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I found an interesting read in the NYTimes today. It read:

The Chinese government also has much greater control over the economy, allowing it to shield the public from job cuts or factory closings by ordering banks to support industries suffering from American tariffs. It can spread the pain of a trade war while tolerating years of losses from state-run companies that dominate major sectors of the economy.

I could not understand what that meant. Could anybody explain it?

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  • $\begingroup$ What this article misses is the staggering rise in the cost of living in China over the past two decades such as housing, food, clothing, etcetera to the point where English speaking people that live there have reported the cost of living is not much different from the United States. The answers given below are correct and do answer the question, but it signals control, control and more control that's how. How long does that last? $\endgroup$ – Daniel Mar 8 '19 at 2:56
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Barry Naughton is an authority on the Chinese economy. He offers evidence on China's government control over the economy in a nice paper called "Is China Socialist?"

China's government controls an unusually large proportion of national income flows. He argues that these income streams have grown dramatically as a share of GDP since the mid-1990s. He shows how the Chinese government steers the economy because it sees a strong economic performance as a core part of its political legitimacy. China's government has some tools to "shield the public from job cuts or factory closings" because of American tariffs.

Beyond the tools of funding direct government programs and ownership, the Chinese system has two distinctive mechanisms through which it attempts to foster development:

  1. a set of bureaucratic incentives that reward officials for growth (of GDP and revenue);
  2. planning that is centered on the national-level Five-Year Plans that propose a certain trajectory for growth.

Chinese Government's Control over National Income

enter image description here

The above Figure illustrates an expanded concept of government revenues that includes four main components:

  1. budgetary revenues (not including social security);
  2. social insurance premiums;
  3. land revenues;
  4. net income from state-owned enterprises.

These four components help Naughton providing an index of government control of resources, which tripled as a share of GDP between 1996 and 2013. This index gives an indication of the overall size of the Chinese government. For instance, all land in China is publicly owned: urban land is owned by the state, and housing is "privately owned" only in the sense that households hold long-term leases, typically of 50–70 years. The financial system in particular is overwhelmingly dominated by the state-owned banks, which generate substantial profits.

Summing all four components, the Chinese government had direct or indirect control of 38% of GDP in 2015. Overall, the Chinese government is large, well-resourced, and potentially highly intrusive. This is both a distinctive feature of the Chinese economy in comparative context, and a dramatic change from the China of 20 years ago.

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The Chinese government can force banks to lend to factories experiencing job cuts, or to subsidize failing businesses. They can also shift production (due to their control) to sectors not impacted by the trade war. Spreading the pain however means that in order to do this, their central bank may need to increase liquidity, which can lead to an inflationary scenario. But instead of one sector impacted by the tariffs, the pain can be spread to everyone via inflation, which they feel is marginally better than an entire industry shutting down. So if a semi conductor firm is impacted by the tariffs for example, the government can issue loans to that firm to keep production going in-spite of the reduction in demand in America. The firm can find other buyers in other countries and can be sustained after the initial “shock” of the US tariffs. In America, it is unlikely that the government will force banks to lend money to failing industries, although it is still possible for our government to manipulate production obviously. We just don’t to the extent that China does.

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