China’s Authoritarian Capitalism vs. American Capitalism

F ar too often, American entrepreneurs have been misled about the true nature of overseas investing. Many pursue foreign markets solely on the expectation of receiving a reasonable rate of capital returns. These investors are often quick to overlook the lack of transparency and absence of privatization in an autocratic country so long as the captured markets provide access to lucrative opportunities to grow wealth.

Likewise, environmental, social, and governance (ESG) investors often fall prey to this trap when forsaking their values-driven expectations in pursuit of a promising overseas venture. Doing so undermines the ethical-investing philosophy at the core of ESG.

This “ends justifies the means” form of investing can prove perilous for U.S. investors, especially as it pertains to investments in China. Many American investors fail to understand the growing threat that China poses to the free world, and as a result are incapable of weaning themselves off their financial dependency on Chinese investments.

Now more than ever, American investors should reevaluate their approach to doing business in China. China’s form of “authoritarian capitalism” should never be confused with America’s market-based capitalism.

In China, private ownership is floated as a fictitious label to invite overseas investments. In reality, the national government, under the firm control of the Chinese Communist Party (CCP), is involved in one way or another in every company housed within the country.

In the United States, investing is spurred by the collaborative efforts of public and private markets. Here, the markets are driven not by the heavy hand of bureaucracy, but by continuous consumer–supplier engagement. A free-enterprise system gives rise to corporate growth and financial prosperity for investors, whose private property is protected by law. These elements define what true capitalism is, as opposed to the version of capitalism driving China’s economy.

China’s government also uses rhetorical gestures toward democracy and the public interest as a fig leaf for its coercive practices, hence its self-identification as a “communist republic,” an unworkable clash of opposites. What is ostensibly a popular democratic government benefiting the people is in truth a state-driven government singularly benefiting the Communist Party.

U.S. investors must become better attuned to the harsh realities of China’s economy. Private businesses are indeed “an important component of the socialist market economy” in Communist China, according to Article 11 of the PRC Constitution. But their financial value is utilized for the furtherance of state interests, not the fulfillment of private interests.

China’s exclusion from the G-7 Conference is a consequence of this reality. Though the country has the second-largest nominal GDP in the world, many Chinese citizens live in poverty. As Winston Churchill famously remarked, socialism’s “inherent virtue is the equal sharing of misery.”

For ESG investors, China’s glaring disregard for environmental sustainability, social responsibility, and equity across governance should discourage future investments. Proponents of ESG presumably invest across entities that square with their personal values and social causes. If true, why is there such a large market for ethical investing in a country that so blatantly undermines the values ESG represents?

There are signs that ESG investors may be starting to reckon with this problem. Sustainalytics recently downgraded several government-backed tech companies for internet censorship and for being non-compliant with U.N. principles. Additionally, net ESG flows into China plummeted by 98 percent to just $1.3 billion in 2022, according to data from Morningstar, as global sustainable-fund inflows sharply decline.

Foreign investors are slowly waking up to the realities of doing business in China, as well. Many are selling their shares in mainland stocks, and the value of Chinese exports has declined by 14 percent this year. China’s economy, which was projected to recover from the disruptions wrought by Covid, is instead now in decline.

U.S. investors in particular should be wary of the growing threat posed by China’s authoritarian capitalism. Since the CCP’s founding in 1949, China’s primary goal has been to displace the United States as the predominant global superpower. Undermining America’s economic interests is paramount to achieving that goal. China’s authoritarian system of capitalism poses a significant threat to economic freedom, undermining the liberties associated with America’s market-driven economy. U.S. investors — both traditional and ESG — must wise up.