Going Global with Bloated Ambitions

When US Treasury Secretary Tim Geithner and Qin Xiao, one of the most thoughtful Chinese state-sector businessmen, are saying the same things, it may be time for those in Beijing and Washington to start listening. At Davos last week, Geithner let loose on China’s regressive policies that emphasize state-owned-industry as the core of the economy. He rightly pointed out that China’s SOEs, and the array of industrial policies supporting them to become “national champions” and go global, are distorting international business practices and undermining the WTO system. It is nice to hear that Treasury is starting to move beyond its one-note harping about currency exchange rates and focus on the more significant and damaging industrial policies.

Qin Xiao, a longtime executive at CITIC who ended his career as chairman of state-owned China Merchants Bank, is concerned about the damage the SOEs are doing to the current Chinese economy and future growth. A recent report from Chinese think tank Unirule points out that when subsidies are removed from the equation the big central SOEs actually provide China with a negative return on equity. From his vantage point as an insider, Mr. Qin has seen how the big central SOEs have become extremely powerful in Party politics as an entrenched interest group. Meanwhile, the private enterprise companies that are key to China’s economic growth, and job creation, are mostly shut out of the Chinese financial system and pushed out of markets where the Party wants to preserve monopolies.

Having SOEs on the front lines of a “going global” strategy is like having a bunch of buffet-bloated, 300-pound slackers with bad knees leading your Olympic team.

Long march ahead to a truly capitalist China – FT.com

Even in an economy that has grown at 10 per cent annually in the past three decades, the debate remains: is this success due to government control or the effect of the free market? The answer to this critical question will define China’s future. Will it continue its unfinished free-market reforms or end our 30-year transition where we are now? Do China’s economic problems and social frictions result from market reforms themselves or from bottlenecks and backward steps in the reform process? Is China’s state-dominated economic model a transitional arrangement that has achieved its ends or an innovation that should be strengthened?….

Modern democracy and the market system need further improvement, but they remain viable, and mankind has not yet found an alternative….

Now, the mission of this state-dominated model is accomplished and it is time to overcome the constraints of special interest groups, transform government functions and further the process of market reform….

The spread of economic crisis across the capitalist world has cast the future of the free market into doubt. Yet China’s story does not support the case against free-market institutions. On the contrary, the past 30 years’ success was due to market reform. To keep progressing, it must now transform its government’s economic role and continue reform into a free-market system. This is its unfinished mission.

Geithner: China’s System ‘Damaging’ to Trade Partners – WSJ.com

“China does present a really unique challenge to the global trading system, because the structure of its economy, even though it has more of a market economy now, is overwhelmingly dominated by the state,” he said at a public forum in Davos, Switzerland, during the World Economic Forum.

Chinese policies, including subsidized prices for energy and land and preferential access to capital, have been “very damaging” to trade partners, he said. “That’s why it’s very important that we get China to move comprehensively not just on the exchange rate but on dialing back its subsidies and distortions.”

China’s state-led capitalist system emerged as a hot topic at the World Economic Forum this week, as participants pondered the country’s economic success in contrast to recent challenges faced by more free-market systems in the U.S. and Europe. Even within China, there has been rising debate over how fast to move ahead with liberalizing reforms and what kind of economic model the country ultimately aims for…

Xu Xiaonian, an economics professor at the China-Europe International Business School, was even more strident in his remarks, saying China’s state-capitalist model was in fact pioneered by Otto Von Bismarck, the 19th-century statesman credited with uniting Germany. “When Bismarck invented this idea in 1870 it gave Germany impressive performance over the main superpower of the time, Great Britain,” he said. But the state-capitalist system, he argued, ultimately played a role in precipitating two world wars and Nazism.

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About James McGregor
James McGregor is an American author, journalist and businessman who has lived in China for more than 25 years. Currently, he is chairman of APCO Worldwide, Greater China. A professional speaker and commentator who specializes in China’s business, politics and society, he regularly appears in the media to discuss China-related topics. McGregor is the author of the books "No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism" (2012) and "One Billion Customers: Lessons from the Front Lines of Doing Business in China" (2005). He also wrote the 2010 report "China’s Drive for ‘Indigenous Innovation’ – A Web of Industrial Policies." From 1987 to 1990 McGregor served as The Wall Street Journal’s bureau chief in Taiwan, and from 1990 to 1994 as the paper’s bureau chief in Mainland China. From 1994 to 2000, he was chief executive of Dow Jones & Company in China. After leaving Dow Jones, he was China managing partner for GIV Venture Partners, a $140 million venture capital fund specializing in the Chinese Internet and technology outsourcing. In 1996, McGregor was elected as chairman of the American Chamber of Commerce in China. He also served for a decade as a governor of that organization. He is a member of the Atlantic Council, Council on Foreign Relations, National Committee on US-China Relations and International Council of the Asia Society. He serves on a variety of China-related advisory boards.

3 Responses to Going Global with Bloated Ambitions

  1. Overwhelmingly in agreement with you Mr. McGregor with some adjustments when it comes to the Chinese Automotive Industry. The State is as you know very deeply involved in cars in China. The State provided manufacturers, distributors, dealers and customers tax incentives which was in large part responsible for recent explosive growth. Not freemarket growth given the source of the incentives and the fact that many of China’s larger manufacturers, and many of her biggest dealer networks have “SOE” attributes, funding, and, sadly, attitudes. In an SOE environment, selling cars takes on a whole new complexion: it becomes a matter of just taking orders rather than filling customer needs. Decoupling “State” ownership (SOE or investment) from car industry will go a long way to enabling real, entreprenurial and sustainable automotive business growth in China.

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