Market Thinking

making sense of the narrative

State Owned Enterprise, or Enterprise Owned State?

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For some, the new Cold War between China and the US is about a clash of ideologies, China replacing the Soviet Union as the ideological ‘other’, its failings to be highlighted and indeed exaggerated in order to demonstrate the virtues of sticking with Western Capitalism, more by what it is not than for what it actually is. In this there are echoes of the Brexit debate, where the Remain side barely attempt to make a case for the EU, instead seeking to demonise the theoretical world of ‘not EU’. The rise of populism is actually a rejection of this default choice, the people refusing to accept the false dichotomy and demanding ‘another way’.

The expression Capitalism with Chinese characteristics has become relatively common as, following Xi’s dictum that “Where the markets can set prices they should be allowed to do so”, China has started a slow but steady progression away from total state control towards a hybrid of state management and a relatively dynamic private sector. A lot of this is pragmatic, the Chinese have recognised that with over a billion people, it is beyond the ability of even an army of the smartest civil servants to predict and provide and allocate resources in a manner that will ensure stability and growth. Market pricing has a role, which is exactly how and why the Chinese are reforming their banking and financial system.

With, often undiagnosed, irony, the supposedly free market west appear to be going in the opposite direction, seemingly following the dictum that “where the market is setting prices it should actually not be allowed to do so”, particularly of course in the area of financial repression. Central Banks are fixing interest rates at negative real yields, ignoring market signals and producing not only a huge misallocation of capital but distortions in underlying economies. Meanwhile, large multinationals work tirelessly through their lobbyists to ensure that politicians and legislators skew the competitive landscape in favour of them and against competitors and by extension against consumers. The real problem is that Western Capitalism is no longer fit for purpose, it has become captured by producer interests and is no longer serving the mass of the population, instead it is working for the benefit of a small, global, financial and industrial ‘elite’. While China still has enterprises run by the State, the west has increasingly moved to a model of States run by Enterprises. Crony Capitalism and Globalism go hand in hand.

There is, of course, a third way and it is the free market, allowing consumer choice to give demand signals and flexible production to meet them, in turn allocating scarce capital to meet consumer needs without driving excess inflation. From an economic historian’s perspective we might argue that economic growth occurs as and when states transition from a State Owned Enterprise to an Enterprise Owned State, for that is the period during which entrepreneurs appear and flourish, when capital is allocated more efficiently and consumer wants and needs have a greater possibility of being satisfied. Rarely though do these transitions happen easily, for vested interests are always powerful on either side. Nor is it a guarantee that there will be a period of free market economics. Currently, the US, like the UK and indeed Hong Kong, is notionally free market, but is in reality a heavily Crony Capitalism EOS –  a point which the US Democratic candidates are all making to some degree or other. However, their idea, certainly true for both of the main candidates immediately behind Joe Biden in the race, Elizabeth Warren and Bernie Saunders, is that the alternative to the EOS is a SOE, where big government allocates capital. For investors this is important, EOSs are good for large listed Equities, SOEs are not.

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