China's Journey Into The Unknown

School children place their hands on the Communist Party flag during a class about the history of the Communist Party at a school in Lianyungang, in China's eastern Jiangsu province on 28 June, 2020. (AFP Photo)

China watchers have grown ever more anxious as President Xi Jinping has concentrated power in his own hands, and as the Communist Party of China’s (CPC) leadership has become more coercive, both at home and abroad. The so-called trade war with the United States (US), deterioration in relations with many foreign governments, and the COVID-19 pandemic have had far-reaching consequences for China. And now comes Xi’s regulatory and legal clampdown on private firms and their owners, as he champions a new campaign to promote “common prosperity.” 

The speed and scope of these developments exemplify the hazard of book-writing on contemporary affairs. Even so, the three books examined here provide (each in its own way) a valuable perspective on the more lasting aspects of Xi’s China, identifying features that can guide thinking about the future of a country that is both challenging the world and facing major challenges of its own.

The focus by these authors on systemic aspects of Chinese governance is all the more relevant in light of this year’s extensive and continuing regulatory measures. A broad array of sectors has been affected by this new regulatory activism, including technology, data, finance, education and tutoring, logistics, distribution, and now housing, where indebtedness, costs, and overbuilding have been deemed excessive.

The revival of the hoary slogan “common prosperity” is widely thought to signify the start of a crusade against inequality. While few details have been announced, the expectation is that the campaign will penalise those with “unreasonable” incomes and focus on so-called “tertiary distribution”: aligning private firms and billionaires with CPC goals through what amounts to coercive state-directed philanthropy.

The scale and urgency of the crackdowns reflect not only Xi’s own leftward shift but also the long build-up to next year’s 20th Party Congress in November, where he likely intends to break another party norm by securing a third term as president. Before then, Xi wants to re-establish state firms at the commanding heights of the economy and subordinate private firms and entrepreneurs to CPC objectives. The only question is which goals will be pursued through regulation, which through guidance, and which through fear.

The irony is that Xi has created a new contradiction for China. The CPC’s craving for control in all domains sits quite uncomfortably with the types of reforms that are needed to support growth and innovation. Whether the Party can resolve this contradiction is a moot point.

The Contradictions Of State Capitalism 

In China and the WTO: Why Multilateralism Still Matters, Columbia Law School’s Petros C. Mavroidis and André Sapir of the Université Libre de Bruxelles bring years of experience and sterling reputations in trade law and economics, respectively, to a crucial issue: Is China’s state capitalism compatible with its membership in one of the world’s most important – but also threatened – international institutions? 

That question is especially pertinent now that China may be embarking on a new path. Remember, it was the reforms and policies designed to win accession to the World Trade Organization (WTO) in 2001 that underpinned China’s subsequent economic success and rise to trade dominance in the first place. The doubt about China’s compatibility with the WTO nowadays derives not so much from any specific breach of WTO provisions, procedures, and rules, but rather from the character of its economic system. Simply put, the problem is that its entire governance model violates the spirit of the WTO.

It is tempting to ask why no one thought so in 2001. But, in all fairness, few at the time imagined that China’s economy would become as large and integrated into the global system as it has, or that its political system would become as Leninist-Maoist as it has under Xi. 

As Mavroidis and Sapir make clear, even after Xi came to power, it took quite a while for people to recognise that the “reform and opening up” launched by Deng Xiaoping in the late 1970s was pretty much over, and that the country was undergoing a sharp political turn.

To illustrate this broader development, the authors identify two intractable issues that stand apart from the run-of-the-mill complaints that the Chinese leadership has confronted in the areas of foreign direct investment, procurement, services, currency controls, export terms, and subsidies.

The first issue is the unfair trade advantage given to state-owned enterprises (SOEs). The authors note that SOEs typically account for about 15 percent of gross domestic product (GDP) in Organisation for Economic Co-operation and Development (OECD) countries, but twice that in China. SOEs’ share of GDP in China has been mostly stable for the last 20-25 years, but Chinese GDP has increased from about US$1.2 trillion to US$14 trillion over this period, implying that SOEs now account for about US$3.5 trillion of output – or 10 times as much as in 2000. 

