Regional experts sometimes call China’s economy a state capitalist model. Sometimes they call it neomerchantalist. Sometimes they call it “socialism with Chinese characteristics.” The common thread involves some blend of authoritarian politics mixed with market economics. Such characterizations might have held up through Jiang Zemin’s presidency, but have become misnomers under the presidency of Xi Jinping.
Since consolidating power, Xi has remade the bureaucracy. His changes, coupled with external pressures such as the trade dispute with the United States, have created a new Chinese domestic economy that’s walled off from much of the rest of the world. It most closely resembles an app store or an online sales platform: the Chinese Communist Party (CCP) serves as the gatekeeper and aggregator of the Chinese domestic market.
Western firms know that to enter the Chinese market, they must enter into joint ventures or share intellectual property with Chinese enterprises, which are often state-owned. This requirement by the CCP is similar to the way many online platforms (Apple, Google, Amazon) allow sellers on their websites, but then harvest the data to use and resell themselves.
This practice was once carried out only by private firms making lower-value goods. But in recent years it seems to have become more purposeful and strategic, orchestrated by state-owned and state-affiliated firms under the direction of the CCP. More and more frequently the CCP intervenes on behalf of its own state-owned champions and preferred private domestic firms, creating an unfair playing field, and allowing state-backed competitors to gain an insurmountable advantage with little invested into research and development. The IP Commission Report finds that the leakage in intellectual property costs American companies more than $225 billion per year. Under previous administrations, the requirement to share technology and unwillingly take on partners seemed to be coming down. However, these barriers have been erected higher than ever by Xi’s government.
Once a firm is playing by Xi’s rules, disobedience will not be tolerated and the terms of agreements can quickly be annulled. Any criticism of the CCP will certainly not be tolerated.
Recent sharp comments regarding financial regulation by Jack Ma are widely understood to have derailed Ant Group’s initial public offering, which was slated to be the world’s largest listing. Further, if a business attempts to organize and advocate for its rights, as Sun Dawu has done, the state can step in and strip the entrepreneur of the business and even bring criminal charges. Applying the app store analogy, one can see parallels in the recent dispute between Fortnite creator Epic Games and Apple. Criticism of the regulator will not be tolerated no matter the harm to the regulator or the businesses and employees involved. The CCP owns the platform and it will show any business it is the boss.
While the CCP can deplatform any company that criticizes it or that tries to stand up for its rights it also has a stable of in-house products and services to sell. Like any online business that owns a platform, the CCP steers customers toward its preferred choices. The CCP’s state-owned firms, particularly banks, stand in for preferred or promoted apps subsidized by the state. Chinese businesses and consumers do have a choice among state competitors and state preferred companies, particularly at the local level, where competition can be fierce. Still, even ostensibly private firms have close links to the CCP which makes the line between state-owned and private fuzzy.
While the economic and political reforms overseen by Deng Xiaoping allowed China to rack up unprecedented growth, China under Xi is building walls and creating a ring-fenced market weighted toward CCP in-house favorites. Competition from foreign investors has been undermined in sector after sector, and the state has become more involved in the day-to-day internal affairs of private business. When a private sector firm tries to stand up for its rights, it is quickly sanctioned.
Xi’s new economy is not the Chinese economy of the 2008 summer Olympics, with fast growth and some room for differences of opinion on policy. The CCP has become the platform and it is pay-to-play. Businesses from democratic states must understand what they are giving up to enter Xi’s closed ecosystem. The music has changed and this is a whole new dance.
Eric Hontz is Deputy Regional Director for Europe and Eurasia at the Center for International Private Enterprise.