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China manages capitalism for its own gain. This explains how.

- September 24, 2015

In this 2014, file photo, President Obama toasts with Chinese President Xi Jinping at a lunch banquet in the Great Hall of the People in Beijing. Xi is in the U.S. this week. (Greg Baker, File-Pool/Associated Press)
Chinese President Xi Jinping is visiting the United States this week, meeting with American CEOs, dining at the White House, and speaking at the 70th United Nations General Assembly.
But there’s a shadow over the visit. Recently, Beijing has been acting against its foreign companies. It has pursued anti-trust actions and intellectual property enforcement in ways that are biased toward Chinese industry. And it has undertaken sweeping measures to prop up the country’s stock market, the ups and downs of which have reverberated globally.
Scholars and media analysts alike link these moves to Xi’s quest to consolidate his own political power and safeguard the survival of the Chinese Communist Party. They also attribute these developments to growing nationalism and protectionism.
But such actions are nothing new: State intervention in business activities and the stock market are Chinese business as usual. They date back to Deng Xiaoping’s reopening of the country to foreign investment in 1992, a few years after the Tiananmen Square Incident.
My recent article shows that Chinese-style capitalism involves two primary components. First is market coordination, which combines competition with regulation to achieve industrial modernization and economic and security goals.Second, the Chinese Communist Party works to ensure that industries it sees as particularly valuable—especially in national and internal security, technology, or for overall economic competitiveness—are owned primarily by Chinese businesses, whether state-owned or private.
China welcomes foreign investment–until it chases it away
China first introduced competition, and soon after started regulating businesses to limit the influence of foreign investment, as I have argued. That especially affected businesses in industries perceived to be strategic for national security and infrastructural development, such as automobiles, finance, renewable energy, and telecommunications.
Beginning in the early 1990s, after initial market liberalization, Chinese companies started collaborating with foreign partners. Once they benefited from technology and knowledge transfers, however, the government has time and time again restricted the ownership structure and business scope of foreign direct investment (FDI) and intervened to promote indigenous technology, incubate Chinese business in fledgling industrial sectors, and ensure their long-term market foothold.
For instance, Beijing broke up the country’s telecommunications monopoly in 1994 and allowed foreign telecommunications service providers and equipment makers to invest in joint ventures and sell in the domestic market, exposing Chinese industry to foreign expertise and know-how. Later in the decade, foreign investors, including Sprint, Motorola, Deutsche Telekom and France Telecom, teamed with newly formed state-owned telecommunications carriers to build new generation communications networks.
Fearful of relinquishing control of the communications infrastructure, however, the government soon forced the divestment of FDI, restructured the state-owned operators, and merged the then-separate telecommunications equipment and service ministries.
Despite becoming a member of the World Trade Organization in 2001, the Chinese government only permits competition in telecommunications value-added services (VAS) among domestic companies, such as Alibaba, whose initial public offering (IPO) in the New York Stock Exchange last fall received more investment than did Facebook, Google, and all previous Internet IPOs. In the fiercely competitive VAS markets, the leaders are Alibaba and other domestic companies with ownership structures and corporate governance connected to Chinese elites (including children and grandchildren of the Chinese Communist Party leadership).
In 2010, China forced Yahoo to divest itself of Alipay, Alibaba’s e-payment subsidiary, in which it had invested as a major investor. It was yet another display of China’s open-door-close-door approach toward foreign investment, allowing its companies to take advantage of foreign investment to upgrade Internet services, and then shooing those foreign companies away.
Today Yahoo, Google, and other foreign companies are limited to minority shares in service segments, like online advertising, that are less important to security and less financially lucrative. Moreover, all telecommunications service providers are expected to follow censorship laws and self-police their content, and to operate on the networks owned and managed by the government.
These methods allow the government to consolidate its control over the business of the Internet, including profits and the dissemination of information, to enhance the national technology base, maintain political stability and ensure national security. The new national security law and proposed laws on cybersecurity and counterterrorism fall along the same lines.
China takes its foreign rivals to court
But inviting and then restricting the ownership structure and business scope of foreign investment is only half the picture. China also takes a more aggressive role in governing the market in a way that gives its own companies an advantage and ensures the country’s hold on critical technologies. In telecommunications equipment, the government postponed the licensing of foreign technologies for nearly a decade when technical difficulties delayed the release of China’s homegrown third-generation networking standard. It then restructured the state-owned carriers to ensure the smooth implementation of TD-SCDMA, the research and development of which involved collaboration between Chinese state-owned companies and foreign ones, namely, Siemens and Motorola.
In the last couple of years, Beijing has brought anti-trust actions against foreign automakers and auto parts manufacturers, including Daimler and Volkswagen, and high technology companies, such as Qualcomm and Microsoft, accusing them of overcharging, price manipulation and abusing their market position. Legal decisions ruled in favor of Chinese companies in intellectual property disputes, such as a recent case involving American company Vringo and ZTE, a Chinese state-owned telecommunications equipment maker, further shows how China governs markets to enhance the national technology base.
Finally, China has ensured the growth of its stock markets, first by offering very friendly rules and then, when Chinese businesses are threatened, by intervening in ways that would be considered market manipulation anywhere else. Consider, for instance, the Chinese government’s part in the dramatic ups and downs of the Shanghai Stock Exchange. The government encouraged the growth of the fledgling stock market by cutting interest rates, permitting leeways on collaterals, devaluing Chinese currency, and relaxing securities trading fees and rules on margin trading. After initial bans, it also permitted local governments to invest their pensions and foreign investment through brokers on the Hong Kong Stock Exchange.
But as soon as the stock market began to sink, the government halted stock trading, banned big shareholders from selling, investigated short-sellers, and paused initial public offerings. At the same time, to prop up the stock market, it buys the stocks of small and medium enterprises and lends money to brokerages, which have pledged to invest more, and announced a new $40 billion stimulus.
Beijing’s industrial policies and market interventions reconcile with the “comprehensively deepening reforms” announced by the 13th Plenum of the Chinese Communist Party in 2013. These seemingly contradictory practices reflect the modus operandi in the last several decades of China’s globalization. Unless Xi’s ambitious anti-corruption campaign at home fails miserably and the legitimacy of the Chinese political system is called into question, we can expect more of business as usual in state capitalism, Chinese style. The meetings between Xi and American business executives and our president should take a long view on U.S.-China political economic relations. Only in this way can they focus on creating a level playing field in win-win scenarios for China and global businesses.
Roselyn Hsueh is Assistant Professor of Political Science at Temple University and the author of China’s Regulatory State: A New Strategy for Globalization.