The “news” from Wikileaks that the Foreign Investment Review Board is seeking to limit investment from China is attracting criticism because of its secrecy and rightly so. The reticence is probably because, like other Western governments, the Australian leadership is conflicted when it comes to China. The government is reluctant to prosecute questions about what is in the national interest because that would smack of an “industry policy” and, even worse, “picking winners. The pretence must be maintained of support for open and free markets – today’s dominant ideology, sorry, economic theory.
An article in the Harvard Business Review “China vs The World”, however, explains what China is really up to. It rather gives the lie to neo-liberalist economic assumptions. China is communist, both politically and financially (if not as much commercially) and its emergence has deep implications for capitalism. These cannot be brushed aside with a few comfortable, mostly circular, neo-classical economic theories.
The HBR article describes an increasingly predatory approach by the Chinese towards technology. China is determined to move its industry base up the value chain and wants to overtake the West as the globe’s technology powerhouse. It says the government has developed a three pronged plan to contain foreign companies and enable its companies to create advanced technologies. The state has ensured it will be both buyer and seller in certain key industries, by retaining ownership of customers and buyers. The government has consolidated manufacturers in order to form a few national champions that have economies of scale and can achieve critical mass with knowledge and learning. Third, it is forcing multinational companies to form joint ventures with its national champions in order to transfer the latest technology.
It says:
Companies that resist are simply excluded from projects. The Chinese government uses the restrictions to drive wedges between foreign rivals vying to land big projects in the country and induce them to transfer the technologies that state owned enterprises need to catch up. Executives working for multinational companies in China privately acknowledge that making official complaints or filing lawsuits usually does little good.
This has been the game all along. China did not open up to trade and Western investment in order to trade its way to wealth in the way that Japan and Korea did in the second half of last century. It cannot be a mercantile nation because it is simply too big (or will be). It must become a continental economy, like the US, in which trade is on the margin. China opened up to foreigners in order to suck in knowledge, technology, expertise, capital – ultimately for its domestic market. That strategy is now intensifying.
This is definitely not laissez faire capitalism, but neither is it mercantilism. It is economic strategy ruled by national interest – run by communist bureaucrats. The key will be what happens in the Chinese financial system, which is still semi-communist (an equity market dominated by government ownership, almost no corporate bonds, a heavy dependence on bank lending).
The HBR article says:
There is a link between China’s rapid development and China’s slowing growth. China has only about a tenth of the capital stock of the US in per capita terms, so it invests roughly three times more, as a percentage of GDP that the US does. It funds these investments from government surpluses and the profits from state owned enterprises, by minimising health care and pension safety nets, and by preventing its savers from accessing investment opportunities abroad. There is also a difference in expectations about future benefits: China is inclined to save more today, while the US prefers current consumption.
Quite. This is the kind of predatory behaviour of which Japan was accused in the 1980s. It is driven by intense nationalism and it will profoundly change the global economy. Australia has to contend with it, like all Western governments. At the very least, there should be more focus on what is in Australia’s national interest – how does China’s strategy affect our manufacturing base, for instance – and less resort to cosy clichés from Canberra’s neo-liberal orthodoxy.