Learning from China’s economic philosophy and policy — XI

Moreover, important lessons can be learnt with the way reforms have been sequenced in China over the decades, to lay building blocks in a systematic and supportive manner, where the next stage builds on the previous ones, while retaining the essential elements of the previous building block.

So, for instance, in the initial phase of the economic development, public sector involvement was quite high in terms of significant financing of state-owned enterprises (SOEs), but as the economic fundamentals in terms of laying the basis of industry was put on sound footing by public sector, this created opportunities for greater private sector involvement in the SOEs; where most continued to be controlled significantly by public sector in terms of decision-making on policy with input from the private sector while only least important ones were opened to privatization.

Also read: Learning from China’s economic philosophy and policy — X

The same handbook pointed out in this regard the ‘Since the beginning of China’s economic reforms in 1978, the Chinese economy has undergone three major phases. The first phase (1978-1997) marks an economy led by growth and reforms of state-owned enterprises (SOEs).

The economy in the second phase (1998-2015) was driven by investment in large and capital-intensive enterprises, which form what is called “the heavy sector.” The heavy sector includes both SOEs and private-owned enterprises (POEs).

In recent years (2016 to the present), observers have witnessed a transition to what the Chinese government calls “a new normal economy.” All three phases have been shaped by particular government policies.’

Also read: Learning from China’s economic philosophy and policy — IX

Overall, the underlying economic philosophical underpinning of Chinese economic policy and reform approach has been a non-neoliberal role of public sector in terms of economic institutions, underlying organizations, and markets in a mission-oriented, purpose-driven way, working in a symbiotic relationship with the private sector, and markets.

With regard to the main tools employed to finance this non-neoliberal, non-austerity, counter-cyclical, mission-oriented policy, ‘The handbook of China’s financial system’ pointed out in this regard: ‘Financial policies in China can be defined as a set of credit policy, monetary policy, and regulatory policy.

Also read: Learning from China’s economic philosophy and policy — VIII

Credit policy played an essential role in driving the SOE-led economy. Such policy consists of a number of administrative tools, such as loan quotas and window guidance to limiting credits to specific sectors or industries. For the investment-driven economy, monetary policy, coupled with credit policy, played a crucial role in promoting overall economic growth.

Monetary policy was particularly potent in combating the 2008 financial crisis in the short run, but with the cost of a high debt burden in the long run (measured by debt-to-GDP ratio) [which having said should have remained manageable given the long-run high growth rates witnessed by China, where supportive monetary policy saved from breaking this growth momentum].

Also read: Learning from China’s economic philosophy and policy — VII

Most of the stimulus was channeled to real estate, and infrastructure, which formed a large portion of the heavy sector.’

Particularly, with regard to regulatory practices, which were put on quite cautious, and overall sound footing, while restructuring risky industries in a focused manner, with benefit of protecting against, otherwise, possible bailout needs generated if that industry reaches default situation on even its fixed costs and any loan liabilities, given even any closure needs clearing of any liabilities, the same book pointed out that ‘…the loan-to-deposit ratio (LDR) regulation became one of the most important components of regulatory policy; it requires a commercial bank to keep the ratio of its loans to its deposits under 75 percent.

Also read: Learning from China’s economic philosophy and policy — VI

The second most important component of regulatory policy is the restriction of advancement of bank credits to certain risky industries, a policy that is often called in Chinese the “safe loan regulation.’ Unlike several advanced Western countries, including the United States, that followed neoliberal policies, China’s significant cautiousness in internalizing risks during loan advancement helped it avoid the severe consequences of the 2007–08 Global Financial Crisis.

Here, for instance, the focused nature of care in restructuring could be gauged, as pointed out in the same handbook as follows: ‘In 2006, the State Council [SC] concerned with China’s real estate and many overcapacity industries, issued a notice to accelerate the restructuring process of these risky industries.

Also read: Learning from China’s economic philosophy and policy — V

In 2010, the PBC [People’s Bank of China] and the Chinese Banking Regulatory Commission (CBRC) jointly issued another notice to reinforce the 2006 notice issued by the State Council, making it operational to prohibit commercial banks from originating new bank loans to these industries.’ This proactive attitude in bringing greater financial stability, which supports, in turn, fiscal sustainability presents itself as a significant learning curve for Pakistan, which has traditionally struggled to restructure its loss-making SOEs in general, and the associated fiscal/financial matters.

