There can be no doubt that the rise of China – or, more accurately, its return to its traditional place as one of the greatest powers in the world – remains a process that causes worldwide fascination. It is undoubtedly the most profound development of our time. And there is also no doubt that there are those in South Africa, hostile to (or at least suspicious of) capitalism and suspicious of the private sector, who have been mesmerised by the apparent role of the so-called State-owned enterprises (SOEs) in China’s economic development success story. China’s SOEs are seen as justifying South Africa’s continued maintenance of its own SOEs, which dominate (if not completely control) large and important sections of the economy.

Now, before going further, it is necessary to note that the South African private sector has an appalling record of illegal collusion, which would make anyone suspicious of it. Local free marketers have frequently expressed the view that South Africa has never had a proper market economy with proper competition, but rather a mixed economy dominated by SOEs, private-sector cartels and afflicted (almost since union in 1910) by ideological interference. However, the fact remains that there are those, especially in the Tripartite Alliance (the African National Congress, the Congress of South African Trade Unions and the South African Communist Party), who are ideologically hostile to the private sector, anywhere and everywhere, and who see China and its SOEs as an inspiration.

This focus on Chinese SOEs was always exaggerated and always and willfully ignored the enormous degree of privatisation undertaken in China during the reforms launched by then Chinese leader Deng Xiaoping (in power from 1978 to 1989). However, it has been generally agreed that the SOEs remained a big part of the Chinese economy. It now seems that this assumption is no longer valid.

Nicholas Lardy, a senior fellow at the Washington DC-based Peterson Institute for International Economics, and described in the respected US journal Foreign Affairs as “one of the foremost foreign scholars of the Chinese economy”, has concluded that the Chinese economy is now dominated by the private sector. In an interview with The Wall Street Journal (September 2, 2014), he said: “SOEs appear to be a relatively small portion of the Chinese economy. They account for between one-third and one-quarter of gross domestic product (GDP). But, in manufacturing, SOEs only account for 20% of output. In some parts of the Chinese economy, the private sector has largely displaced state companies.”

Lardy characterises the Chinese economy today as a market economy, although not a pure market economy. But then, there are few, if any, pure market economies in the world today. It is certainly not a system of State capitalism. “State capitalism means a high degree of State ownership of production, a great deal of control over investment, a great deal of control of the banking sector and a very substantial use of industrial policy,” he noted. “I don’t think the term ‘State capitalism’ fits China very well because its industrial policy has been an almost complete failure . . . When you look at the number of people employed by the State, it’s less than France as a percentage of the labour force.”

As for the State-owned banks, these are increasingly commercially focused and a large proportion of their lending is going to the private sector. Although not yet 100% commercial, these banks are more commercial than generally realised. However, the Chinese private sector is still underserved by these banks, getting 52% of loans from 2010 to 2012, despite being responsible for 66% to 75% of the country’s GDP.

“State firms’ return on assets is extremely low, relative to the cost of capital,” he points out. “That makes them a very big drag on China’s economic growth. They’re not that big a drag in manufacturing because State firms only account for about 10% of manufacturing investment. In the services sector, though, state firms are investing more than private firms. As China becomes a more service-dominated economy, there is an enormous opportunity (to boost economic growth by reducing state control).” (Lardy’s latest book, recently published, is Markets over Mao: The Rise of Private Business in China.)

Meanwhile, US management consultancy the Boston Consulting Group last month published a report into the comparative costs of manufacturing across the world’s top 25 exporting economies. This took into account factors such as the cost of labour, energy and currency fluctuations. The US was taken as the base, assigned a value of 100. China came in lower, but only slightly lower, at 96. Of the other Brics (Brazil, Russia, India, China and South Africa) group of countries, Brazil was a bad 123 (helping explain the country’s current economic malaise), Russia was 99 and India was 87 (South Africa is not a top 25 exporting country and so is not on the list). The other emerging countries listed were South Korea at 102, Mexico at 91, Taiwan at 97, Thailand at 91 and Indonesia at 83.

Among developed States, the figure for the UK was 109 and for Japan 111. Canada was at 115. The major eurozone countries fared badly, with France at 124, Germany at 121 and Italy at 123. The highest cost country in Europe (not just the eurozone) was Switzerland, at 125, while the lowest cost country was Poland, at 101. But the highest manufacturing cost country on the list was Australia, at a dreadful 130. Couple this with the country’s relatively small population (22.5-million) and it is no wonder that the Australian automotive industry is collapsing.

Regarding China, the costs of manufacturing have now reached such a level that other, more intangible, factors such as levels of corruption, the rule of law and, within that, the security of contracts, can become decisive for CEOs when making decisions on where to invest. The greater security and stability can make the not-so-very-much-greater costs of investing in the US, UK, Japan or South Korea worthwhile. Moreover, productivity tends to be higher in developed countries than in developing countries.

China today is unquestionably one of the great economic success stories of history. There is much to be learnt from its story, but people have to be clear on what is really happening and not project their own illusions onto the country’s recent history. Nor should they ignore the revival of the US and the UK and, possibly (it is still early days), Japan.