Let China grow its own way

Last month, Republican presidential hopeful Mitt Romney promised that, if elected, he would 'get tough' on China. Not only was Beijing was manipulating its currency, he said, but Chinese firms were also competing unfairly. He demanded tariffs to correct the 'uneven playing field'.

On both counts he is misguided, and if this is not just campaign rhetoric, he also risks widening an ideological chasm - a battle between the free marketeers and centralised-control theorists - from a position of weakness.

As we all know, the Chinese yuan is mostly tied to the US dollar, although Beijing has let its currency appreciate slowly in recent years. This has not been good enough for some American politicians, however, who have repeatedly demanded that the yuan be allowed to float freely. Yet there is a logic behind Beijing's policy. It makes sense for the Chinese government to tie the yuan to the dollar, first, as America is one of China's biggest trading partners.

Second, the dollar is the currency in which almost all global commodities are priced, from oil to gold and metal ores. So keeping the yuan closely tied to the dollar helps maintain economic stability.

Third, much of China's savings are held in dollars. If the yuan appreciates wildly, the value of these assets falls, costing the country billions. Finally, its banking system is not yet able to cope with the demands of a floating exchange rate.

America's accusations of currency manipulation also ring hollow. The US government has itself been manipulating the value of the dollar for the past few years by printing money and holding down interest rates. These policies are specifically intended to drive down the value of the dollar to help make America competitive again. What really upsets US politicians, it seems, is that China has largely thwarted these measures.

And when US politicians accuse Chinese companies of competing unfairly, they are also treading on squishy ground. For the past three decades, American economists and politicians have continuously banged the same economic drum. The free market was the best way - indeed, the only way - to compete, they said. Adam Smith's invisible hand should always be unrestrained. It is nature's way.

Following the principles of this model, Western businesses are expected to raise finance themselves, compete for resources and people, establish their own customer bases and make profits large enough to reward shareholders and reinvest for the future. Those that fail to do that go bust.

But in China (and much of the rest of Asia), things work differently. There is a different business model reflecting different social ideas and values. Big businesses are not expected to stand in isolation as they do in the West. Many retain close links to the state, with senior managers moved between firms on Beijing's orders.

While many large Chinese firms are listed on local and international stock markets, they often do this for credibility more than finance. Chinese businesses are not expected to generate dividends, as they are in the West. The rewards for stock investors come from how well they gamble on the market. Sometimes the firms also have customers provided. When domestic tenders go up for grabs, more and more are open only to Chinese firms.

Although this may seem unfair in Western minds, it ensures that skills, jobs and wealth are kept at home, not sucked away by 'foreign devil' employers. It makes sense. Big Chinese firms are often given privileged access to new technologies, too, removing hefty research and development costs.

Leached away from foreign firms and then localised, Chinese companies often acquire their capabilities without cost. While this breaks foreign intellectual property laws, many Chinese firms see their actions differently. They think foreign regulations are unreasonable. How can it be right for American and European firms to restrict access to designs that are well established and ubiquitous?

When Chinese companies go abroad, the state is often beside them. If they bid to build power plants or railways in Africa or Eastern Europe, the state or one of its banks provides the customer with low-cost financing to ease the deal through. The government also helps Chinese businesses gain access to valuable resources. Schools, roads and bridges are built by Chinese workers in return for coal, oil and iron ore. That way, China gets the business, the jobs and the resources.

Rival European or US bidders complain this is unfair because they are unable to compete. Yet the Chinese see these deals as strategic. They are a clever blend of good business and good politics, a way to win contracts and geopolitical influence at the same time. If such deals incur losses along the way, so what? There are bigger issues at stake, and longer-term implications.

Despite the squawking of American politicians, the Chinese business model is not wrong, just different. It does not depend on the free market and profits to survive. It takes another approach, and perhaps a better one.

Since the late 1970s, the West has been obsessed with just one economic and business model. Markets must be left to run themselves with minimal regulation. The invisible hand will fix any problems, punishing the uncompetitive and supporting the strong. Many business leaders in the US and Europe seemed to believe that this was the only way to achieve growth and economic superiority. In the past few years, Western banks, governments and businesses have learned otherwise. They have found that their model was flawed. Laden with debts, greatly as a result of under-regulation, they face years of difficulties. Now they need to understand that there is another way to compete.

Graeme Maxton's latest book is The End of Progress: How Modern Economics Has Failed Us