A new commitment to modern market systems

If the plans of the Third Plenum in November 2013 are carried to their logical conclusion, China will experience a slowish revolution, but a remarkable one nonetheless. Its effects will be as wide-ranging as those of the revolution of 1949, though there is an understandable fear of the speed at which those were implemented, with the constant danger of going out of control. In light of this, it is hardly surprising that the current Chinese government is proceeding cautiously.

A "modern market system," in the parlance of most of the modern world, means not so much a "system" as a state of affairs in which the nation relies on the natural effects of the market, not the purposive planning of the state and its institutions, to deliver the needs of the people. Inevitably, the results of market operations will be rather hit and miss, and the state must be prepared to step in to correct market failures; and certain matters are simply too sensitive to be left to the vagaries of the market and private business interests, such as national security. No country can risk its defences being controlled by private companies who may at any time be bought by connections of her enemies. But, apart from that, the theory of market economics states that anything which is a genuine need will find someone willing to provide for it without any need for the state to step in to supply the requirement or act as middleman.

China has two main worries. The first consists of the security issues mentioned above. Open markets will carry with them the possibility of strategic industries falling under foreign domination. Once a company is floated on the open market it is impossible to control who ends up owning it. The second worry is the well-being of the working people, especially in the cities, from the point of view of social stability. If a foreign company which is a major employer in China takes a business decision to cut tens of thousands of jobs, how will the Chinese and their government react? A Chinese leadership which was too supportive of foreign investors in such a situation might be seen as colluding with foreign powers operating a kind of "economic colonialism." Colonialism has never been popular in China, and this sort is unlikely to be any more so. Thus China is likely to look for ways to retain de facto control over businesses operating in strategic sectors, and only let go of the reins very gradually. We can see this already operating in the new world being brought into being in the context of the market reforms announced in 2013, in the case of the Shanghai Free Trade Zone. It seems that, having allowed a freer market to operate on Chinese soil, the authorities have opted simply to bring the barriers of global free trade a few miles inland, not to dismantle them altogether!

The probability is that a greatly strengthened China will be tempted to use its power to retain elements of state control over and above the principles of the global free market. China has always made a boast of never seeking hegemony, but sometimes hegemony comes unsought for, simply as a result of preponderant power. The United States has always exercised a degree of global economic hegemony by default, simply in respect of her unique position around the turn of the millennium. For instance, American taxes are imposed on American citizens, businesses and other entities (as defined by U.S. law) wherever in the world they may actually be situated. The U.S. can do this because they are confident that no international business will be prepared to operate wholly outside the U.S. orbit – everybody has to go there at some point, they think, which is also a reason why their immigration procedures remain so heavy-handed. Up to now, for most non-Asian businesses, China remains somewhat of an adventure, a glamorous option, rather than a simple necessity for maintaining any semblance of a global presence.

This may change, however. Later this century China may find herself in a very similar position to the one the United States is in now. Chinese may even come to rival English as the global second language (although I find that hard to believe, given how difficult it is!) And perhaps China will become a destination which no serious global business can avoid. This will give China potential leverage over international businesses which may enable her to offset the dangers posed by adverse market trends and the possibility of foreign entities exerting pressure on China. At the moment, such leverage exists simply because China remains a partly closed market which major international businesses are trying to access. Even the biggest global players, such as Goldman Sachs, have been going easy on China to ensure gradual access to markets in which China maintains tight control of operating licences. But the big international firms will not be so gentle in the future, and China will have a struggle to maintain the balance between marketization and falling into the clutches of forces outside her control.

The author is a columnist with China.org.cn.