Who Switched the Playbooks?

When I was starting up in China, many experts cautioned me on what I would encounter. “It’s not a free market and there’s no rule of law, they told me. “The government controls the courts, the companies and the banks. Central planners in Beijing, not the marketplace, decide what goods to produce and which companies should produce them.”

“Decisions are made for political, not economic reasons,” they went on to explain. “The heads of China’s state-owned enterprises serve at the pleasure of the Party, the banks are told what loans to make, and making a profit is secondary to ensuring employment. That’s the reason why China’s banks are a mess and full of non-performing loans.”

Occasionally, I would push back, noting the economic progress that China had made since Deng Xiaoping opened the economy in 1978. “You don’t believe the government’s numbers, do you?” they would ask incredulously. “Everyone knows they’re manufactured to convey whatever message the government wants. And, when it comes to financial statements, forget it. Chinese companies have at least three sets of books, and you can’t believe any of them.”

Of course, much of what they had to say was true, or at least somewhat true. By the time I began to set up my company, though, I had spent a considerable amount of time studying and traveling the country, so none of their comments were news. I was much more interested in something else that my personal investigation had revealed– that China was changing, and it was changing fast. It was very obvious to me that Deng Xiaoping had scrapped the socialist economic playbook that China had adopted in 1949, in favor of the capitalist economic playbook that the United States had used from inception to make it the world’s leading superpower.

China is still not perfect, no country is. But, China has changed a great deal since I first arrived in 1994, and it now looks a lot more like the United States that I remember back then. Many markets, like automotive components, for example, are hardly regulated today, and most are much less regulated than they were 15 years ago. Over the past 15 years, China has invested heavily in infrastructure, much as the United States did in the 1950s, building the roads, railroads and airports that make a country much more productive. Thousands of state-owned enterprises have been turned over to their managers and employees and encouraged to develop as private companies. Favorable tax policies, free land, and bureaucratic tape cutting have all been used to promote investment, which the Chinese understand is the lifeblood of any economy. And finally, all levels of the government–central, provincial and local–have been committed to economic development.

China’s move from socialism to capitalism, albeit “capitalism with Chinese characteristics,” has lead to tremendous economic progress. During my time here, China has become the third largest economy in the world, the world’s largest market for cars, computers, cell phones and a host of other products, and the country has accumulated $2 trillion of foreign currency reserves. China is now the single largest investor in the United States, unthinkable in 1994 when China had less than $50 billion of reserves. As Deng Xiaoping suggested, the Chinese have learned that it is indeed “glorious to be rich.”

Given all that has transpired, the leaders at Zhongnanhai must be scratching their heads, wondering what their counterparts in the United States are up to.

It began with Enron, Worldcom, Tyco and a host of accounting scandals. In a flash, the financial statements of Chinese companies were just as believable and just as transparent, if not more so, than those of U.S. companies.

Then it was Bear Stearns, Lehman, AIG, Bank of America, Freddie Mac, Fannie Mae, Citicorp and the meltdown of the U.S. financial industry. Hoping to learn how to develop its own financial system, China encouraged investments in its state-owned banks by leading U.S. players. Maybe they aren’t such good examples to follow after all? China’s banks are among the strongest in the world today.

But the sharp left turn that the Obama Administration has taken since coming to power must really have China’s leaders wondering. Not just the banks, but now large industrial companies, are owned by the U.S. government, and the United States is doing what any government does when it owns companies–it meddles, and political, not economic, considerations are taking precedence.

Rather than let the bankruptcy system work as it has over the years to restructure companies, billions of dollars, much of which will never be recovered, have been pumped into General Motors and Chrysler, two companies that represent less than 30 percent of the U.S. automobile market and have been losing market share to foreign-owned companies that now also happen to manufacture in the United States–all in the name of saving the jobs of the United Auto Workers, whose support played an important role in getting the current administration elected.

An administration-appointed car czar, not the company’s board of directors, has fired the General Motors chairman and CEO and installed a new CEO, president and chairman. General Motors is told what plants it cannot close and where its offices should be located. Barney Frank personally called the General Motors CEO to reverse a decision to close a GM distribution facility in his district, and President Obama himself assured Detroit’s mayor that GM’s headquarters would remain in Detroit, rather than move to a neighboring suburb. Undoubtedly, the Obama Administration and Congress will tell their management appointees what types of cars GM should produce. Toyota, Honda, Nissan, Hyundai and their U.S. workers must be delighted with this turn of events.

