National overview
The bill is on the verge of China’s ‘capitalist’ experiment
The Chinese Communist Party (CCP) has once again awakened to a deep truth: rich, secure capitalists are the natural enemies of authoritarian regimes. In a hybrid autocratic-capitalist model, capitalism is the means to generate wealth, but power is the end goal. Successful capitalists, of course, begin to demand that their personal and property rights be protected from authoritarian fiat. 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 officials within private enterprises ”and to have state-aided enterprises invested in private enterprises. In the absence of civil rights or an independent judiciary, ‘private’ companies have no real independence from government in China. Disputes and demands for civil rights are a threat to the regime and will be crushed. China’s shift of encouraging external investment and competition in the internal market towards viewing capitalism as a threat has a clear historical precedent. From 1921–1928, the Soviet Union introduced a policy of economic liberalization, which enabled the privatization of agriculture, retail, and light industry. This partial and temporary return to a controlled and limited capitalism, known as the New Economic Policy (NEP), saved the Soviet economy from collapse and enabled Russia to modernize. But in 1928, Stalin suddenly reversed the course: he collectivized agriculture and liquidated the most prosperous farmers, necessitating regular reliance on grain imports, especially from the United States. China’s own experiment with economic liberalization began in 1981 when Prime Minister Deng Xiaoping began. to decentralize and privatize economic activities while continuing the mandate of the CCP. With the liberalization, international enterprises were invited to China. The price was high: the Chinese regime demanded that they cooperate and train with local businesses. This arrangement led to a widespread theft of intellectual property, and soon local competitors supplanted their international competitors in the local market, often with the help of government subsidies. CCP-sponsored companies have used local dominance to enter the international market, outperforming their competitors worldwide. International “partners” were then subjected to asymmetric regulatory action, excluding China. (Uber is a recent case of this phenomenon. There are numerous others.) Now that the West is waking up to this game, the inflow of capital into China is slowing down. Is China’s neo-mercantilist form of capitalism about to end? This seems unlikely; it is too far entrenched to be quickly uprooted. But the freedom of action granted to Chinese companies and executives is already being dramatically curtailed, as Xi Jinping claims explicit political control over the economy. For example, in November, the CCP unexpectedly prevented the IPO of Ant Group, a company whose business model was seen as misaligned with the party’s goals. International companies that are heavily invested in the UK need to prepare for the worst: ‘Offers’ of the kind that cannot be refused will be made to force the sale of rural facilities and operations. Given the capital controls imposed on the relocation of money from China, many Western investments in China have probably been seized as Deng’s experiment is abolished. Western competitors in the world market must finally acknowledge that their Chinese competitors are both at the mercy of the CCP and are backed by instruments of state power. At the heart of Chinese relations with the West was the monopoly of political authority by the CCP, China has a free market economic system and should be considered a free market trading partner. It has always been a convenient fiction. However, the distance between economic and political activities in China has disappeared as the party takes control of independent companies. A number of Chinese state-aided companies, including some in strategically important industries, have begun to default on their debt obligations. Will international creditors be allowed to claim the assets? Will the shareholders – in many cases the CCP or regional and local governments in China – be wiped out? If these companies are rescued by the government, will domestic and foreign debtors be treated equally? Or will foreign creditors find that their assets are wiped out while these companies continue under nominal new ownership and perhaps a new corporate brand? It seems certain that foreign debt will be explicitly or implicitly rejected. What was previously commercial debt now has the risks usually associated with government debt, which can be canceled by the State Pulpit. In short, a wave of write-offs is coming for Western companies invested in China. Western companies are not competitors operating in a free market in the VRS. As we wrote in a recent article, the CCP constantly views Western enterprises as opponents of the sovereign interests of the VRC and uses all the tools at its disposal. Western businessmen need to prepare themselves for the very realistic possibility of extensive seizure of Western assets in China in the near future. Before that happens, the U.S. government must pass legislation that allows Western companies to claim compensation from CCP-controlled entities in U.S. courts for the seizure of assets. And since the CCP gives control over all Chinese companies, all of these companies should be treated as part of a single government-controlled entity for litigation purposes. When the capitalism bill comes to China, the West must be ready. Michael Hochberg is a physicist who founded four successful semiconductor and telecommunications businesses. Leonard Hochberg is the coordinator of the Mackinder Forum-US and a senior fellow at the Foreign Policy Research Institute.