Wed, Jul 01, 2009 page8

• China’s capitalism of compromise

  • By J. Michael Cole 寇謐將
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  The Heritage Foundation’s Derek Scissors had a fine piece in the May/June issue of Foreign Affairs magazine (“Deng Undone: The cost of halting market reform in China”), in which he argues that after embracing market reform in the Deng Xiaoping (鄧小平) era, China under President Hu Jintao (胡錦濤) and Premier Wen Jiabao (溫家寶) has backtracked on its reform agenda, with the state gaining more, not less, control over the private sector.

  Scissors’ analysis is told from an economist’s perspective and could be problematic in that it presumes to give advice to the Chinese leadership even after the form of free market capitalism he advocates sparked the global financial crisis that is now upon us.

  Yet Scissors’ piece is quite informative for two principal reasons. First, it exposes the myth that China is continuing with reforms and gradually embracing capitalism: It shows that in recent years some companies that had nominally gone private remained under state control, while others — especially in the largely undefined “sensitive” sectors — have been pushed behind layers of state control or even renationalized.

  The intricacies of these developments, from state monopolies to price control mechanisms, from state bank lending to protectionism, are beyond the scope of this article. Suffice it to say that the Chinese Communist Party (CCP) is showing signs that, while continuing to seek economic development, it may be placing more importance on its grip on social and financial institutions than is commonly believed.

  (As Scissors observed, the number of Chinese in 2006 who owned a business dropped by 15 percent to 26 million, while official data showed that during the first nine months of 2007 private companies contributed less than 10 percent of the national tax revenue, a figure that reportedly dropped early last year.)

  The second aspect of Scissors’ article that warrants attention is left largely ignored by the author: the political ramifications of China’s volte-face on economic reform. This matter gains special meaning when placed in the context of recent moves by the administration of President Ma Ying-jeou (馬英九) and its Chinese counterparts to liberalize cross-strait investment.

  As Scissors points out, state control of private or semi-private firms means that company heads tend to be CCP officials who are either “retired” or part of a cycle in which officials alternate between corporate and government positions. Chinese investment in Taiwanese companies, therefore, means that behind the veneer of private-sector investment likely lies the invisible hand of the state.

  For the moment, certain sectors such as telecommunications and defense remain off-limits to Chinese investment, but we can expect those restrictions to be lifted over time, both as a result of political pressure from China and from Taiwanese companies themselves.

  We have already observed this in the attempt by China Mobile to buy a 12 percent stake in Far EasTone Telecommunications, Taiwan’s second-largest telecommunications operator (China Mobile chairman Wang Jianzhou (王建宙) is a CCP official who has occupied various posts in government).

  Despite restrictions by the Taiwanese government, Far EasTone board members have voted in favor of the investment, so we can expect the company to start pressuring Taipei to lift the restrictions soon if they haven’t started already.

  Equally, if not more, disturbing was news that the Taiwanese government-owned Aerospace Industrial Development Corporation, which, among other things, designed the Ching Kuo Indigenous Defense Fighter, is proposing a joint venture with the Commercial Aircraft Co of China (COMAC) to co-assemble commercial airplanes.

  COMAC shareholders include the Chinese central government and the municipal government of Shanghai. The chairman of the board, Zhang Qingwei (張慶偉), is chairman of the Commission of Science, Technology and Industry for National Defense of the People’s Republic of China.

  These two examples involve transparent attempts by Chinese state-owned companies to invest in Taiwan. In light of signs that Beijing is walking away from market reform and strengthening its grip on the private sector, future investment in Taiwanese companies could be made by Chinese firms that on paper seem to be private but that in reality are very much under state control.

  As Chinese investment intensifies (a 12 percent stake in Far EasTone, for example, could just be an opening gambit) and expands into a greater number of sectors, the potential for technology transfer, espionage and compromised security will only increase.

  To ensure national security, Taiwanese will have to be vigilant, even when a prospective Chinese investor is ostensibly a private company. With Chinese state banks dominating the lending market and the CCP spreading its tentacles in various sectors in the domestic economy, it will be essential to determine where the money comes from and who’s in charge.

  Let’s not be taken in: China has not embraced market capitalism to the extent of compromising its political agenda.

  J. Michael Cole is a writer based in Taipei.
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