The Chinese box: the opaque economic borders of the Chinese state

Abstract

Although the state in China is no longer all encompassing as it had been during the pre-1979 centrally planned period, it still reaches into numerous areas of the economy, notably through its continuing ownership of state-owned enterprises. As a result, China poses a paradox in that it has incomplete property rights and rule of law which are thought to be essential for growth. There are, though, numerous inefficiencies associated with such a gradual transition which may have maintained a stable growth rate in the past, but could hamper future economic development. As a key example, state-owned firms continue to benefit from financial repression in which they received preferable allocations of credit. Thus, China's high savings rate fuels investment which has driven growth, but is increasingly inefficient as credit is funnelled to the less productive SOEs. This inefficiency points to the need for legal and institutional reforms which may conflict with the still broad but opaque borders of the Chinese state. Copyright 2011, Oxford University Press.