How temporary is the new mainland mercantilism?

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Article Highlights

  • Viewed in isolation, the Xi government's commercial policies are not defensible.

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  • Party corruption has become fully intertwined with state-owned enterprises.

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  • It is risky to take a hammer to the state sector while foreign firms can easily pursue market shares.

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Accusations come almost daily. China is waging a mercantilist campaign against multinationals, from German auto titans to American technology firms to Japanese ball-bearing makers, for supposed monopoly abuses and other legal infractions.

There is more going on, however, than the attack on foreign companies. As General Secretary of the Communist Party, Xi Jinping has launched a far bigger campaign within the Party itself.

This "anti-corruption" effort may explain the recent protectionist outbreak. If so, the conclusion of Xi's internal program will lead to a considerable improvement in the environment for multinationals. Viewed in isolation, the government's commercial policies are not defensible.

The targeting of foreigners was initiated by Xi's administration, which purports to be giving the market a "decisive role." Right now, the Ministry of Commerce, State Administration for Industry and Commerce, and National Development and Reform Commission play the decisive role for foreign business.

The government denies bias, claiming domestic firms are also scrutinized. Domestic firms are scrutinized, yet laws are still being applied unfairly. This is happening through extreme differences across industries.

Industries where foreign entities lead are examined from all angles for inadequate competition. These include autos and technology but also pharmaceuticals, eyeglasses, milk powder, and some manufacturers.

In industries with little foreign presence, the government itself wants to dramatically reduce competition. A few examples are agriculture, electronics, and rare earths. The attack on foreign carmakers comes after failed consolidation on the domestic side.

Consolidation is part of long-standing attempts to build national champions to compete globally. These involve orchestrated mergers with no money paid - a reduction of competition through non-market means.

Anti-trust laws are intended to prevent market power from being used to reduce competition. Beijing is simultaneously wielding its anti-trust law against multinationals while elsewhere exercising state power with exactly the opposite intention. There's no reasonable way to defend this. It is also dangerous to China's prosperity - the state's consolidation of farms, for example, runs counter to the reform that launched the Chinese economic miracle.

It is not usual for Beijing to adopt unwise policies - Hu Jintao's government did so repeatedly. But it seems strange for the Xi administration to tout intense reform while treating private ownership and market competition as negotiable.

There is an explanation. The major change from Hu to Xi is not rougher treatment of foreigners but rougher treatment of some Party members. The debate over whether Xi's ultimate goal is genuine reform or to concentrate power in his own hands will not be settled for years. Regardless of the motive, though, his actions essentially require a simultaneous crackdown on multinationals.

In the era of the mixed economy, Party corruption has become fully intertwined with state-owned enterprises (SOE's). Handouts under the table pale against the huge sums extracted through control over and relationships with giant state firms.

To pursue corruption among a large number of Party officials, thus, inevitably disrupts SOE's.

China National Petroleum Corporation is the biggest example of a company affected by the crackdown but it is not alone. China Resources and less famous enterprises such as China Grain Reserves and China Publishing Group have been targeted.

There have been multiple investigations into shipping SOE's. Banking is seen as a natural place for graft to flourish, given the large sums moving in and out of the country.

Energy, retail trade, agriculture, media, shipping, banking (and less prominent inquiries) - Xi's rectification campaign within the Party has enormous economic scope. Interfering with the operations of all these firms will inevitably bring charges that the crackdown indirectly benefits competing foreign interests.

Put another way: it is politically risky to take a hammer to the state sector while foreign firms can easily pursue expanded market share and profits. In this light, the attacks on multinationals are a political shield for the anti-corruption campaign.

If the true goal is rooting out vested interests and conducting vigorous economic reform, there will of course eventually be improvement in the business environment for non-state entities.

But even if Xi's goal is self-aggrandizement, there is less political need to tough on foreigners once he is finished. It remains an option, but is no longer imperative or even appealing.

The protectionist surge of the past year is not a mystery. And the outcome is foreseeable: it will likely end shortly after the Party shake-up ends.

 

 

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Derek M.
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