A newly appointed pay czar (there are now more than 20 such “czars” in Washington) will now review the compensation of the top 100 managers of any company that has received support from the government. As for the vaunted “rule of law” that the United States has been known for, ask the GM and Chrysler secured bondholders what they think. And as for manufacturing statistics–Americans are being told that the administration will “save or create” 600,000 jobs this summer, a statistic that the Wall Street Journal has labeled an “immeasurable metric.”

Ask any Super Bowl coach about his strategy for the high stakes game, and he’ll tell you that you go with what got you there. Somewhere along the line, the United States picked up that socialist economic playbook that Deng Xiaoping was smart enough to throw away. Perhaps the U.S. should “follow Deng” and go back to what got the United States, and now China, to where it is today?

2 Responses to “Who Switched the Playbooks?”

  1. “Favorable tax policies, free land, and bureaucratic tape cutting have all been used to promote investment, which the Chinese understand is the lifeblood of any economy.”

    This isn’t an embrace of capitalism. Land isn’t free. If the govt gives it to Megacorp., the government hasn’t opened the free market, it has sponsored Megacorp, tilting the playing field in their favor. It has taken a resource that was owned in common by the country and privatized it in exchange for – wait for it – nothing. Same with a favorable tax deal. If the govt. gives Megacorp. a million dollar tax break to locate itself in a province, that is really state sponsorship of that company. And how do you get those kind of deals for your company? By A. Being rich and B. Having political connections. You have unwittingly stumbled upon the true reason that China has risen to crush the United States, and it’s really not very clever at all. China eliminates barriers to the free flow of capital. Democratically enacted impediments to realizing the maximum return on capital investments can be crushed in the blink of an eye by a Chinese government that answers only to a select few who are rich and politically connected. With this dictatorial regime, you can stomp unions, ignore environmental concerns, and ignore health and safety concerns, and most importantly, you can ignore the costs associated with them which would minimize returns on capital investment. You can also give away state owned land and sweetheart tax deals to private companies as well, never fearing any reprisal at a ballot box. It’s not as though the United States didn’t do the same exact same thing. In the 19th century, we gave away land to rail roads for nothing. Heck, we built the automotive companies an interstate on which to sell their products. We shot at unions, we allowed companies to dump toxins on public land, and we knowingly allowed workers to get injured on the job, knowing it was cheaper to just get another one when that one was unable to work anymore. That’s China today. That’s the “secret” of their success. It’s not an embrace of capitalism, it’s an embrace of corporate capitalism, where the rich and politically connected enjoy the “gloriousness of being rich,” while everyone else eeks out a dismal and dangerous living under their complete control. But the absolute worst part of it all is that this protected class will, just like you, thereafter pretend they ascended to their position through their own hardwork and ingenuity, ignoring that they received a mountain of direct and indirect state subsidies to get them there.

  2. au6553,

    I respect your right to express your opinion, but you sound like you are in the camp that believes that the only way that China can be successful is by trampling other’s rights, polluting the environment and tilting the playing field in favor of the rich and powerful.

    Have you ever been to China? Have you traveled all over China over the past fifteen years and seen the enormous changes in the well being of ordinary Chinese that has occurred? I have, and I can tell you that China’s embrace of capitalism has benefited nearly everyone. Sure, some have benefited more than others but that’s the way it works in capitalistic economies.

    I never stepped foot in China until 1992, but as a foreigner, I got free land to build some of my plants. The local governments where I did, made the calculation that my plant would provide jobs and economic benefits to their community. Don’t states in the US do the sames to attract investment? We also have received tax incentives available to all foreign companies making investments in China. I don’t see how using tax policy and other incentives to attract investment is counter to capitalism.

    China is being successful because it has a tremendous amount of human capital—smart, hard working, entrepreneurial, thrifty people who want to get ahead—and a government that realizes its first priority is to provide economic opportunities for as many of its people as possible. If you think otherwise, you’re in for a rude awakening.