While State-Owned Enterprises (SOEs) continue to play a crucial role in supporting the purpose-driven mandate of the public sector, the private sector is generally unsuited for these areas. This is due to the private sector’s short-term focus on reaping quick profits, its lack of a deep capital base to sustain long-term investments, and the long gestation periods typical of SOE focus areas.

Also read: Learning from China’s economic philosophy and policy —IV

Conversely, Chinese SOEs have remained financially viable due to a highly focused, decades-long approach by the government, which has evolved its support to match the changing context of their economic roles.

Once again, Pakistan can learn a lot from the Chinese experience. Pakistan has been facing serious financial stability concerns regarding its State-Owned Enterprises (SOEs) [and] the heavy fiscal bailout burdens they continue to generate.

Under the standard neoliberal “shock therapy” prescription, wholesale privatization is often seen as the answer. However, even with the well-documented misgivings from the “golden age of privatization” in the early 2000s—which should call for a revision of this inclination—the best approach is not mass privatization.

Also read: Learning from China’s economic philosophy and policy — III

Instead, the focus should be on creating viability within SOEs, as successfully demonstrated by China. At most, only the least economically important SOEs should be privatized to optimize the focus of the public sector.

Moreover, Pakistan has an opportunity to learn from China’s innovative policy evolution. After establishing a sound economic foundation through government support led by SOEs, China transitioned certain enterprises into mixed-ownership enterprises (MOEs) once economic fundamentals matured enough to allow competition.

Yet, even in these MOEs, the public sector retains the majority say, while privatization is strictly limited to the least strategically important SOEs.

To bring greater financial stability, banking oversight was brought in, whereby instead of direct credits, government’s financial support to SOEs was channelled through state banks.

Also read: Learning from China’s economic philosophy and policy — II

The same handbook pointed out in this regard the following: ‘In 1984, decentralization took place, giving the local governments a stronger managerial power. In 1987, economic development was the central theme as well as the bottom line of the Thirteenth Central Committee of the Communist Party.

In 1992, Deng Xiaoping advanced further economic reforms throughout the country. …The year 1984 was a pivotal point for GDP growth. Since then, promoting local GDP growth has become the major task of local government officials, because their performance has always been based on local economic growth.

Also read: Learning from China’s economic philosophy and policy – I

The external financing of SOEs, moreover, switched from direct credit allocations to bank loans in 1984. By relaxing credit quotas on state banks, credit policy was aimed at promoting growth of SOEs in each province, city, and district. Administrative tools were used to control credit advancements to SOEs and helped to close, restructure, or merge small and medium-sized SOEs that experienced large profit losses.

Since SOEs were prevalent in every industry (in both heavy and light sectors), such credit policy influenced investment and consumption simultaneously.’

Moreover, the role of local governments was enhanced, whereby they were engaged as a vehicle for channelling SOE finances. This is, indeed, noteworthy given the closeness, and hence greater area-focus advantage local governments have in terms of keeping a close focus on state banks’ local branches with regard to seamlessly release funds to SOEs in that local government area space.

In addition, the importance of well-functioning local governments in terms of their positive impact for local economic growth is another important lesson from China’s non-neoliberal approach to involve overall greater role of public sector in economy, than envisaged under neoliberal approach, where meaningfully less- regulation, incentivization, and proactive role of public sector has led to serious economic issues, including rising negative externalities overall, elevated levels of inequality, and diminishing political voice.

The same handbook indicated in this regard: ‘The central government’s preferential credit policy toward SOEs was channelled through local government. Local governments often directed local branches of state banks to advance credits to SOEs beyond credit quotas (the so-called soft budget constraints).

Pressures exerted by local governments on local branches of state banks to increase credits to local SOEs, resulted in pressures from local branches on their headquarters to loosen credit quotas., which in turn forced the PBC to eventually raise the aggregate credit volume (in Chinese this is called “reverse loan quote transmission”).’

(To be continued…)

Copyright Business Recorder, 2026