China Meets the Zombies

Beijing can be big and bold when it meets reality. Remember when Zhu Rongji, China’s former economic tsar, gave 30 million workers pink slips, privatized hundreds of state-owned enterprises (SOEs) and swept many others into the dust bin?

Beijing has met reality, again. In consequence, some SOEs and zombies that are dragging China’s economy down are being purged. Indeed, Reuters reports that “China aims to lay off 5-6 million state workers over the next two to three years…”

If Beijing is to avoid meeting zombies in the future, it must embrace another reality: economic principles.

These principles, which stand on a mountain of empirical evidence, show that, when compared to similar private enterprises, SOEs’ actions are more unpredictable and their performance is inferior. Sales per employee are lower for SOEs. Adjusted profits per employee are lower.

Per dollar of sales, operating expenses, plus wages are higher. Sales per dollar investment are lower. Profits per dollar of total assets are lower. Profits per dollar of sales are lower. Sales per employee grow at a slower rate. And, with the exception of some state-owned oil companies, who often have considerable monopoly power, most traditional SOEs generate accounting losses.

China might be taking another step in the right direction. But, until Beijing dumps its model of State Capitalism, it will continue to be mired in a swamp of zombies and endemic corruption.
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