That level of output is highly significant in a global system where people are concerned about fair trade, level playing fields, and “behind-the-border” barriers to trade. We can anticipate that China’s massive SOE sector will be one of many controversial sticking points in its application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), if that process ever starts.

The other intractable issue is forced technology and intellectual-property transfer, which is the price foreign firms in China pay for accessing Chinese markets (often by forming joint ventures with Chinese firms). In the wake of revelations about human-rights abuses and appalling labour and social conditions in Xinjiang, new objections born of ESG (environmental, social, and governance) criteria will likely complicate China’s trade relationships even more.

Mavroidis and Sapir warn that, having failed to liberalise as its state-capitalist economy evolved, China must now rely on a WTO system that might not survive unless either China or the WTO changes. The omens are not auspicious. No one can compel China’s government to reverse course. Unilateral measures, such as those employed by the Trump administration, have proven to be both, unrealistic and unwise. Bypassing the WTO not only undermined that institution’s credibility and relevance; it also ultimately harmed the US itself.

The only recourse for the rest of the world, as Mavroidis and Sapir see it, is to try induce a change in behaviour, at least as far as trade policy is concerned, by reaffirming a commitment to multilateralism that includes China. For example, applying new rules across the board incrementally (following a pattern applied in the past to Eastern European countries, Japan, India, and Brazil) could enable compromise in contentious areas, or at least provide a basis for dialogue and engagement.

XI’s Big Stick 

In Chinese Antitrust Exceptionalism: How The Rise of China Challenges Global Regulation, Angela Huyue Zhang, a professor of law at Hong Kong University, takes a rather different approach to analysing China’s governance model. Hers is a timely work: terms like antitrust and anti-monopoly have made frequent appearances in the new regulatory crackdown, generating much discussion about what the authorities’ agenda entails. 

Is it fundamentally about antitrust and market efficiency, or is it really about political power and control? Zhang may have started out by examining how antitrust law shapes markets, prices, and competition; but she acknowledges that, in light of China’s use of antitrust as an instrument in trade and foreign policy, her book is also about Chinese politics, economic institutions, and international relations. 

Her aim thus is to explain the role and application of antitrust law against the backdrop of China’s broader governance model. She first assesses China’s regulatory performance, and then considers cases in which European or US antitrust actions have affected Chinese firms.

China’s main regulatory agency is the State Administration for Market Supervision (SAMR), which was created in 2018 from three agencies beset by rivalry and bureaucratic inertia. The legal basis for antitrust enforcement derives from the Anti-Monopoly Law, passed in 2008, which prohibits monopolistic and anti-competitive conduct. It is supplemented by a plethora of other rules and regulations covering market and price conditions, contract law, and foreign-trade law.

The development of antitrust law and enforcement in China is of particular interest in today’s circumstances, partly because of the regulatory campaign, but also because of the ways in which China has used this instrument to retaliate against foreign measures taken against its own firms and entities. 

This has applied especially to the trade war with the US, which in fact spans not just merchandise trade but also financial assets, direct investment, and technology. The broad questions of antitrust and treatment under Chinese law are becoming especially important for foreign firms in China. As Zhang notes, the problem these firms face is not so much the law as the institutional environment and bureaucratic incentives that lead to biased enforcement outcomes.

A particularly contentious issue, as Mavroidis and Sapir also note, is the prominence and role of SOEs. One might add “private” firms that are technically incorporated but not actually private. Half or more of the US and EU firms operating in China regard current antitrust enforcement as unfair and arbitrary, and view regulators as prone to use their vast administrative discretion and media control to favour domestic firms.

Like Mavroidis and Sapir, Zhang understandably would like to see collaborative outcomes, such as US help promoting structural reforms within and by the Chinese bureaucracy to enhance due process in administrative enforcement. 

Zhang also worries that the anti-China consensus in many democratic countries is drowning out the voices of progressive Chinese reformers who are advocating for a freer, more equitable, and more open China. But such warnings seem passé. The Chinese government’s behaviour and rhetoric offer nothing to suggest that there is scope for compromise or backtracking on governance. Even if we accept that there are committed progressive reformers in China, it is obvious that they do not have Xi’s ear.

