Disclaimer: The ultimate goal of this article is to analyse and offer an original take on the column with the same title published in The Economist. Click this link to check the main reference.
As suggested by the fragment detached from a 2015 article of The Economist with the same title, there are diverging sentiments regarding the influence exerted by the Communist Party of China upon business ventures. Some believe that “the state and party are omnipresent”, while others (ex.: Lenovo’s management) deem that foreigners would never be appointed to top executive positions, if the former statement held true. In fact, the author seeks to validate either point of view, by putting forth three questions, which shall also be assessed as follows.
The kneeling of an iron lady
First, how strategic is the industry under scrutiny? While the author equally weighs out both sides, taking Gree Electric as the perfect example of successful private entrepreneurship in China, there is one factor that remains unconsidered. Power dynamics.
Mrs. Dong Minzhu, or commonly known as “the iron lady”, is an important public figure, leading the country’s largest air-conditioner producer, Gree Electric (He 2019). This certainly gives her a large media outlet, posing a great threat to the ideology of the party, should she wish for more rights and freedom of expression. The thing most Western democracies do not comprehend about communist regimes, specifically a diluted one such as China’s, is the necessity of the central government to have full control over its powerful figures, for the mere need to ascertain the silence of the working class.
If Mrs. Dong, who leads a non-strategic company, suddenly became more influential within Gree Electric than the party itself, she would immediately face the wrath of the system, which is anything but delicate. In fact, she may already have, says He (2019), as she was quietly demoted from the post of chairwoman of Gree Group in 2016, not receiving any valid explanation.
Master or puppeteer?
Second, who makes the managerial decisions? There are two kinds of managerial decisions, important investment decisions or board member approvals, and daily tasks that do not hold much consequence. McGregor (2019) says private companies have much more freedom in their routine operations, but when it comes to major transactions “there is a blurred line between what is private and what is state owned”. The PRC (People’s Republic of China) is an antonym of the Western system, in terms of the liaison between the corporate and the state. While in capitalist economies private corporates finance presidential campaigns and lobby politicians (Wilkie 2018); in the socialist republic it is the politicians who stand in the position of the puppeteer. For companies to receive favours and the affinity of the central government, they must comply with the unspoken rules of the regime.
A fresh example is the scandal of Starbucks in Hong Kong, in a case when an international company negates the civil right to riot, calling citizens “a small group of radical protesters”, (Cho Wai 2019). Although the Chinese branch of Starbucks is managed by Maxim’s Caterers, a private company, it still meddles in political affairs to prove its support to the party, as it expects to reap the favours that come with this support. Consequently, the power dynamics paradox between the two different political regimes is crystal clear.
Where do loyalties stand?
Third, who are the employees loyal to? One could also alter the question to: who has more bargaining power over the employee? Logically, it is the firm that feeds its employees, and in an environment where the former is not controlled by any other entity, the employer-employee relationship does not have any explicit disruptors. Surely, even a capitalist government can subsidize or hinder a company based on its pertinence with the written law; yet, it cannot determine the workers’ pay, position within the firm and additional benefits. Whereas, a state-controlled economy does not provide the same habitat for companies to develop, its influence is far too noticeable, being deeply rooted in the mind and spirit of the workers. “You can kill a man, but you can’t kill an idea”-Sophocles says. And he’s right! The ideology of socialism has lasted for more than 100 years in the People’s Republic, passed from father to child as a common belief system. It is impossible therefore, for a private employer to be more important than the party. Yet, in recent years the underclass, which makes up most of the workforce of large companies (private ones too), appears to be weighing out the pros and cons of a system that clearly disfavours them in every aspect, (Dyer 2020). There is a deep segregation between the rural and urban areas, that legally impedes migration within the country. Moreover, the workers’ children cannot even access the same education as the urban middle class, given they must pay much steeper fees for attending the same state colleges and universities located in the prosperous areas of China.
This leaves the young workforce highly untrained, posing an additional cost to the corporate sector. The incompetence of local authorities in developing better education in rural areas, and the existence of “black jails” for those who protest the migration laws, proves this oppression and lack of state organization will continue to translate in headache for private companies who compete in manufacturing industries, (Dyer 2020).
Unveiling China’s Capitalist Model
In Marxist literature, state capitalism is a form of intertwining a free market with a state regulated economy, where the government controls the most strategic industries and factors of production, while at the same time allowing for private enterprise to coexist with SOEs (State Owned Enterprises). This is the ideology adopted by the People’s Republic of China, where the party takes centre stage in directing the economy, unlike Western systems where the multinational corporate is the lead protagonist, says Bremmer (2010).
Firstly, the party utilizes SOEs to exploit state owned resources, deemed to be the “crown jewels” of the country, to employ its vast workforce, and achieve economic growth through the export of domestic production. Secondly, government officials hand-pick industries where private companies can prevail, always ensuring the authority of the party over the directing board in a shadowy manner. Thirdly, state-owned sovereign wealth funds are employed to turn idle cash into valuable investments that constantly broaden the country’s affluence.
