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From the May/June 2012 issue: China's Corporate Leninism
John Lee
On December 10, 2003, Premier Wen Jiabao introduced American audiences to the concept of China’s “peaceful rise” in a speech to students at Harvard University. Pointing out that China was a poor country in per capita terms and a backward economy in many respects, Premier Wen argued that China needed a stable environment in which to rise. He noted importantly that China is rising within the global liberal economic order, choosing participation over the austere autarky of the Mao Zedong era. China’s “peaceful rise” thesis, later adjusted to “peaceful development”, seemed to reaffirm what prominent scholars had been saying for years: Even though the liberal economic order was designed and built in the West, it was an open order. Rising non-Western states could prosper within this competitive environment without contesting its basic rules and principles.1
The argument that China neither wishes nor is able to undermine and transform the international liberal order is persuasive. China has been that order’s greatest beneficiary over the past two decades, and for practical reasons seems locked into it for the foreseeable future. Already the largest trading partner of Japan, South Korea, Vietnam, Singapore and Australia, as well as the largest Asian trading partner of America and India, China cannot afford to remove itself from the global trading regime. More important, perhaps, China has not elaborated an alternative concept to the existing order—certainly not a concept other countries would be remotely likely to follow or replicate. Nor is it remotely likely that China could impose a new order on its Asian neighbors. America remains both the preeminent Asian military power and also the preferred security partner for every significant country in the region. In strategic terms, China remains a decidedly isolated rising power despite its growing military capabilities.
Yet the argument and evidence that China will choose to be increasingly integrated into the global liberal economic order, or be persuaded that it should do so, is far weaker. Those who assume an irresistible trend toward greater Chinese integration into the liberal economic order—those persuaded of the stakeholder metaphor coined by Robert Zoellick—critically misapprehend the worldview and priorities of the Chinese Communist Party (CCP), and miss the broader implications of how China is actually ruled. They also ignore the political and structural pressures on the CCP to “guarantee” certain economic outcomes for its state-owned enterprises (SOEs), as well as the realities of how political, economic and social relations are conducted between entities in the country’s state-led and state-dominated political economy.
In essence, the problem is this: A rules-based system of entities competing against each other through a commercially driven process seeks to circumscribe the role and capacity of governments (and political parties) to intervene in economic activity. It quarantines economic activity from political interference by governments to the extent possible, and it allows the logic of commercial rather than political interests to play out. It respects ordered but genuine markets. The CCP ultimately seeks opposite ends.
To be sure, liberal democratic governments have an intrinsic political stake in the outcome of economic competition. However, successfully engineering a predetermined economic outcome (through securing expanded opportunities for its SOEs, and guaranteeing resources for its fixed-investment led economy) goes to the very survival of China’s authoritarian regime. The upshot is that genuine integration into the global liberal order would demand significant modifications to the Chinese political economy—and to how China is ruled—that could fatally weaken the relevance of the CCP and fundamentally threaten the Party’s tenuous bargain with China’s economic and social elites. Since retaining power remains the CCP’s paramount priority, Chinese economic entities, especially those directly owned by the state, remain latent tools not just of statecraft but also of regime security within its evolved “Leninist worldview.”
Given that Chinese SOEs face significant operational and cultural barriers to success in the global marketplace, the CCP is unlikely to leave their fate to the gods of competition, competence and chance within the hurly-burly of a rules-based market system. In other words, the perceived political, economic and strategic costs of genuine integration into the global liberal economic order are far higher for the CCP than the largely transactional costs of free riding within that order.
Pillars of the Global Liberal Order
It is common to observe that the pillars of the modern international liberal order include a system characterized by rule-based competition and dispute resolution processes, and open economic and trading systems. But what these rules imply for the role of governments, for the diffusion of power and for the practice of domestic and international politics is much less often discussed and far less well understood.
Within a liberal order, governments must commit to upholding a system of global economic rules, an agreed framework for economic cooperation and competition, and processes of dispute resolution that are not supposed to predetermine eventual economic winners and losers. For example, the constabulary responsibilities of the American Seventh Fleet in the Indo-Pacific can have no bearing on the operation or outcome of economic activity in the region. Washington can legitimately use its material power to protect its citizens abroad but not to strong-arm foreign governments or firms to achieve desired economic results. We are beyond the mercantilist war system, and getting beyond it was indeed one of the ideological pillars of the American Revolution.2 In policing the system rather than primarily engaging in economic and trade competition themselves, governments substantially forfeit their capacity to engineer economic outcomes. In other words, an international liberal order implies a clear separation between political and economic agency and agents.
