China's system of authoritarian capitalism under stress
James McGregor says China's unique system of state-driven capitalism is grating so badly with global trade and business governance that, without reform, a collapse is likely
China's phenomenal rise has led many to view the country as an indomitable juggernaut. Why then does Premier Wen Jiabao describe the country's economic model as "unstable, unbalanced, unco-ordinated and unsustainable"? Because it is.
The much-vaunted China Model has morphed in the past decade into a one-of-a-kind system of authoritarian capitalism that is in danger of terminating itself - and taking the world down with it. It is also proving incompatible with global trade and business governance, and threatening multinationals that fear losing technology secrets to China's state-owned enterprises with whom they are forced to be partners.
The Communist Party has two objectives: make China rich and powerful, and guarantee the party's political monopoly. Some top party leaders are pushing far-reaching reforms that expand the private sector and empower entrepreneurs, to foster growth and social stability. But such plans face determined opposition from others enriched by the status quo.
Describing the dilemma, a senior economic planner cited a line from a Tang dynasty poem, "No ancient wisdom, no followers", referring to new endeavours in tumultuous times. "Policy formulators in China often have a sense of venturing out alone," Liu He, deputy director of the State Council's Development Research Centre, wrote in an essay advocating reforms, "with no ancient wisdom to guide them and nobody appearing to follow them."
Deng Xiaoping started down this path in the 1980s by allowing farmers to market a portion of their crops. Rural entrepreneurs invested their earnings in local enterprises. By 1996, these enterprises accounted for 36 per cent of industrial output and 135 million jobs. Meanwhile, state-owned enterprises stagnated.
As the private sector rocketed ahead, the party concluded in the mid-2000s that a dominant state sector was necessary. To avoid the rise of Russian-style oligarchs, China opted for a party-led oligarchy. Control is exercised through the party's Central Organisation Department that appoints all key leaders of centrally controlled state-owned enterprises. Most of these positions carry ministerial or vice-ministerial rank in the party, so they outrank their government overseers. As a result, these enterprises are more beholden to the party than the government.
A 2006 directive designated two categories of industries for state involvement: "strategic" industries - armaments, power generation, oil, telecoms, aerospace and more - were to have sole state ownership or absolute state control; "pillar" industries - including automobiles, electronic communications, architecture, steel, nonferrous metals and chemicals - were to stay largely in state hands.
