China may pay lip service to free markets. But in the mind-set of its officials, free markets can only be free as long as they serve the interests of the Chinese Communist Party.
On 31 August, Wang Xiaolu, a business reporter at the Beijing-based finance magazine Caijing, apologised on the state broadcaster CCTV for “causing the country and its investors…a big loss”. Wang stated, possibly under duress, that he was willing “to confess my crime”. He is accused of “colluding with others and fabricating and spreading fake information on the securities and futures market.” With a public ‘confession’ by the prominent journalist aired on state television, the campaign by the Chinese government against those deemed to be responsible for the recent stock market turmoil reached new heights.
The frustrations of the Chinese authorities are huge. The ‘national team’ (a collective of state-directed financial institutions) spent around 200 billion dollars in an effort to keep shares up, but the index is still far lower than in June, before purchasing activities started. In order to prevent such a loss ever occurring again the authorities have since initiated a crackdown. The Chinese government has opted for a ‘whatever it takes’ approach to tame market forces, but with little success so far.
Under president Xi Jinping, the government has regularly paid lip-service to the importance of free markets. Unquestionably, they have been crucial to the development of China, ever since Deng Xiaoping ‘opened up’ the country during the late 1970s. In particular, free international trade has been a key factor in China’s rise – no other country has profited so much from its membership (since 2001) of the World Trade Organization, which enshrines free trade as its core principle.
But when it comes to the domestic market, limits to freedom have always been imposed. Although some foreign companies have been allowed in, the Chinese Communist Party (CCP) has always insisted on controlling the economy’s commanding heights, as symbolized by its Leninist heritage: the Five Year Plans. According state owned enterprises (SOEs) a dominant role in various sectors helped the CCP, as all the board members of these companies need party approval. In various sectors foreign companies don’t have market access or feel that they simply don’t stand a chance, as American companies like Google, Facebook and Twitter know only too well.
After the Third Plenum in 2013, Xi Jinping announced an all-encompassing blueprint for economic, social and legal reform, which identified ‘more market’ as a key to China’s continued economic success. This would involve giving the market a ‘decisive’ role in resource allocation and reducing the dominant role of SOEs. A bigger service sector and more room for consumption would enable the necessary rebalancing of the economy.
At the time, foreign investors and companies welcomed these announcements by Xi Jinping, but almost two years later, little progress has been made in terms of market access. Various sectors remain closed to foreign companies when the government thinks national interest dictates it. Public procurement, worth around 1000 billion dollars annually, is a good example. The authorities claim, rather laughably, that anyone can win tenders for infrastructure projects and the like, but that the choice for Chinese companies is ‘habitual’. In fact, they win all the time.
Equally, with its preference for ‘national champions’ in sectors such as automobiles, telecoms and aerospace, the government sends out conflicting signals. Foreign companies in China have been arguing for a level playing field for years, but feel they are discriminated against when they come into competition with these national champions. They have the strong impression that they are increasingly targeted by anti-monopoly laws, as surveys among US and European companies showed last year. “It is because we are foreign”, Jörg Wuttke, president of the European Chamber of Commerce in China, pointed out to me. “We don’t have political protection, unlike the Chinese companies.”
The problem is the mind-set of Chinese officials. In their view, free markets can only be free as long as they serve the interests of the CCP. The current witch-hunt for market manipulators is the latest example of this rule, which can be applied to political freedom as well. Businessmen arrested for ‘spreading rumours’ find themselves in the same boat (or jail) as human rights lawyers and bloggers critical of the CCP.
The current economic slowdown, reflected in the latest data on manufacturing activity, is unlikely to be beneficial to freeing up markets and better market access. The reflex of Chinese leaders will be to increase control, not to decrease it. Xi Jinping’s reform agenda is currently bumping into huge resistance from SOEs and other ‘vested interests’, according to state media. This might be true, and the slowdown is certainly not going to help. But part of the problem is also Xi himself, who says he wants reform, but at the same time puts all his efforts into CCP dominance of the economy and society.
Xi Jinping sees himself as the anti-Gorbachev, whose reforms led to the end of the Soviet Union. The Chinese leader is fundamentally suspicious of reforms which might reduce his control. And yet he wants ‘more market’. The west should realize that in this clash of conflicting targets, the free market will not come out on top.
This article has been republished from opendemocracy.net.