The Bill Is Coming Due for China’s ‘Capitalist’ Experiment
The Chinese Communist Party (CCP) has re-awoken to a profound truth: Rich, secure capitalists are the natural enemies of authoritarian regimes. In a hybrid autocratic-capitalist model, capitalism is the means to generate wealth, but power is the end goal. Successful capitalists naturally begin to demand that their personal and property rights be protected from authoritarian fiat. Capital in the hands of entrepreneurs is a political resource; it poses a threat to the implementation of centralized plans.
Realizing this, the CCP has begun to assert control over the private sector by “installing . . . Party officials inside private firms” and having state-backed firms invest in private enterprises. In the absence of civil rights or an independent judiciary, “private” companies have no real independence from the government in China. Dissent and demands for civil rights are a threat to the regime and will be crushed.
China’s shift from encouraging external investment and internal market competition toward treating capitalism as a threat has an obvious historical precedent. From 1921–1928, the Soviet Union instituted a policy of economic liberalization, which allowed for the privatization of agriculture, retail trade, and light industry. This partial and temporary return to a controlled and limited capitalism, known as the New Economic Policy (NEP), saved the Soviet economy from collapse and enabled Russia to modernize. But, in 1928, Stalin suddenly reversed course: He collectivized agriculture and liquidated the most prosperous farmers, thereby necessitating the frequent resort to grain imports, notably from the United States.
China’s own experiment with economic liberalization began in 1981, when Premier Deng Xiaoping began to decentralize and privatize economic activity while continuing to assert the ultimate authority of the CCP. With liberalization, international businesses were invited into China. The price was high: the Chinese regime demanded that they work with and train local firms. This arrangement led to widespread theft of intellectual property, and soon enough, domestic competitors displaced their international rivals in the domestic market, often with the help of government subsidies. CCP-sponsored firms leveraged domestic dominance to enter the international marketplace, undercutting their competitors worldwide. International “partners” were then subjected to asymmetric regulatory action, excluding them from China. (Uber is one recent case of this phenomenon. There are countless others.)
Now that the West is waking up to this game, the inflow of capital to China is slowing. Is China’s neo-mercantilist form of capitalism about to end? That seems unlikely; it is too far entrenched to be uprooted quickly. But the freedom of action accorded to Chinese companies and executives is already being dramatically curtailed as Xi Jinping asserts explicit political control over the economy. For example, in November, the CCP unexpectedly prevented the IPO of Ant Group, a company whose business model was considered misaligned with the goals of the party.
International businesses that are heavily invested in the PRC must prepare for the worst: “Offers” of the sort that can’t be refused will be made to coerce the sale of onshore facilities and operations. Given the capital controls imposed on the movement of money out of China, it is likely that many Western investments in China will be confiscated as Deng’s experiment is wound down. Western competitors in the global market should finally recognize that their Chinese competitors are both at the mercy of the CCP and backed by instruments of state power.
The central conceit of Chinese relations with the West has been that while political authority is monopolized by the CCP, China has a free-market economic system, and should be treated as a free-market trading partner. This was always a convenient fiction. But whatever distance might have existed in the past between economic and political activity in China has disappeared as the party takes control of nominally independent companies.
A number of Chinese state-backed companies, including some in strategically important industries, have begun to default on their debt obligations. Will international creditors be allowed to claim the assets? Will the equity holders — in many cases the CCP or regional and local governments in China — be wiped out? If these companies are bailed out by the government, will domestic and foreign debt-holders be treated equally? Or will foreign creditors find their assets wiped out, while these companies continue operating under nominally new ownership and perhaps a new corporate brand? It seems a safe bet that foreign debts will be repudiated, either explicitly or implicitly. What was previously commercial debt now has the risks that are typically associated with sovereign debt, which can be canceled by government fiat. In short, a wave of write-downs is coming for Western businesses invested in China.
Western businesses are not competitors operating in a free market in the PRC. As we wrote in a recent article, the CCP consistently treats western firms as adversaries to the sovereign interests of the PRC and uses all the tools at its disposal to target them. Western business executives need to prepare themselves for the very realistic possibility of extensive confiscation of Western assets in China in the near future. Before this happens, the U.S. government should pass legislation allowing Western companies to claim compensation from CCP-controlled entities in U.S. courts for the confiscation of assets. And since the CCP is asserting control over all Chinese companies, all of these companies should be treated as part of a single, government-controlled entity for purposes of litigation and regulation. When the bill comes due for capitalism in China, the West must be ready.
— Michael Hochberg is a physicist who has founded four successful semiconductor and telecommunications startups. Leonard Hochberg is the Coordinator of the Mackinder Forum-U.S. and a senior fellow at the Foreign Policy Research Institute.