National Review
The bill is coming for China’s ‘capitalist’ experiment
The Chinese Communist Party (CCP) has again awakened to a profound 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 ultimate goal. Successful capitalists naturally begin to demand that their personal and property rights are protected from authoritarian decrees. Capital in the hands of entrepreneurs is a political resource; it poses a threat to the implementation of centralized plans. Realizing this, the CCP began to exercise control over the private sector “by installing. . . Party employees inside private companies ”and with companies supported by the State investing in private companies. In the absence of civil rights or an independent judiciary, “private” companies have no real independence from the government of China. Dissent and demands for civil rights are a threat to the regime and will be crushed. China’s move to encourage foreign investment and competition in the domestic market to treat capitalism as a threat has an obvious 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 reversed the course: he collectivized agriculture and liquidated the most prosperous farmers, thus requiring frequent recourse to grain imports, mainly from the United States. decentralize and privatize economic activity, continuing to assert the CCP’s ultimate authority. With liberalization, international companies were invited to enter China. The price was high: the Chinese regime demanded that they work and train local firms. This arrangement led to widespread theft of intellectual property, and domestic competitors soon replaced their international rivals in the domestic market, often with the help of government subsidies. CCP-sponsored companies leveraged their domestic dominance to enter the international market, hurting their competitors around the world. The international “partners” were then subjected to asymmetric regulatory actions, excluding them from China. (Uber is a recent case of this phenomenon. There are countless others.) Now that the West is waking up to this game, the flow of capital to China is slowing. Is China’s neo-mercantilist form of capitalism about to end? This seems unlikely; it is too ingrained to be uprooted quickly. But the freedom of action granted to Chinese companies and executives is already being severely restricted as Xi Jinping asserts explicit political control over the economy. For example, in November, the CCP unexpectedly avoided the IPO of Ant Group, a company whose business model was considered out of line with the party’s objectives. International businesses that are heavily invested in the PRC must prepare for the worst: “Offers” of the kind that cannot be refused will be made to coerce the sale of facilities and operations on the ground. Given the capital controls imposed on the movement of money outside of China, it is likely that many Western investments in China will be confiscated when the Deng experiment is over. Western competitors in the global market must finally recognize that their Chinese competitors are at the mercy of the CCP and supported by instruments of state power. The central concept of Chinese relations with the West is that, although political authority is monopolized by the CCP, China has a free market economic system and should be treated as a free market trading partner. This has always been a convenient fiction. But any gaps that may have existed in the past between economic and political activity in China disappeared when the party took control of nominally independent companies. Several state-backed Chinese companies, including some in strategically important sectors, have begun to default on 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 eliminated? If these companies are bailed out by the government, will the holders of domestic and foreign debt be treated the same? Or will foreign creditors have their assets destroyed while these companies continue to operate under a new nominal ownership and perhaps a new corporate brand? It seems like a safe bet that foreign debts will be repudiated, either explicitly or implicitly. What used to be commercial debt, now has the risks normally associated with sovereign debt, which can be canceled by government decree. In short, a wave of casualties is coming for Western companies invested in China. Western companies are not competitors that operate in a free market in the PRC. As we wrote in a recent article, the CCP consistently treats Western companies as adversaries to the sovereign interests of the PRC and uses all the tools at its disposal to achieve them. Western business executives need to prepare for the very realistic possibility of extensive confiscation of Western assets in China in the near future. Before that happens, the U.S. government must pass legislation allowing Western companies to claim compensation from CCP-controlled entities in U.S. courts for the forfeiture of assets. And since CCP is taking control of all Chinese companies, all of these companies must be treated as part of a single government-controlled entity for the purposes of litigation and regulation. When the account of capitalism in China arrives, the West must be ready. – Michael Hochberg is a physicist who founded four successful semiconductor and telecommunications startups. Leonard Hochberg is the coordinator of the Mackinder Forum-US and a senior member of the Foreign Policy Research Institute.