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National review
China’s ‘capitalist’ experiment bill expires
The Chinese Communist Party (CCP) has reawakened to a profound truth: wealthy and secure capitalists are the natural enemies of authoritarian regimes. In an autocratic-capitalist hybrid 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 decree. Capital in the hands of entrepreneurs is a political resource; represents a threat to the implementation of centralized plans. Realizing this, the CCP has begun to assert control over the private sector through “installation. . . Party officials within private companies ”and that state-backed companies invest in private companies. In the absence of civil rights or an independent judiciary, “private” companies have no real independence from the government in China. Dissent and civil rights demands are a threat to the regime and will be crushed. China’s shift from encouraging foreign investment and domestic market competition to treating capitalism as a threat has obvious historical precedent. From 1921 to 1928, the Soviet Union instituted a policy of economic liberalization that 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 allowed Russia to modernize. But, in 1928, Stalin suddenly changed course: he collectivized agriculture and liquidated the most prosperous farmers, requiring frequent recourse to grain imports, especially from the United States. China’s own experiment with economic liberalization began in 1981, when Prime Minister Deng Xiaoping began decentralizing and privatizing economic activity while still asserting the ultimate authority of the CCP. With liberalization, international companies were invited to China. The price was high: the Chinese regime required local companies to work and train. This arrangement led to widespread theft of intellectual property, and soon, domestic competitors displaced their international rivals in the domestic market, often with the help of government subsidies. Companies sponsored by the CCP took advantage of national dominance to enter the international market, outperforming their competitors around the world. International “partners” were then subjected to asymmetric regulatory action, excluding them from China. (Uber is a recent case of this phenomenon. There are many others.) Now that the West is waking up to this game, capital inflows into China are slowing. Is China’s neo-mercantilist form of capitalism about to end? That seems unlikely; it is too ingrained to be uprooted quickly. But the freedom of action granted to Chinese companies and executives is already being drastically reduced as Xi Jinping asserts explicit political control over the economy. For example, in November, the CCP unexpectedly prevented the listing of Ant Group, a company whose business model was deemed misaligned with the party’s goals. International companies that have heavy investments in the PRC should prepare for the worst – the kind that can’t be turned down will be done to coerce the sale of facilities and operations on land. Given the capital controls imposed on the movement of money out of China, many Western investments in China are likely to be confiscated as Deng’s experiment ends. Western competitors in the global market should finally recognize that their Chinese competitors are at the mercy of the CCP and backed by instruments of state power. The central concept of China’s 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 any distance that may have existed in the past between economic and political activity in China has disappeared as the party takes control of nominally independent companies. Several Chinese state-backed companies, including some in strategically important industries, have begun to default on their obligations. debt obligations. Will international creditors be allowed to claim the assets? Will shareholders, in many cases the ECC or China’s regional and local governments, be eliminated? If these companies are bailed out by the government, will national and foreign debt holders be treated the same? Or will foreign creditors see their assets disappear, while these companies continue to operate under nominally new ownership and perhaps a new corporate brand? It seems like a safe bet that external debts will be disowned, either explicitly or implicitly. What was once commercial debt now has the risks normally associated with sovereign debt, which can be written off by order of the government. In short, a wave of write-offs is coming for Western companies investing in China. Western companies are not competitors operating in a free market in the People’s Republic of China. As we wrote in a recent article, the CCP constantly treats Western companies as adversaries of the sovereign interests of the People’s Republic of China and uses every tool at its disposal to attack them. Western business executives should prepare for the very realistic possibility of an extensive confiscation of Western assets in China in the near future. Before this happens, the US government should pass legislation allowing Western companies to claim compensation from CCP-controlled entities in US courts for asset forfeiture. And since the CCP is exercising control over all Chinese companies, all of these companies should be treated as part of a single government-controlled entity for litigation and regulation purposes. When China’s capitalism bill expires, 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-US and a senior fellow at the Foreign Policy Research Institute.
