Mind the Gap
by

Xi’s congress speech offered few clear signs and clues to political or economic reforms

Foreign businesses hoping for a level playing field in China were left disappointed with lack of commitment to market reform and fair access to Chinese markets

PUBLISHED : Monday, 23 October, 2017, 9:03am
UPDATED : Monday, 23 October, 2017, 9:03am

“Without deviation from the norm, progress is not possible, ” said Frank Zappa. The American rock activist’s work was characterised by nonconformity and free-form improvisation.

His thought can just as easily apply to the Chinese President Xi Jinping’s contrarian, ambitious and some suggest authoritarian vision that he laid out at the Communist Party’s 19th congress last week.

But, it is only contrarian to foreign observers.

“Socialism with Chinese characteristics” necessarily means a pragmatic and selective rejection of Western values. It increases the dominance of a command economy, but it will worsen the obstacles that foreign firms continue to face in China.

Trying to analyse Xi’s congress speech is like trying to read between the lines of the US Federal Reserve’s Open Market Committee meeting minutes: It offered few clear signs and clues to reforms

Trying to analyse Xi’s congress speech is like trying to read between the lines of the US Federal Reserve’s Open Market Committee meeting minutes: It offered few clear signs and clues to reforms.

Additional economic liberalisation is not likely because it could be a threat to political stability. Foreign businesses hoping for a level playing field in China were left disappointed with the lack of commitment to market reform and fair access to Chinese markets. The command economy only extended the primacy of politics over economic imperatives.

Foreign technology and IT firms have complained loudly to the US government about their unfair treatment and restricted access in China. State demands like taking on a mainland partner and revealing their source codes to the Chinese authorities have proven to be an unworkable proposition and an open door to intellectual property theft. And, unnecessary, recalcitrant and unresponsive Chinese partners only hurt their business.

The expansion of Communist Party cells in foreign companies is growing beyond a relationship between businesses and the government.

According to Reuters’ August 24 report, some firms are now facing requests to amend their joint venture arrangements to allow the Party to have approval rights over business operations and investment decisions.

If China doesn’t reform its trade and investments policies to create a level playing field, the US and European Union will surely retaliate with protectionist barriers or sanctions of their own against Chinese exports.

China’s anti-corruption drive requires immediate and sophisticated access to a broad range of international databases and applications

The situation has become so warped in China that it seems acceptable to rip off foreigners; they possess no legal recourse. You only read about selected successes in China, but if you talk to security consultants and investigators, their case books are overflowing with frauds and rip offs.

One of the few IT sectors allowed to sell their products and services without being required to reveal source codes are companies that supply data, information and analytics concerning the know-your-client and anti-money-laundering investigations.

China’s anti-corruption drive requires immediate and sophisticated access to a broad range of international databases and applications.

We have a cultural war as much as an economic one. Perhaps Xi’s hard line is a bargaining position ahead of Trump’s visit in November.

In trade, Trump conjures and personifies a coarse, bellicose and demanding America. His favourite military general of history, Douglas MacArthur, exemplified this arrogance and bombast by deriding Chinese soldiers as “laundrymen” while they launched an attack on Allied forces at the Battle of the Chosin Reservoir during the Korean war.

But Trump’s threat to tear up trade agreements is real if “America First” demands are not met. A recent Goldman Sachs report titled Thoughts on the Potential US Withdrawal from Nafta concluded that the US is likely to withdraw from the trade agreement next year.

China’s own trade problems are fuelled by policies that don’t want foreigners to flourish in its domestic markets and don’t want them to make money.

Such zero-sum, one-sided thinking must stop or it will lead to a trade war.

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