Artist Yoram Gal on painting about the pandemic

National review

The bill falls due for China’s “capitalist” experiment

The Chinese Communist Party (CCP) has returned to a profound truth: Rich, secure capitalists are the natural enemies of authoritarian regimes. In a hybrid autocratic-capitalist model, capitalism is the means of creating wealth, but power is the ultimate end. Successful capitalists, of course, demand that their personal and property rights be protected from authoritarian fiat. Capital in the hands of entrepreneurs is a political resource; This poses a threat to the implementation of centralized plans. To make this happen, the CCP has begun to take control of the private sector through “installation”. . . “Party Officials in Private Companies” and government-sponsored companies invest in private companies. Without civil rights or an independent judiciary, “private” companies have no real independence from the government in China. Disagreements and calls for civil rights pose a threat to the regime and are being crushed. China’s shift from encouraging external investment and competition in the domestic market to treating capitalism as a threat has an obvious historical precedent. From 1921 to 1928, the Soviet Union pursued a policy of economic liberalization that enabled the privatization of agriculture, retail and light industry. This partial and temporary return to a controlled and limited capitalism known as New Economic Policy (NEP) saved the Soviet economy from collapse and enabled Russia to modernize. But in 1928 Stalin suddenly reversed course: he collectivized agriculture and liquidated the wealthiest farmers, which necessitated frequent recourse to grain imports, particularly from the United States. China’s own experiment in economic liberalization began in 1981 when Prime Minister Deng Xiaoping began decentralizing and privatizing economic activity while asserting the CCP’s ultimate authority. With the liberalization, international companies were invited to China. The price was high: the Chinese regime required them to work with local companies and train them. This regime led to widespread intellectual property theft and soon domestic competitors were ousting international competitors in the domestic market, often with the help of government subsidies. CCP-sponsored companies used national dominance to enter the international market, undercutting their global competitors. International “partners” were then subjected to asymmetrical regulatory measures that excluded 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, capital inflows into China are slowing. Is China’s neo-mercantilist form of capitalism nearing its end? That seems unlikely; it’s too deeply rooted to be uprooted quickly. However, the freedom of action of Chinese companies and executives is already being dramatically restricted as Xi Jinping asserts explicit political control over the economy. For example, in November the CCP unexpectedly prevented the Ant Group, a company whose business model was viewed as inconsistent with the party’s goals, from going public. International corporations heavily invested in the PRC must prepare for the worst: The Variety That Cannot Be Refused “Offers” are being forced to force sales of onshore assets and operations. Given the capital controls that have been placed on the movement of money out of China, it is likely that many Western investments in China will be confiscated if Deng’s experiment stops. Western competitors in the world market should finally realize that their Chinese competitors are both at the mercy of the CCP and supported by instruments of state power. The central concept of China’s relationship with the West was that political authority be monopolized by the CCP. China has a market economy system and should be treated as a trading partner of the free market. This has always been a convenient fiction. But whatever the distance between economic and political activity in China in the past has disappeared when the party takes control of nominally independent corporations. A number of government-backed Chinese companies, including some in strategically important industries, have begun to default on debt obligations. Are international creditors allowed to claim the assets? Will the shareholders – in many cases the CCP or the regional and local governments in China – be wiped out? If these companies are bailed out by the government, will domestic and foreign debtors be treated equally? Or will foreign creditors find their assets wiped out while these companies continue to operate under nominally new ownership and possibly under a new corporate brand? It seems like a safe bet that external debt will either be explicitly or implicitly rejected. What used to be trade debt now carries the risks typically associated with government debt, which government fiat can cancel. In short, there is a wave of write-offs for Western companies invested in China. Western companies are not competitors operating in a free market in the PRC. As we wrote in a recent article, the CCP consistently treats Western companies as opponents of the sovereign interests of the PRC and uses all the tools at its disposal to target them. Western business executives must prepare for the very realistic possibility of a large scale seizure of Western assets in China in the near future. Before that happens, the US government should pass legislation that would allow Western companies to seek compensation from US courts for the confiscation of assets from CCP-controlled companies. And since the CCP maintains control of all Chinese companies, all of these companies should be treated as part of a single government-controlled entity for litigation and regulatory purposes. When the capitalism bill is due in China, the West must be ready. Michael Hochberg is a physicist who founded four successful semiconductor and telecommunications startups. Leonard Hochberg is the Mackinder Forum-US Coordinator and Senior Fellow at the Foreign Policy Research Institute.

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