Chinese Capitalism May Destroy China

By James McGregor

China's phenomenal rise has led many to view the country as an indomitable juggernaut. Why then does Premier Wen Jiabao describe the country's economic model as "unstable, unbalanced, uncoordinated and unsustainable?"

Because it is.

The much-vaunted China Model has morphed in the past decade to a one-of-a-kind system of authoritarian capitalism that is in danger of terminating itself - and taking the world down with it. It is also proving incompatible with global trade and business governance, and threatening multinationals that fear losing technology and business secrets to China's mammoth state-owned enterprises (SOEs) they are forced to partner with.

The Chinese Communist Party has two unwavering objectives: make China rich and powerful and guarantee the party's political monopoly. Some top party leaders are pushing far-reaching reforms that expand the private sector and empower entrepreneurs. They believe that the party must cede its smothering hold on economic power to foster growth and social stability. But such plans face determined opposition from others enriched by the status quo.

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Describing the dilemma, a senior economic planner cited a line from a Tang Dynasty poem, "No ancient wisdom, no followers," referring to new endeavors during tumultuous times. "Policy formulators in China often have a sense of venturing out alone," Liu He, deputy director of the Development Research Center of the State Council wrote in an essay advocating reforms, "with no ancient wisdom to guide them and nobody appearing to follow them."

Deng Xiaoping started down this path in the 1980s by allowing farmers to market a portion of their crops. Rural entrepreneurs quickly invested their earnings in local enterprises. By 1996, these enterprises accounted for 36 percent of industrial output and 135 million jobs. Meanwhile, the country's Soviet-designed SOEs stagnated.

As the private sector rocketed ahead, the party concluded in the mid-2000s that a dominant state sector was necessary. To avoid the rise of Russian-style oligarchs, China opted for a party-led oligarchy. Control is exercised through the party's Central Organization Department that appoints all key leaders of the huge, monopolistic, centrally controlled SOEs. Most of these positions carry ministerial or vice-ministerial rank in the party, so they outrank their government overseers. As a result, these SOEs are more beholden to the party than the government.

This system was cemented in place with a 2006 directive designating two categories of industries for state involvement: "Strategic" industries - armaments, power generation, oil, telecommunications, aerospace and more - were to have sole state ownership or absolute state control. "Pillar" industries - including automobiles, electronic communications, architecture, steel, nonferrous metals, and chemicals - were to stay largely in state hands, meaning majority state control or ownership.

Also in 2006, China launched the infamous Indigenous Innovation campaign with the goal of transforming China into a technology powerhouse. The plans directed SOEs to obtain technology from multinational partners through "co-innovation and re-innovation based on the assimilation of imported technologies." Not surprisingly, multinationals and their governments saw this as a blueprint for technology theft.

Neither the World Trade Organization nor the array of bilateral trade dialogues and dispute resolution bodies has ever dealt with anything like China's authoritarian capitalism. Given the country's size and economic clout, it threatens to push existing systems to a breaking point. But China is also the biggest beneficiary of current configurations. Contradictions abound.


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James McGregor is author of the new book No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism. He is a journalist turned businessman who has lived in Beijing for more than two decades.

Copyright © 2012 Yale Center for the Study of Globalization. Yale Global

(AP Photo)

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