China’s Faustian Bargain 

Finally, Yuen Yuen Ang, a political science professor at the University of Michigan, gives us an altogether different and engaging brand of insight. Unlike the other books considered here, the focus of China’s Gilded Age: The Paradox of Economic Boom and Vast Corruption – a title evoking America’s late-19th-century period of rapid economic growth, soaring inequality, deepening social tension, and rampant corruption – is entirely domestic. 

Starting from the observation that corruption is normally associated with poor performance, faltering social progress, and political instability, the book considers why China’s corruption-ridden economy nonetheless has been able to grow rapidly and more or less consistently since 1978. The relevance of this question is underscored by Xi’s long and relentless anti-corruption campaign, which has already resulted in the incarceration or other punishment of some 1.5 million people, including many top officials. Xi’s purge certainly entails a genuine effort to root out graft and other abuses of power, but it also reflects an effort to enforce party discipline and neutralize political rivals. 

Ang’s quantitative and analytical work (including interviews conducted in China and comparisons with Russia, India, and the US) will be of particular value to those interested in corruption as a broader concept. By unbundling its varied forms, she shows that some are much worse than others when it comes to economic development. Her central argument is that China’s Gilded Age can be attributed to corrupt exchanges, rather than to the more garden-variety types associated with theft and embezzlement.

In China, the principal corrupt actors are political elites rather than rank-and-file bureaucrats and apparatchiks. This distinction is useful, because, whereas the latter seek personal gain and have limited other objectives, the former can offer special deals, cheap credit, tax breaks, access to people, and procurement tenders. It is they who control public funds and valuable resources such as land. Ang calls this type of corruption “access money,” and it has indeed played an essential role in China’s economic development until now.

Deng’s famous “reform and opening up” strategy created strong incentives for access money, because it combined greater reliance on markets and the CPC’s political monopoly rule, a model guided by the lodestar of national prosperity and strength. This mix of incentives gave party leaders and officials a direct stake in economic growth, and in promoting private businesses and new industries while still preserving their control over people, processes, decision-making, and resources.

To facilitate access money even further, Chinese leaders have deliberately curtailed other forms of corruption that prevent or inhibit entrepreneurial growth. This policy has involved new laws, tax structures, financial oversight, and other mechanisms that increase the state’s capacity to monitor and punish corrupt behaviour of which it disapproves.

Lurking Dangers 

While not part of Ang’s brief, there is other evidence of kleptocracy at work in China over the last decade or so. Years of high credit growth in China, dating back to the big stimulus program in 2008, have coexisted with reams of statistics that consistently fail to show where and how that credit has boosted the economy (though housing and infrastructure have been exceptions).

The monetary boost is not a fiction. The deposits, assets, and surge in bank balance sheets in the financial system are real, but they contrast with rather more pedestrian economic statistics showing a rising volume of credit for every additional yuan of output. The money must have gone somewhere, but exactly where remains a mystery. 

In any case, the question is whether this hitherto successful form of corruption in China will continue to support economic growth, or whether it will finally become too corrosive for Xi’s government, or even the CPC, to manage. 

According to Ang, those hoping for answers need to look beyond the economy. But, at a minimum, one can infer from the new troubles in China’s property market (which are likely to persist in the coming years) that even access money has limits beyond which economic and financial instability become endemic.

Xi’s crackdown may have made officials more fearful, but Ang maintains that the drivers of corruption are deeply embedded, owing to the government’s huge power over the economy and the bureaucracy’s patronage system, and that it will eventually undermine political stability. 

Now that Xi has made himself the sole unchallengeable leader, the battles for political succession will intensify, as will factional rivalries fuelled by the forms of corruption that he has allowed to continue. – Project Syndicate

George Magnus, a research associate at the University of Oxford’s China Centre and SOAS University of London, is the author of Red Flags: Why Xi’s China Is in Jeopardy (Yale University Press, 2018).