Magazine | May 20, 2019, Issue

‘Chinese Capitalism’ Is an Oxymoron

China’s president Xi Jinping meets with members of the Chinese delegation in Buenos Aires, Argentina, December 1, 2018. (Kevin Lamarque/Reuters )
What Beijing rules over is not a market economy

In his classic 1967 book Modern Capitalism: The Changing Balance of Public and Private Power, Andrew Shonfield tried to make sense of the distinctly different flavors of capitalism that evolved in the post-war era: the German model, where large banks played a key role in allocating investment; the Italian model of public–private ownership of key industries; the French model of indicative planning; the Japanese model of state-led industrial policy; and the American and British models of largely free-market, laissez-faire capitalism, albeit leavened with a growing social-welfare state.

He concluded that, notwithstanding their differences, advanced capitalist economies share basic convictions, including that private capital should be at the center of economic activity, that market-based transactions are the key to prosperity, and that private property should be protected. To be sure, the Left and the Right fight over how to achieve the proper balance of these factors — fights that appear to be intensifying — but most agree on the core principles. In short, any differences between capitalist nations are of degree, not of kind.

This has long led defenders of capitalism to suffer from a certain level of hubris: Isn’t it obvious that the capitalist cookbook is the best? One need only look back at the failed Communist experiment in the Soviet Union for proof. Indeed, as Francis Fukuyama told us in The End of History, “the triumph of the West” included a triumph of market-based capitalism.

But these days, as we struggle to figure out the puzzle that is China, things aren’t so clear. To be sure, China, propelled by private firms, has transformed itself from a Communist basket case where the masses wore Mao suits into the world’s second-largest economy. Because China is less Communist than it once was, many simply assume it has become capitalist. Wall Street financier Steven Rattner argues that “despite its Communist heritage,” China “understands the benefits of incorporating a robust free-enterprise element.” Nobel laureate Ronald Coase and his co-author Ning Wang proclaim that China has “embraced capitalism,” citing, in part, the fact that Adam Smith’s book The Theory of Moral Sentiments has more than a dozen Chinese translations.

But just because China has many private companies, allows Communist-Party member Jack Ma to become a billionaire as head of Alibaba Group, and translates capitalist classics into Mandarin doesn’t mean it’s capitalist. The fact that few describe the Chinese economic system without putting a modifier in front of the term “capitalism” — “authoritarian,” “state,” “predatory,” “Communist,” etc. — should tell us something. As should the fact that the Chinese Communist Party, which follows the “guidance of Marxism-Leninism,” calls for a socialist market economy. The reality is that the differences between the Chinese and Western variants of capitalism are more of kind than of degree.

China is a hybrid economy in which the state uses an array of tools for Communist-Party ends. To start with, China has more than 150,000 state-owned enterprises, accounting for 40 percent of industrial assets. However, Chinese state capitalism is not just, or even principally, about the number and size of such enterprises; it’s about the central role the Chinese Communist Party (CCP) plays in virtually all aspects of economic life. In fact, CCP officials are part of many Chinese companies “to make sure the company follows the law.”

China takes great pains to paint its party-directed efforts in the most genial light. Indeed, when you feel compelled to publish an English-language cartoon on Twitter touting how your 13th Five-Year Plan is a fun, progressive activity, your propaganda department is earning its yuan. (Interestingly enough, while the Chinese government is happy to put its propaganda on Twitter, it blocks access to Twitter in China.) Indeed, the party takes great effort to make its central planning sound nothing like a cold, sterile, Stalinist enterprise but rather a jubilant, bottom-up exercise developed by cherubic-faced workers and wise intelligentsia. Who actually makes the plans? Not a clutch of dour bureaucrats in Beijing. Rather, the cartoon jingle explains, “There’s government ministers and think-tank minds, and party leadership contributing finds. There’s doctors, bankers, and farmers too, and even engineers who deal with poo.” Oh, how fun.