The separation of political, economic and legal and administrative agency, and the subsequent diffusion of power it creates, are of course foundational features of domestic political order in modern liberal democratic systems. Individuals can bring actions against the government, with legal judgments determined by independent courts and judges. The ultimate manifestation of the rule of law in operation in any polity is the peaceful removal of a serving government following an election defeat, which mandates that it relinquish all capacity to use state assets to coerce its way into future incumbency. These are structures and habits of behavior vital to the genuine operation of both a domestic and an international liberal order. In the latter, this order is made possible by the seminal fact that governments voluntarily enter into this arrangement (and regimes within it such as the World Trade Organization). It is no coincidence that the Western keepers of their domestic liberal orders have extended a parallel expectation for membership in the international liberal order. Westerners may not explicitly recognize this parallel, so natural does it seem to them, but the CCP elite certainly does, and they well understand the edgy implications of the connection.
To be sure, authoritarian regimes can participate in a liberal global order without their domestic regimes being decisively implicated as a consequence. Japan in the late 1940s and South Korea and Taiwan into the 1980s were authoritarian regimes rising within the post-World War II liberal order. But all these countries were nestled within the Western alliance and relied on the U.S. security umbrella, meaning that authoritarian governments in these countries were far more susceptible to American pressure for political and economic reform than China is today. Partly in consequence, by the end of the 1970s the rule of law, firm property and intellectual property rights and independent bureaucracies were far more deeply established even in still-authoritarian countries than they are in China today. Once genuine democratization occurred in these countries, they became truly integrated into the liberal order and vocal champions of it. None of these circumstances or developments applies to China.
Finally, the frequently intoned line that modern China is simply following the “East Asian model of development” is also highly misleading. As the economic models of other East Asian countries evolved, barriers against greater integration into the liberal order weakened. Given the politics-first structure of the Chinese model of political economy, China is becoming more hostile to key elements of what integration into the liberal order would entail. Although China will continue to participate in the liberal order, the CCP is very unlikely to seek genuine integration and assimilation into it for fear of fatally undermining its domestic strategy to remain in power.
China’s Two Distinct Reform Periods
We can understand better the relationship between domestic politics and China’s global orientation if we examine closely the nature of Chinese reforms in the post-Mao era. These reforms can be divided into two distinct periods: the pre-Tiananmen period from 1978–89 and the post-Tiananmen period from 1991 to the present.
The first period began under Deng Xiaoping in December 1978. Prior to 1989 the unplanned spontaneous explosion of private initiative in rural China, largely fuelled by land reform, was encouraged by officials and even supported by government policy. Farmers were encouraged to make their own decisions about how to use their plot of land (even if it was still owned by the state) and were allowed to sell their produce at market prices after meeting production quotas. A happy accident of the limited land reforms was the spontaneous rise of small-scale businesses known as Township and Village Enterprises (TVEs), mainly in rural China. TVEs were the result of collusion between local officials and rural workers. Local officials were given incentives to remove bureaucratic roadblocks since TVEs contributed to local budgets. As Deng admitted in 1987, “the result was not anything I or any other comrades had foreseen; it just came out of nowhere.”3 Employing fewer than 30 million people in 1980, TVEs were providing jobs for around 140 million by the early 1990s.
Significantly, TVEs helped give decisive momentum to Chinese industrialization. During this decade, mean wages and household incomes were rising at the same rate or faster than GDP growth. An independent middle class was emerging in China. Indeed, 80 percent of the approximately 400 million people who have been lifted out of poverty since 1979 were thus lifted in the first decade of reform (1978–89.)
Due to the emergence of China as the central hub of regional and global trade, many Americans attached special significance to Deng’s famous post-Tiananmen 1992 Southern Tour of the most successful Special Economic Zones, such as Guangzhou and Shenzhen. To be sure, this helped accelerate the Pearl River Delta area as the hub of Chinese manufacturing, particularly for the export sectors. More broadly, many believe that the Southern Tour—encapsulated by Deng’s alleged aphorism, “To get rich is glorious”—was essential for ensuring that China continued to open up rather than return to Maoist thought and economic autarky. This interpretation is incomplete, however. Even as Mao’s communism was decisively abandoned, the enduring and more significant legacy of the countrywide protests in 1989 was the rise of Chinese “state corporatism”, a development that went beyond anything that ever occurred in the other successful East Asian economies.
