Tuesday, March 21, 2006

Eye on China: Capitalism served up raw

An annoying editorial was published in the Financial Times on March 16 arguing, in the usual liberal-economic view, that the Chinese were being silly to complain about reform (as they have recently being doing) and that what they needed was more reform rather than less.

It was annoying partly because it was plain wrong, arguing that "the logic of liberalisation had not been challenged to this extent since the aftermath of the crackdown in 1989".

This is quite untrue: The "logic of liberalisation" was being challenged before 1989. The protests of 1989 were not pro-market and anti-Government; they were above all anti-market.

Despite the students' use of the plaster model of the Statue of Liberty (a clever and successful stunt to attract foreign media coverage), this was a left-wing movement punishing the Government for its economic policies - "reforms" not being a description shared by everyone.

The writer goes on to make a distinction between the state and the market, arguing that the reform of the state is trailing the reforms of the market. This disingenuous comment sent me running back to my history books. As I suspected, Marx and Lenin don't protest against the idea of a market; they protest against capitalism. This is defined very simply as putting the hyper-profitability of the wealthy few above the interests of the working masses.

While in the West, capitalism has gone through a taming process, this is not the case in China. It's plain silly to make a distinction between state and markets. Here we have capitalism in its raw form - a tight interconnection of capital providers and Government officials working for their own private interests.

They only make concessions if they are forced to.

That's exactly what they did after 1989. That is, they pacified urban residents by enabling them to get the lion's share of the economic restructuring, shifting resources away from the countryside in the process. That's precisely why today's Chinese farmers are screaming blue murder.

Here's an amusing anecdote. I was talking to a private banker based in Hong Kong. He was telling me how private bankers have become more prominent because of the rise of the mainland Chinese tycoons.

I asked him if that meant he didn't have any role to play in the Chinese state sector, in particular when Chinese state-owned enterprises are listed in Hong Kong. He tapped his nose and assured me they were just as busy on those. "You have to look after people," he said.

One common way, he explained, was for a bank executive to get a huge allocation of stock options. In fact, these are not all for him. They will later be distributed to the people who gave the approval for the listing but only in the event they personally benefit.

Especially invidious is the fact that stock options encourage undervaluing the company by Chinese bank executives. Remember, option-holders are not interested in the absolute value of the share price after listing but in the spread between the face value of the option and the target price. If you set the former very low and the latter low, you ensure a fat spread with little risk the counter won't hit the target price.

It is practices like these that Chinese people are complaining about, and rightly so.

Of course, no one is too interested in exploring these shenanigans in Hong Kong and that's one powerful reason these Chinese banks don't list in New York, where the Sarbanes Oxley Act is in place to ensure corporate governance standards.

In Hong Kong, apart from the feisty local papers (whose influence is diminished by the fact that they are not written in English and, hence, inaccessible to the foreign fund managers who are the principal buyers of China stocks) there are only two English-language papers. I literally can't remember the last time either of them broke a scandal and the bigger of the two has been going through transformation involving the removal of several foreign managers.

Chinese capitalism, bringing disproportionate benefits to a minority of the population, is not dissimilar to Western capitalism, increasingly represented by the multinationals who have benefited under globalisation at the expense of the domestic population.

The multinationals have few local ties any longer, a process accelerated by "off-shoring" jobs out of Europe and the US to places like China.

Multinationals such as Wal-Mart make vast profits selling cheap goods to consumers back home. And that's just as well, given that off-shoring has ensured that more and more US families can't afford anything else.

James Kynge, the former Financial Times China correspondent, recently wrote a wonderful book about this mutually reinforcing trend.

On his visit to Rockford, Illinois, the home of what was the premier US machine tool manufacturer, Ingersoll-Rand, he describes how the vitality has been drained out of the town under the twin onslaught of a Wal-Mart on the edge of town and the sale of part of Ingersoll's operations to a Chinese outfit.

The Chinese buyers of the Ingersoll division were caught making a bid for the principal part of the business under the cover of the unit they had just bought. Only at the last minute was a deal averted - a lucky escape, considering Ingersoll makes top secret military components.

Kynge describes an alliance between multinationals concerned only with profit and a China willing to beg, buy or steal products and technology to catch up with the West.

Ironically, just as China's capitalism is leaving behind the weak and the powerless, it is pushing Western capitalism in the same direction.

* Each week, the Business Herald's columnists track the latest developments in the world's two emerging economic superpowers, China and India. Dan Slater is a Beijing-based journalist.

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