No Twitter video can disguise the fact that, at its heart, Chinese state capitalism is a system in which the purpose of firms — private and public — is to fulfill the goals of the Communist Party. And the CCP uses an array of tools to obtain that alignment: hard and soft power; carrots and sticks. One tool is turning a blind eye to, and in many cases actively instigating, intellectual-property theft from foreign organizations. Another is requiring most foreign firms to enter into joint ventures with Chinese firms as a condition of market access — an arrangement the Chinese call “exchanging market for technology.” On top of that, central and provincial governments provide hundreds of billions of dollars’ worth of subsidies to China’s domestic champions in industries that range from steel and auto parts to jet aircraft and semiconductors.

The government also intervenes in currency markets, as it has done over the past year in response to the Trump administration’s imposition of 10 percent tariffs on a wide array of Chinese imports: It engineered a counterbalancing 10 percent decline in the value of the yuan relative to the dollar. Underlying all this is the almost complete absence of a rule of law to constrain party officials. The courts are part of the state apparatus, and few administrative agencies are transparent in their regulations.

One reason for confusion in the West about the Chinese economic system is that many see capitalism simply as a system built on private ownership of property. But capitalism is more than that. It is a system in which those property owners have considerable — albeit not unlimited — freedom to pursue their goals without influence from the state. By this standard, China’s is far from a capitalist economy.

The last time two competing and incompatible economic systems faced each other, each side erected firewalls. Beyond the occasional sale of a few consumer items, such as Pepsi, in Russia, there was very little trade or investment between First World market-based nations and Second World Communist nations. But by 2001, just ten years after the fall of the Soviet Union, people thought Communism was a 20th-century relic. It was against that backdrop that China not only was allowed to join the World Trade Organization (WTO) but was warmly embraced, amid high hopes that its accession would lead it to take the final steps necessary to become a truly market-based economy. Incoming WTO chairman Supachai Panitchpakdi summarized the view of most at the time when he wrote that joining would signal “China’s willingness to play by international trade rules and to bring its often opaque and cumbersome governmental apparatus into harmony with a world order that demands clarity and fairness.”

Needless to say, as even the most ardent defenders of China’s WTO accession now acknowledge, that did not happen. In fact, as the Information Technology and Innovation Foundation and other groups have shown, there is a yawning gap between China’s WTO commitments and its actual trade and economic practices. The result is that in a deeply integrated global economy, two very different systems now coexist.

That coexistence has proven highly damaging to global innovation and economic growth. To see why, imagine that the Department of Justice randomly assigns half of U.S. corporations to be A-corps and half to be B-corps. For A-corps, nothing changes. But B-corps now enjoy special privileges and rules. They are exempt from laws governing intellectual-property theft. They receive more-favorable tax incentives. They are recipients of sizable subsidies, including some to buy their A-corp rivals. They are able to enlist the DOJ to win capricious legal claims against A-corp rivals.

The result of such an experiment would be dire: The best, most innovative A-corp firms would lose market share; A-corps would be loath to invest in research and development, given that B-corp rivals would be able to purloin it; and there would be massive waste as inefficient B-corp firms expanded more than market forces required. Now extrapolate that to the global economy and you get a sense of the harms the Chinese system has imposed on capitalist economies.

Western capitalist economies now face three strategic choices. The first is to muddle through, hoping that China shoots itself in the foot and that the overall damage to it and the global economy is not too great. The second is to move in the direction of the Cold War–era, two-economies system. Indeed, we are potentially seeing the beginning of that, in part with the growing movement by capitalist economies to ban sales of Huawei telecommunications equipment. The third is for Western capitalist democracies, presumably under U.S. leadership, to band together, press China to reform, and establish global trade rules with real teeth. Choice three is clearly the best for the world. Let’s hope President Trump, and whoever succeeds him, selects it. And let’s stop pretending that what exists in China is capitalism.

This article appears as “‘Chinese Capitalism’ Is An Oxymoron ” in the May 20, 2019, print edition of National Review.

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