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Re-jigging red capitalism

28 December 2012 By Wei Gu

China’s authoritarian capitalism may be a victim of its own success. It is getting harder to satisfy a population that is devoid of ideology and which demands non-stop lifestyle improvements. Powerful state-owned companies are consuming the fruits of reform. Moreover, the system’s lack of checks and balances has led to widespread corruption. For China to thrive, it needs change its one-of-a-kind development model. That is the persuasive argument made by journalist-turned businessman James McGregor in his new book, “No Ancient Wisdom, No Followers”.

McGregor appears to be particularly concerned with the role of State Owned Enterprises, making them his first chapter. Over the last decade the SOEs have become much more efficient and profit-oriented, but the resurgence of these government-favoured companies, which account for as much as half of GDP, squeezes private companies. And the state-private competition is biased against the private sector. Chinese think-tank Unirule estimates that subsidies and foregone costs gave the SOEs a $1.2 trillion boost between 2001 and 2009. Without that help, the average return on equity for the SOEs would have been a negative 6.3 percent.

The combination of state support and underlying unprofitability hardly suits them for their new role as leaders of China’s corporate push abroad. McGregor suggests that Chinese leadership change priorities. The goal should be to promote true entrepreneurship by levelling the domestic playing field.

Another problem is industrial policies which aim to promote domestic champions. Foreign businesses are encouraged to transfer technology in exchange for market access. The ultimate goal is to reduce reliance on foreign technology – and to maintain the Communist Party’s control. For the foreigners involved, this Indigenous Innovation campaign constitutes a blueprint for massive technology theft.

No wonder that the policy has created an international backlash. Multinationals, which have been the biggest supporters of China in the United States and Europe, have spoken out openly about their concerns. On the ground, the foreigners may pretend to cooperate, but they often “black-box” – hide – their most valuable technology. The inability of Chinese firms to acquire key foreign expertise may have contributed to the failure of a train signalling system that led to a fatal high speed train crash in 2011.

Chairman Mao once described the United States as a “paper tiger”. McGregor has a similar analogy that describes China today. “Peeling back the layers of China’s economic onion reveals a world of weak oversight, obsessive secrecy, murky accounting, and unrestrained power. At the core of the system, behind a façade of market listings, audit firms, and government regulators sits the Chinese Communist Party, the chief architect and beneficiary of China’s authoritarian capitalist system.”

The Party’s central Organization Department appoints all important government, media, education and judicial leaders in China. That is too much power. Even the wildest conspiracy theorist would have trouble imagining a comparable American organisation. It would appoint the entire Cabinet, all the governors and mayors, the justices of the Supreme Court, the heads of regulatory agencies, the heads of major universities and the chief executives of the largest companies, including all important media outlets.

The Party’s unbridled power has led to corruption and created vested interests, significant impediments to future growth. Nepotism is a serious issue. Party officials consider SOEs a fitting place for their children to carry out the Party’s agenda, learn business skills and, in many cases, gather assets for the family.

McGregor’s has become less optimistic about China since he wrote his popular first book “One Billion Customers”. In that work, the former chief executive of Dow Jones in China offered multinationals valuable lessons for doing business in China. Then he thought companies needed to adapt to China. Now he argues that it is red capitalism which must adapt. Still, McGregor has not given up hope. He wants only a “retooling”, not an entirely new system.


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