China embraces market capitalism? Think again

The Heritage Foundation’s Derek Scissors had a fine piece in the May/June issue of Foreign Affairs magazine (“Deng Undone: The cost of halting market reform in China”), in which he argues that after embracing market reform during the Deng Xiaoping (鄧小平) era, China under President Hu Jintao (胡錦濤) and Premier Wen Jiabao (溫家寶) has backtracked on reform, with the state gaining more, rather than relinquishing, control over the private sector.

Scissors’ analysis is told from an economist’s perspective and can be seen as problematic, given that it presumes to give advice to the Chinese leadership after the style of free market capitalism he advocates sparked the global financial crisis that is currently upon us. I might add that my personal views on how countries should run their economies is slightly more socialist than the capitalist style the Heritage Foundation has long embraced.

These differences notwithstanding, Scissors’ piece is quite informative for two principal reasons. First, it exposes the myth that China is continuing reform and gradually embracing capitalism by showing that in recent years some companies that had nominally gone private remained under state control, while others — especially in the largely undefined “sensitive” sectors — have either been pushed behind layers of state controls or altogether renationalized. The intricacies of these developments, from state monopolies to price control mechanisms, state bank lending to protectionism, are beyond the scope of this article and Scissors is far more qualified than me to address them. Suffice it to say that the Chinese Communist Party (CCP) is showing signs that while it continues to seek economic development, it may be giving more importance to its grip on social and financial institutions than is commonly believed. (As Scissors observed, in 2006 the number of Chinese who owned a business dropped 15 percent to 26 million, while official data showed that during the first nine months of 2007 private companies contributed less than 10 percent of national tax revenues, a figure that reportedly dropped early last year.)

Ironically, the second aspect of Scissors’ article that warrants attention is left largely ignored by the author: The political ramifications of China’s volte-face on economic reform. This matter gains special meaning when it comes to recent moves by the Ma Ying-jeou (馬英九) administration and its Chinese counterparts to liberalize cross Taiwan Strait investment. As Scissors points out, state control of private or semiprivate firms means that company heads tend to be CCP officials who are either “retired” or part of a cycle whereby officials alternate between corporate and government positions. Chinese investment in Taiwanese companies, therefore, means that behind the veneer of private-sector investment likely lies the invisible hand of the state.

For the moment, certain sectors, such as telecommunications and defense, remain off-limits to Chinese investment, but we can expect those restrictions to be lifted over time, both as a result of political pressure from China and Taiwanese companies themselves. We have already observed this with the attempt by China Mobile to buy a 12 percent stake in Far EasTone Telecommunications, Taiwan’s second-largest telecommunications operator (China Mobile’s chairman, Wang Jianzhou [王建宙], is a CCP official who has occupied various posts in government). Despite restrictions by the Taiwanese government, board members at Far EasTone have voted in favor of the investment and we can expect the company to soon start pressuring Taipei to lift the restrictions.

Equally, if not more, disturbing was news that the Taiwanese government-owned Aerospace Industrial Development Corporation, which among other things designs the Ching Kuo Indigenous Defense Fighter, is proposing cooperating with the Commercial Aircraft Co of China (COMAC) to co-assemble commercial airplanes. Shareholders of COMAC include, among others, the Chinese central government and the municipal government of Shanghai. The chairman of the board, Zhang Qingwei (张庆伟), is chairman of the Commission of Science, Technology and Industry for National Defense of the People’s Republic of China.

These two examples involve transparent attempts by Chinese-state-owned companies to invest in Taiwan. In light of signs that Beijing is retrenching on market reform and strengthening its grip on the private sector, future investments in Taiwanese companies could be made by Chinese firms that, on paper, may seem to be private but that in reality are very much under the control of the state. The security implications as Chinese investment intensifies (a 12 percent stake in Far EasTone, for example, could just be an opening move) and starts involving a greater number of sectors, the potential for technology transfer, espionage and compromised security will only increase. To ensure national security, Taiwanese will have to be extremely vigilant, even when a prospective Chinese investor is ostensibly a private company. With Chinese state banks dominating the lending market and the CCP spreading its tentacles in various sectors of the Chinese economy, it will be essential to determine where the money comes from, and who’s in charge.

Let’s not be deceived: China has not embraced market capitalism to the extent that its political aspirations would take a backseat.

This article appeared in the July 1 issue of the Taipei Times under the title China's capitalism of compromise .