In its just-released annual report on China’s WTO compliance, the Office of the U.S. Trade Representative said that China has failed to follow “market-oriented principles” and instead pursued a “state-led, non-market approach to the economy and trade.”
Based on a similar complaint about China, President Donald Trump demanded that the Chinese government increase buying agricultural, industrial, and energy products from America in what is known as the Phase 1 trade agreement of January 2020, which the Chinese government is failing to live up to.
While fighting back on China’s unfair trade practices is a good start, I want to point out the irony in the U.S. demanding that the Chinese government buy products. Obviously, being a free market economy, the U.S.’s government is in no position to buy huge quantities of grains, oil, or consumer products from China or anywhere — only private firms and consumers can buy them. The very complaint the U.S. has against the Chinese government is that it acts like a giant firm. And yet, the trade deal further endorses the role of the Chinese government as a corporation.
This shows that although U.S. policymakers recognize the threat posed by China, their understanding of the threat is deficient, and their policies on China are conflicting. For example, the Biden administration calls the China model a “state-centered economic system,” implying that we should support private firms in China. As I will show, this is wrong and dangerous.
The CCP does not ban private businesses as Biden’s “state-centered economy” label implies; the CCP owns China. Here is the evidence.
The right to form a company is owned by the CCP. If it does not like someone, this person cannot start a business. The CCP also owns the right to name a company. The words “China,” “Chinese,” and “National” are monopolized by the CCP. The government has direct access to the bank account of firms and can establish its branch in firms.
The CCP owns the stock market. Through “window guidance,” the party instructs private stock brokerage firms to sell if the market is too hot and to buy if it is too weak.
Recently the CCP has increasingly manifested its ownership over many industries, including hi-tech, tutoring, delivery, entertaining, gaming, and real estate. Jack Ma, the founder of Alibaba and fintech giant Ant Group, made unflattering comments about the government, and the CCP stopped Ant Group’s IPO. The U.S. IPO of ride-sharing giant DiDi displeased the CCP, and the CCP ordered it to delist. De jure, Ma has the right to criticize the government, and DiDi has the freedom to list in the U.S. But de facto, the owner of these firms is the CCP. And the CCP must remind them who the owner is from time to time.
This de facto ownership by the CCP applies to all firms in China. State-owned firms are business units of the party-state; firms with close ties with the CCP, such as the hi-tech giant Huawei, are the CCP’s subsidiaries; private firms, such as Ant Group and DiDi, are joint ventures with the CCP, with the party having the control right; foreign firms must have a good relationship with the CCP to be there. While having more freedoms, they operate under the auspices and are the franchisees of the CCP. The closer a firm is to the CCP, the more privileges and fewer freedoms it has, and the more obligated it is to fulfill the party’s orders.
People in China cannot freely choose where to live. Without the government’s approval, they cannot go to school, work, or purchase an apartment. Rural people who live in a city without the government’s permission are illegal immigrants in China. Exchanging foreign currencies is tightly controlled, too. The yuan people hold is more like internally circulating coupons. All these make people more like employees of the CCP rather than citizens.
Living, working, and doing business in China are not rights, but privileges granted by the CCP. The CCP has transformed China into a giant corporation. The central committee of the party is the headquarters, the leader of the party is the CEO, and the ministries are like the functional departments of China, Inc. For example, the State Security Ministry can help China, Inc. to obtain economic intelligence, and the United Front Work Department can help China, Inc. to identify investment opportunities and recruit talent overseas.
The industrial policy of the Chinese government has become the business strategy of China, Inc. The party identifies industries deemed important, selects domestic players, shields foreign competition, obtains needed technologies, and mobilizes the resources of the entire country to develop them. The large domestic market enables the Chinese firms to quickly achieve economies of scale. Once they achieve low-cost production, they will go out to dominate the world’s market. For example, in the high-speed rail industry, China banned foreign entry and yet took technologies from Germany, France, and Japan, and produced its own trainset called the Fuxing. Now CRRC, China’s gigantic rail monopoly, is the largest rail company in the world, exporting trainsets to many countries, including the U.S. China’s dominance in electric vehicle batteries and solar panels was achieved in the same way.
China, Inc. puts the democratic countries at great disadvantages. In state-to-state affairs, the Chinese government can act swiftly without checks and balances like a firm; in firm-to-firm competitions, the Chinese firms can act like a state, relying on the government in funding and other state assistance that is forbidden in the democratic countries, such as economic espionage or hostage-taking. The success of China, Inc. relies on the tolerance of other countries. But many countries have begun to realize that China, Inc. cannot continue as it damages other countries, and thus ask the CCP to make changes toward respecting human rights, the rule of law, and fair and open markets.
Unfortunately, the CCP, Chinese firms, and people enjoy the advantage of China, Inc. and do not want to change. But they should understand that such changes would benefit not only the world, but also China, because if China keeps taking advantage of the democracies, the latter will eventually be forced to delink with China. Delinking will hurt China more than the democracies, as the latter can benefit by trading with each other. In contrast, dictatorships cannot maintain mutually beneficial trade relationships. Now China and Russia have teamed up to counter the democracies, but it is a “marriage of convenience” primarily for geopolitical and military purposes; they still heavily rely on the democracies for trade. Latest figures show China’s annual export volume to Russia was $54 billion, or 4.6 percent of what it sold to the democracies ($1.2 trillion), and Russia’s export to China was about $60 billion, or 22.6 percent of what it sent to the democracies ($266 billion). In fact, their newly drummed-up effort to forge a closer tie shows that the increasing effort to reduce the economic relationship with China by the democracies is working.
Worst of all, if a dictatorship is closed, the ruling and ruled will infight, as shown in the Chinese Cultural Revolution. Therefore, the democracies should stand firm in their demands and be ready to drastically reduce links with China.
Demanding China, Inc. change is a multistage process, and the goal is not complete delinking. In the first stage, the democracies should push the CCP to make changes, and the CCP may refuse and retaliate. In the second stage, the democracies should raise the pressure and delink further, making China increasingly isolated. Facing the prospect of internal turmoil resulting from the isolation, the CCP should make meaningful structural changes to relink China with the advanced economies. The most important structural change for the CCP is to embrace the rule of law.
Shaomin Li is a professor of international business at Old Dominion University. His most recent book on this topic, The Rise of China, Inc.: How the Chinese Communist Party Transformed China into a Giant Corporation, is published by Cambridge University Press.
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