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MAO Yushi: The Logic of China’s Economy
Time:2018-11-25 23:16:38   Clicks:

By Professor MAO Yushi, President of Humanism Economic Society, Honorary President of Unirule Institute of Economics; Translated by Mr. Ma Junjie, Researcher of Unirule Institute of Economics. 

The logics I am talking about here is something that is irrefutable. For example, if A equals B, and B equals C, then A equals C; if A is not greater than B, and no less than B, then A equals B. Such logic is find commonly in maths. 


There is also irrefutable logics in our everyday life. For example, suspects cannot be the judge, and a referee is not allowed to play in the football court. 


If the logic does not stand, the hypothesis can’t possibly be right. Therefore, the only test stone for truth is logic, instead of practice. If truth can is verified by practice, then, even Newton's First Law, or Law of Inertia, would not have been discovered. We cannot find any object on planet earth is not acted upon by an external force, where Newton’s First Law states that an object will remain at rest or in uniform motion in a straight line unless acted upon by an external force. It has hindered China’s scientific development to a large extent when the importance of practice is exaggerated and overestimated to even test the truth. Chinese scientists are good at analyzing by resorting to practice instead of logic. I am not denying that practice is important. It is right that truth is uncovered by practice. However, whether this truth is in line with the nature of truth should be tested and verified by logic, instead of practice. 


The biggest discovery about China’s economy after adopting the test of logic is that the state owned economy does not stand in logical terms. Its sheer existence is against the basic logic that’s the same with the principle of a referee and player not being the same person. The government of a country is its administrator, or the referee, and it cannot enter the market to make a profit. Therefore, a normal country should not allow its government to create profit-making enterprises. Enterprises can only be created and managed by private entities, instead of the government. China has failed to find a solution to its state-owned enterprise problem for decades. The reason is that the state-owned enterprises stand on shaky logical ground. The only way out is to privatize these state-owned enterprises. 


The privileged class in China is convinced of communism, and China’s Constitution stipulates that the economy is dominated by state-owned entities. All the key strategic sectors, such as finance, telecommunication, electricity, gas, and transportation, are monopolized by the state and exclusive to private capital. Even in sectors that allow private capital, it is only allowed to supplement the state-owned entities. This ownership feature is totally different from the western private ownership systems. 


Due to the lack of competition, Chinese state-owned enterprises are low in efficiency. However, they are profiting on depriving the consumers of their interest thanks to the monopoly status. The revenues of the big state-owned enterprises become revenues for the government. Therefore, the Chinese government has a lot to spare, not only the tax revenues, but also the monopoly profit from state-owned enterprises. Whereas, in western countries, the revenue of the enterprises belong to the shareholders, which becomes incomes for the people. Compared to the west, the Chinese government is rich and its people are poor. 

Since the governmental income cannot be used for consumption after deducing the necessary administrative expenses, investment is the main use of government revenue. Therefore, the main demand for the Chinese economy is investment, instead of consumption. In the chart below, we can see that savings(most of which are converted to investment) account the biggest share of China’s GDP compared to other countries. 


Total Savings, Total Consumption of GDP for some countries in the world(from left to right: China, India, Japan, USA, and UK)

Source: World Bank(2014)

The uniqueness of China’s economy is attributed to the public ownership. 

China’s investment by the government mainly flows into the construction of infrastructure, such as the highways, high speed railway system, metro lines, airports, dams, power plants and ports. That explains why China’s infrastructure is more developed than many developed countries. The investment also flows into some industrial sectors, such as steel and concrete. The output of China’s steel reaches 800million tons per year, accounting for over half of the world’s total output, and China’s population accounts for only 20% of the world’s total. On the other hand, consumption is low because of the low income of the people. Then there is the overcapacity issue where the products cannot find their buyers. How to solve this issue? China’s answer has been to increase investment in order to maintain a certain growth rate. The self-enhancing influence of this kind of investment works in the short term, but it won’t solve the problem in the long run. In the long term, it is inevitable to change the distribution of the national income, to increase the share of the  income of the people in the GDP. One of the methods is to privatize the state-owned enterprises, and shift the income of the government into income of the people. 



Housing price of 20 key cities among center area for July, 2018

All enterprises chase profits. In an environment where there is rule of law, conflicts would not be incurred when people chase profits; on the contrary, the environment will make it possible for the resource allocation to be improved. Therefore, free trade(domestic and international) are the main path to the increase of wealth. If there are other goals besides chasing profit for an enterprise, then the foundation for free trade does not exist any more. State owned enterprises usually have other goals besides profits. Therefore, free trade might not be favorable for state-owned enterprises. State-owned enterprises usually have the goals of the government(not necessarily its people), therefore, the articles of the WTO may not be compatible with the state-owned enterprises. Other free trade agreements may not apply to state-owned enterprises, either. Chinese state-owned enterprises are unique in the world, or peculiar, to be exact. 


The high housing price in China’s mega cities rank among the very top in the world. Even though China is a country of medium income, its housing price has exceeded that in many high-income countries. One of the causes also involve China’s public ownership, that is because the savings of the Chinese people cannot find any other options to make a profit. Those profitable ventures are dominated by the state, such as the financial sector, energy sector, and telecommunication sector. Therefore, Chinese people can only find very limited investment options among which the housing market is comparatively more free to enter. Enormous amount of capital flows into the housing market, pushing up the price. There is an easy cure of the overly high housing price, that is to open the monopolized sectors to private capital. For instance, if the people are allowed to open banks, many might sell their properties in the housing market and use that money to invest in banking. There are over 5,000 banks in the US, and they are all founded on private capital. China is one of few countries that do not allow private individuals to open banks, and one of its indirect effect is the surprisingly high housing price. 


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