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National review
Bill expires for China’s ‘capitalist’ experiment
The Chinese Communist Party (CCP) has awakened to a deep 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 fiat. Capital in the hands of entrepreneurs is a political resource; this poses a threat to the implementation of centralized plans. Realizing this, the CCP began to assert its control over the private sector by “installing.” . . Party officials in private companies ”and state-backed companies invest in private companies. In the absence of civil rights or an independent judiciary, “private” companies have no real independence vis-à-vis the Chinese government. Dissent and civil rights claims pose a threat to the regime and will be crushed. China’s shift from encouraging external investment and competition in the domestic market to treating capitalism as a threat has a clear historical precedent. From 1921 to 1928, the Soviet Union instituted a policy of economic liberalization, which allowed the privatization of agriculture, retail trade and light industry. This partial and temporary return to 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, which necessitated frequent recourse to grain imports, especially from the United States. decentralize and privatize economic activity while continuing to assert the ultimate authority of the CCP. With liberalization, international companies have been invited to China. The price was high: the Chinese regime required them to work and train local businesses. This arrangement led to widespread theft of intellectual property, and quite quickly domestic competitors replaced their international competitors in the domestic market, often with government subsidies. The CCP-sponsored companies have taken advantage of their dominant position in the domestic market to enter the international market, reducing their competitors around the world. International “partners” were then subjected to asymmetric regulatory measures, excluding them from China. (Uber is a recent case of this phenomenon. There are countless more.) Now that the West is waking up to this game, the influx of capital to China is slowing down. Is the neo-mercantilist form of Chinese capitalism about to end? It seems unlikely; it is too rooted to be uprooted quickly. But the freedom of action granted to Chinese companies and leaders is already considerably curtailed as Xi Jinping asserts explicit political control over the economy. For example, in November, the CCP unexpectedly blocked the IPO of Ant Group, a company whose business model was seen as not in line with party goals. International companies heavily invested in the PRC must prepare for the worst: the kind that cannot be refused 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, it is likely that many Western investments in China will be confiscated as Deng’s experiment is completed. Western competitors in the world market should finally recognize that their Chinese competitors are both at the mercy of the CCP and supported by instruments of state power. China has a free market economic system and should be treated as a free market trading partner. It was always practical fiction. But whatever distance may have existed in the past between economic and political activity in China, the party is taking control of nominally independent companies, a number of Chinese state-backed companies, including some in strategically important sectors, began to debt obligations. Will international creditors be allowed to claim the assets? Will shareholders – 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 creditors be treated equally? Or will foreign creditors see their assets wiped out, as these companies continue to operate under new nominal owner and perhaps under a new corporate brand? It seems that it is a safe bet that the external debts will be repudiated, explicitly or implicitly. What was previously commercial debt now carries the risks that are typically associated with sovereign debt, which can be canceled by government decision. In short, a wave of write-downs is coming for Western companies investing in China. Western companies are not competitors operating in a free market in the PRC. As we wrote in a recent article, the CCP systematically treats Western companies as adversaries of the sovereign interests of the PRC and uses all the tools at its disposal to target them. Western business leaders need to prepare for the very realistic possibility of a massive confiscation of Western assets in China in the near future. Before that happens, the US government should pass a law allowing Western companies to claim compensation from CCP-controlled entities in US courts for asset confiscation. And since the CCP asserts control over all Chinese companies, all of these companies should be treated as part of a single government-controlled entity for the purposes of litigation and regulation. When the bill for capitalism in China comes due, the West must be ready. Michael Hochberg is a physicist who founded four successful semiconductor and telecommunications start-ups. Leonard Hochberg is the Mackinder Forum-US coordinator and a senior researcher at the Institute for Foreign Policy Research.
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