23 August 2023
The challenge of “China, Inc.”

The challenge of “China, Inc.”

The Chinese Communist Party has transformed China into a giant corporation, which has made it a formidable geopolitical competitor

As great power competition between the US and China heats up, there is much debate about the power balances between the two. Based on purchasing power parity, China’s total GDP is bigger than the US’, while at market exchange rates, US’ total GDP is larger than China’s. So, the two countries could arguably seem to be broadly equally powerful.

But according to the analysis of Professor Shaomin Li, such comparisons are rather simplistic. This is because the majority of China’s GDP is under the control of the Chinese Communist Party (CCP), whereas a much smaller share of US GDP is under US government control. China is a hybrid of a state and a corporation, which makes it very powerful in world markets. Indeed, the CCP controls the largest amount of resources in the world of any political or corporate entity, making it potentially a major geopolitical threat to the US and the Western world. This may not always be consistent with China’s legal system, but the CCP is able to do what it wants.

China becomes a giant corporation

The CCP has transformed China into a giant corporation, “China, Inc.”. All firms and individuals are under government control, which in turn is under the CCP’s control. President Xi Jinping has said, “Party, government, military, civilian, and academic, east, west, south, north, and centre, the party leads everything”, using the exact phrase coined by Mao Zedong. India is quite the opposite of China in that it is too decentralised and diverse to be centralised as a corporation, and therefore does not have the same geopolitical potential.

Professor Li sees Xi Jinping as being the CEO of China, Inc. with the CCP as the corporate board. China’s government agencies/ ministries are akin to corporate departments of China, Inc. For example, China’s propaganda department is the PR department of China, Inc., while the police and intelligence services collect data for firms, and the United Front looks out for business opportunities.

China’s state-owned enterprises—notably in the energy, transport and finance sectors—are just business units within China, Inc., with no independence. State-related firms like Huawei are subsidiaries of China Inc. On paper, Huawei is a 100% privately-owned firm. But in reality, it is a state-related firm, in which China, Inc. has put lots of resources to enable Huawei to pursue its 5G ambitions.

Private firms like Alibaba or DiDi are like joint ventures in which the CCP is a shadowy, de facto controlling partner. Foreign firms operating in China are like franchisees. Not every firm can enter China, and doing business in China is not a right—it is a privilege that only the CCP can give you. In sum, China is a huge autocracy that is run like a corporation.

The vast reach of the CCP

In exercising its control over the economy, the CCP has its tentacles everywhere. It exerts tight control over new business formation, and controls the stock market by directing private brokerage firms to buy and sell to stabilise the market. In recent times, it has interfered in the tech, tutoring, food delivery, entertainment, gaming, and housing sectors as well. High profile cases have involved the Ant Group and DiDi. And Chinese citizens live a very controlled existence, with limited human rights. They cannot move from their usual residence and still enjoy the benefits of citizenship. They cannot criticise the CCP and China’s leadership. Members of the CCP cannot leave the Party.

One of the major strategies of China, Inc. is implementing China’s industrial policy, which is not based on “guidance” as was Japan’s—it is a strictly enforced corporate strategy. This involves: identifying and designating key industries; protecting them from foreign competition; helping them gain access to foreign markets and technologies; mobilising national resources to quickly achieve the economies of scale and low cost; and dominating the global market.

China has achieved great success in the EV battery industry, solar panels, and high-speed rail. It has identified 35 throat-choking technologies that it does not have, which may be the new directions for China’s industrial policy.

Many Western analysts once believed that the CCP would not (or could not) maintain control over the Chinese economy and society as the country developed. Economic development fosters the rise of the middle class, which demands democracy, as occurred in England following the Industrial Revolution. This was the argument in favour of strategic engagement employed by Western countries, and promoted by US President Clinton. But this did not happen in China—the new middle class did not challenge the CCP because it depends on the CCP, which supports it from cradle to grave. In this way, strategic engagement proved a failure.

The many dilemmas of China, Inc.

As successful as China’s development strategy has been, the CCP faces dilemmas. It must keep its economic door open, because it needs markets, technologies, talents and resources. At the same time, it needs to block democracy, freedom, and the rule of law to maintain its monopoly on power. So for the CCP to maintain its long-term rule, it is now seeking to change and influence the world according to its own ideology.

For example, it tries to make access to Chinese markets conditional on not criticising Chinese policies. It sanctions countries whose actions and policies displease the CCP. China, Inc. takes advantage of the openness of Western economies, society and politics, while keeping its own system relatively closed. It has also made great efforts to shape global governance by occupying leadership roles at the UN, and by creating new initiatives like the Asian Infrastructure Investment Bank, the New Development Bank, and the Belt and Road Initiative. It plays divide rule, such as between the different member countries of the EU and even the different states of Australia.

But not all these efforts to manipulate other countries have been successful. Australia did not buckle when China implemented trade sanctions in response to Australia’s call for an independent, international inquiry into the origins of COVID-19.

Another dilemma that China faces is fostering innovation and creativity in a hyper-controlled society. Innovation requires freedom of thought, which is limited in China. This is one of the reasons why China resorts to intellectual property theft on a widespread scale.

A fine balance

China, Inc. is a threat to the rules-based liberal world order as Chinese firms are used in the CCP’s grand geopolitical game and self-preservation strategy. China, Inc. also represents a challenge for firms from other countries. They can find themselves facing up against the mighty Chinese state because China, Inc. is a state that acts like a firm. China, Inc. enjoys the agility of a firm and the vast resources of a state. In sum, in state affairs China, Inc. can act like a firm, and in corporate competition, it can act like a state.

Addressing the challenge of China, Inc. is no simple matter. Professor Li believes the West needs to stand up to China, Inc. by isolating and decoupling its economy and pushing China to follow the rules-based order and require its firms to operate on a fully commercial basis. It is necessary to stand up to China because it would never change of its own volition. But despite the importance of tackling China, it was not until President Trump’s trade war that the West ever began to address this issue seriously.

To be effective, the West must work together as a coalition to force China to change, something that was all too rare before the war in Ukraine, and especially so under the chaotic US presidency of Donald Trump. But standing up to China in a united front would mean short-term pain in order to achieve long term gain, something which is hard to sell and sustain in democracies.

Professor Li may be overstating the challenge of China, Inc. in that the Chinese system is unlikely to match the innovative capabilities of the US and other Western countries. And in the case of open conflict, the US would likely be able to draw upon the resources of its private sector, especially in light of the military–industrial complex that is behind the US’ massive military spending.

But Li’s analysis is very insightful in that it reminds us that we are not only amid competition between two great powers, but between two very different politico-economic systems.


This article by John West was first published by Unravel on 22 August 2023.
Tags: china

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