The 1989 upheavals were far larger than most Americans and other outsiders appreciate. Most foreign observers see only events in Beijing, but there were thousands of protests in around 350 cities, involving millions of people. After a period of political introspection, the CCP decisively changed tack, its thinking affected dramatically by the fall of the Berlin Wall and the subsequent implosion of the Soviet Union. As Chinese leaders and scholars analyzed their circumstances, they concluded that in addition to maintaining the Party’s extensive coercive apparatus, the future well-being of the urban middle-classes needed to be intricately tied to the CCP one-party system. In a rapidly industrializing system, the Party faithful realized, urban elites determined the fate of authoritarian governments. The great lesson of the East European and Soviet revolutions learned in Beijing was that authoritarian regimes become irrelevant to their own elites at their very considerable peril.
The CCP plan to retake the levers of economic power and privilege was cobbled together from the mid-1990s onward. In essence, it involved further expansion of the private sector and a sharp reduction in the number of centrally managed SOEs, but it also reserved around a dozen of the most important and lucrative sectors of the economy for SOE dominance. These sectors include banking and finance, insurance, construction, infrastructure, chemicals, media, information technology and telecommunications. Although foreign direct investment was encouraged in the export-manufacturing sectors, it was deflected away from these core, politically sensitive sectors. Even China’s own private domestic companies were deliberately disadvantaged in terms of access to markets, capital and land in these core sectors. Here the state would maintain political control through the state-owned enterprises, which would in turn guarantee both elite loyalty and revenue for the CCP.
Today, there are approximately 150 centrally managed SOEs and 120,000 provincial and locally managed ones in China. When SOE subsidiaries are included, there are probably twice that many. Compare this number to the approximately four million private corporations, and tens of millions of small, informal private businesses, and it might seem, on the face of it, that China appears to be a success story driven by the private sector. Upon closer inspection, however, the return of the state in the Chinese political economy is evident from several measurements and other observations.
One measure, which traces the flow of capital, is particularly revealing because it shows that domestically funded fixed investment (basically, building things) is the dominant driver of Chinese GDP growth. From 2001 to 2008, it was responsible for about 40 percent of growth. In 2009, due to the massive stimulus ordered by the government, between 80 and 90 percent of growth was the result of capital investment, dropping to levels of about 50–55 percent of growth currently.
China is unusual in that bank loans, drawn from the deposits of its citizens and funneled into state-controlled banks, constitute about 80 percent of all investment activity. China has very underdeveloped equity markets for such a large economy. State-controlled banks dominate the formal finance sector, while private domestic and foreign banks constitute only between 2–5 percent. The sharp bias toward the state-controlled sector is clear from the relationship between these state-controlled banks and China’s industrial SOEs.
Even though state-controlled enterprises produce 30–50 percent of all output in the country, they receive more than 75 percent of the country’s capital, and the figure is rising.4 SOEs received more than 95 percent of the stimulus monies lent out in 2008–09 and an estimated 85 percent in 2010. The State-owned Assets Supervision and Administration Commission (SASAC) indicates that the assets of SOEs amount to more than 66 percent of all assets in the country, up from 60 percent in 2003. This is the reverse of what occurred in China during the first ten years of reform, when the majority of new fixed assets were effectively controlled by the emerging private sector. Even if they were formally “community” enterprises, the plain truth is that private sector businesses received more than 70 percent of all the country’s capital.
Indeed, according to the Chinese National Bureau of Statistics, an analysis of the economy by sector shows that state-controlled entities invest more in almost every major sector in urban China than do private companies. The only sector dominated by private industry is manufacturing, a sector dominated by foreign-owned or foreign-invested export-manufacturing firms.
Moreover, it is generally treated as a strategic priority for state-owned enterprises to dominate every emerging sector that becomes important to the modernizing Chinese economy. For example, the SASAC’s Guiding Opinion on Promoting the Adjustment of State-Owned Capital and Reorganization of State-Owned Enterprises, issued in December 2006, expanded strategic sectors to include civil aviation, auto industries and shipping in addition to the dozen or so sectors previously designated as critical. According to the Guiding Opinion, the state was to maintain a majority ownership stake in every major firm in those industry groupings. Although the State Council did not formally ratify this document, it remains the de facto guiding framework for these emerging sectors. Indeed, the 12th Five-Year Plan (2011-–2015) released in March 2011 explicitly states that “national champions” are to take the lead in “strategic emerging industries” such as renewable energy, healthcare, biotechnology, high-end equipment manufacturing, energy-efficient vehicles and information technology. It is clear in the plan that the government is to “channel state capital into industries pertinent to national security and the economy through discretionary and rational capital injection or withdrawal.” This includes both resources from the formal fiscal budget but also, more importantly, loans from state-owned banks.
Other measures are also telling. For example, the 2009 China Statistical Yearbook reveals that state-controlled entities accounted for more than half of all total wages paid to urban employees. Not surprisingly, this corresponds with another finding that almost half of all tax revenues received by the government is from state-controlled entities.
Continued....
