to achieve sustainable growth and avoid social unrest triggered by land grabs, inequity and injustice.

    The World Bank and the Development Research Center of the State Council last month jointly issued a report titled “China 2030,” proposing reforms that China needs to develop a mature, well-functioning market economy by 2030. The report urges China to overhaul SOEs, develop the private sector and liberalize the land, labor and financial markets, saying the country’s brisk growth is unsustainable unless it makes major free-market reforms.

    When World Bank President Robert Zoellick held a news conference in Beijing on Feb. 28 to explain the report, a protester — claiming to be an independent economist — disrupted the event saying its suggestions were “poisonous” to China. Some economists favoring a strong State sector were also opposed to the report’s call to revamp SOEs.

    However, many of the report’s suggestions coincide with the policy orientation of the Chinese Government. In his government work report in March, the premier said non-State capital will be allowed into railways, utilities, finance, energy, telecom and other sectors while the country breaks State “monopoly” (in most cases, oligopoly) and eases access for private firms.

    Zoellick said he expected vested interests that benefit from the status quo to resist change. He was right. Those entrenched interest groups will defend State-owned overlords saying socialism’s survival depends on their prosperity. But the SOE cartels risk becoming Frankenstein’s monsters, with their unfair gains, wasteful spending and indecent “fat cat” bonuses promoting capitalist evils rather than socialist virtues. Their stranglehold over resources and market access also stifles competition and innovation, misallocates resources, creates inefficiencies and hence threatens China’s sustainable growth.

    The country’s economy has reached its limits under the model of development that relies on exports, cheap labor and government-led investments. If the call to end the banking “monopoly” turns into action and fair play is realized in other sectors, China is poised to reinvent itself by engineering a new path of growth and unleashing potential from private firms who will prove to be a new engine for robust economic growth.

    (The author is editor of the Shenzhen Daily News Desk.)