Finally, Bremmer (2010) considers a major distinctness between Western and Chinese capitalism: the former’s objective is economic growth, while the latter’s is political influence by “maximizing the state’s power and its chances of survival” (Bremmer 2010). The abovementioned features adopted by Chinese state capitalism have, indeed, yielded positive results for the republic, considering the timeline after the “open door policy” (1986- 1990), following the restoration of diplomatic relations with the U.S. and updated commercial laws in the domestic market. According to statistics of the World Bank, the lowest % GDP growth rate since 1986 has been 3.907%, and the highest 14.231%; making the Chinese economy today the first manufacturer in the world and only second to the U.S. in terms of GDP. Clearly, the data suggests that a success story can stem even from a one-party system.
Will PRC’s old victories become its downfall?
The features that brought progress to the Chinese economy were of various nature. First, the meticulous organization allowed for centralized guidance in the development of core industries, which the country to this day controls via state owned enterprises. Fiercely competing with other countries and acquiring foreign intelligence through globalized trade and investments, allowed for the knowledge base in each sector to rapidly expand, urging new research in technology, which finally led to China overshadowing foreign economies in manufacturing segments. Moreover, the large proceeds from exports allowed it to increase the well-being of its citizens, who make up around 20% of the world’s population. According to Amadeo (2019), only 3.3% of the inhabitants live under the poverty line, confirmed by Dyer (2020) stating that real income per capita is growing by 6% a year. Yet, Dyer (2020) poses a reasonable question: “Will China ever become part of the exclusive group of high-income countries?”. Many developing economies tried but failed miserably; namely, Brazil, Thailand, Argentina and more. When a country goes out of the lower quality manufacturing segment, to pursue more advanced industries, it risks being trapped somewhere in the middle and lose on both sides.
The Chinese economy certainly lacks highly skilled workers as proved above when rural employees were discussed. It can never achieve the apprenticeship of Italians in luxury goods, or the U.S. and Japan in advanced technology; because its economy has been constructed entirely to compete on price competitive segments, taking advantage of economies of scale and an over-saturated labour market. Hence, the corporate sector is showing a recent slowdown, and the “sparkle seems to be dimming”, says Leng (2019) referring to the hi-tech and luxury industry sectors. Moreover, the political influence over the state economy has its downfalls, as it drives out foreign investors like Google, and domestic brands like Tik Tok, who want to break free of government scrutiny, security breaches, censorship or even just shake off the Made in China label. While many Western multinationals fail to successfully enter this market due to their own mismanagement, lack of logistics, or disconnection from the local culture, such as KFC, Home Depot, eBay, Amazon and recently the Renault Group; others crack under the pressure of an unknown communist system that is deeply rooted in the societal axioms.
Red or Not?
Finally, this leaves us with a radically different interpretation of entrepreneurship compared to Western economies. In the People’s Republic, the small Chinese entrepreneur has more liberty, because his/her perception of doing business has been constructed in the midst of an oppressive environment, that being the only reality he/she can ever know or accept. Being a living vessel of the communist idealism, the Chinese entrepreneur would never damage the image of the party or seek to diverge power away from its hands, because that would be treason to their own belief system. Contrarily, the large private corporate, especially the foreign multinational, is much more pressured and its top executive compromised by political board connections and external manipulations. Arguably this system can leave the top executive anywhere between fragile independence or full backstage control, but never nonpartisan and autonomous leadership. Indeed, the Chinese capitalism is crimson red.
APPENDIX
Amadeo, Kimberly. 2019. “China’s economic growth, its causes, pros, cons, and future.” the balance, December 18, 2019.
Bremmer, Ian. 2010. “The rise of state-controlled capitalism.” NPR, May 17, 2010.
Cho Wai, Lam. 2019. “Why Starbucks? The brand being attacked in Hong Kong.” BBC, October 11, 2019.
Dyer, Geoff. 2020. “How durable is China’s capitalist model?” Financial Times, March 25, 2020.
He, Laura. 2019. “Is ‘Iron Lady’ Dong Minzhu’s Gree Electric facing an ownership shake up? Air con giant plans partial stake transfer.” South China Morning Post, April 2, 2019.
Leng, Sidney. 2019. “China’s new economy loses sparkle, as hi-tech and modern industries fail to deliver.” South China Morning Post, December 31, 2019.
McGregor, Richard. 2019. “How the state runs business in China.” The Guardian, July 25, 2019.
The World Bank and OECD National Accounts Data. “GDP growth (annual %) – China.” The World Bank, 2019.
Unknown. 2019. “China profile-Timeline” BBC, July 29, 2019.
Wilkie, Christina. 2018. “What the Michael Cohen scandal reveals about corporate lobbying in the age of Trump.” CNBC, May 13, 2018.