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China: Capitalism, But Not As We Know It

by Mable-Ann Chang

June 10, 2020

Dexter RobertsDexter Roberts, author of The Myth of Chinese Capitalism: The Worker, the Factory, and the Future of the World looks at China’s economy and how its capitalism differs from anywhere else in the world

With China and the United States seeing their relative levels of power on the world stage converge and their political differences grow, tensions between the world’s two largest economies have surged. The trade war, the risk of decoupling and the coronavirus have all contributed toward this growing rift, and it is now more important than ever to understand the two countries’ systems and how they differ.

Dexter Roberts, a regular commentator on the China-US trade and political relationship, is the former China bureau chief and Asia News Editor at Bloomberg Businessweek and was based in Beijing for more than two decades. He has reported from all of China’s provinces, covering the rise of companies and entrepreneurs, the changing roles of its manufacturing sector and migrant workers as well as exploring its demography and civil society. He has also reported from Cambodia, Mongolia and North Korea, while focusing on China’s growing economic and political influence.

Roberts’ first book, The Myth of Chinese Capitalism, looks at how legacy policies from China’s past, including its household registration system (the hukou) are leading to growing inequality and social tensions and are holding back the country’s development. In this interview, Roberts highlights what sets China’s economic and political system apart from those typical in Western countries.

What myths does your book, The Myth of Chinese Capitalism, refer to?

In broad terms, the myth I’m referring to is how the economic reforms that we’ve seen coming out of China in previous years are going to continue at a similar pace going forward. The dramatic growth in GDP (gross domestic product) that the Chinese government has seen in previous years, and the opportunities that both corporations and countries have benefited from, will not be duplicated.

Another myth that I focus on is the idea that the middle class will just keep endlessly growing in leaps and bounds. The course that the country is set upon right now, with the legacy policies that are still in place that I write about in my book, are restricting the future growth of the middle class.

How does Chinese capitalism differ from capitalism in other countries?

The most obvious difference is in how the role of the state is more important in China. We’ve actually seen it become even more important in recent years, within Chinese capitalism. There’s this sense amongst top officials that corporations should be answering more to the government and that there should be a strong role for the state in key strategic industries. Ultimately there is the expectation that companies, both state-owned and private, should at key moments have a role in ensuring social stability and doing things the government sees as good for society. They shouldn’t just focus on making money.

The situation that we are now in with the coronavirus provides a good example. The expectation in China is that companies should help, for example, by making machines that produce masks. In the US there is a much more laissez-faire idea. The government, while it does exert control over companies, of course, typically does not expect companies to contribute to society to the same degree as what we see in China.

What are the prospects of a transformation of Chinese capitalism into a more traditional form of capitalism?

I don’t see China moving toward a Western or American style capitalism, very much to the contrary. The leadership in China sees their system as an alternate model and would like to see others move more toward the Chinese model. I don’t see the two countries becoming more similar. I don’t see China moving toward the US or vice versa.
We saw a real rethinking of the value of the Western model of capitalism within China first during the 2008 global financial crisis. I think there was a realization then that unfettered financial markets can ultimately be very damaging for an economy. I was in China then and it was the first time that I really felt this wave of people, including businessmen and officials, thinking ‘maybe we just don’t adopt the Western model. Maybe we can try and do something different.’

Does the framework of capitalism, with shareholders and stock markets, not contain with it the seeds of an inevitable shift toward the approach of the internationally standard form of capitalism?

China may use stock markets to raise capital, but they’re not going to blindly follow the model of the West. So for example, there has been a move to strengthen the role of the Party in big Chinese companies in particular. Clearly President Xi Jinping thinks that’s important.

Another example would be the way that the so-called “national team” operates in the stock market. Large Chinese companies make concerted efforts when the Chinese economy looks weak, at the behest of the government, to step in and support the market. I would argue that this is relatively unique to China, or at least something we don’t see in the United States.

Many people refer to the meritocratic nature of China’s system. How would you compare the Chinese system with the Western system in terms of its ability to place capable individuals in leadership roles in society? To what extent is that changing in both the West and China?

First of all, one could easily point out that our system in the US has recently produced some leaders who are not very effective. Elections don’t always produce the most capable people, a big issue that we’re dealing with right now in the US.

Officials rise in politics in China through the Communist Party of course. There is this ideal that officials move through leadership roles in the provinces and in the countryside, before finally getting positions in key cities like Shanghai or Beijing. It’s assumed that after rotation through a variety of different posts, they will be ready to do a good job if they finally get promoted into the central government.

The reality doesn’t necessarily turn out that way, however. If you look at the early response to the coronavirus, that hardly highlighted meritocracy. Instead of immediately clamping down on the spread of Covid-19, a decision was made to go ahead and have this huge Communist Party meeting in Wuhan. In a one-party system, a disastrous mistake like that can happen; you don’t have another party saying, wait a second, there is a mysterious disease we are hearing about. We can’t have a political meeting now.

China says that it should be given the right make its own decisions on how it chooses to run its economy. What would be your view on that?

I think that that is entirely reasonable. China is now the world’s second largest economy, with a lot of people thinking that it’s on the path to becoming the world’s largest economy. China is playing catch-up in terms of the size of its role in international organizations and it too has created some multilateral organizations itself, like the AIIB. As a country that is becoming more and more economically important, it is natural they play a larger role in setting the terms of international trade and investment.

To the extent possible, one would hope that their economic decisions reflect the interests of all the people in the country, which is a challenge that all countries face and not just China.

How important are private enterprises and foreign investment to the overall stability of the Chinese system?

They are very important. The most obvious statistic that jumps out is the huge proportion of people employed by private enterprises in China, something like 80% of urban workers. So, if private companies find themselves in a situation where they are doing badly, then it becomes a difficult situation for most working people in China.

Foreign companies are important as well, but less than they used to be. When I arrived in China in 1995, it was a different world. There weren’t a lot of internationally-minded Chinese companies and they could learn a lot from foreign companies. Now China has many globally competitive companies and the need for the investment and managerial know-how they got from foreign investors, that once was so crucial, is not as important anymore. I’m not saying that foreign companies are of no use to China of course, but I do think that they are undeniably less important than in the past.

How do you see the China-US relationship developing over the next two years?

I’m actually quite worried about the relationship. I think already over the last couple of years with the trade war, we did see real evidence of decoupling. Multinationals including from the US are recognizing the need to diversify their supply chains for economic and business reasons, but also because of the deterioration in the political relationship between the two countries. There is a fear that they will find themselves exposed to the vagaries of the deteriorating political relationship.

On the other hand, it’s very obvious with the coronavirus, that it is now ever more important for the largest and second-largest economies in the world to be working closely together. Other global challenges including arms proliferation, climate change and tensions on the Korean peninsula all show how important it is for China and the US to work more closely together. So I’m concerned about the deterioration in the relationship we’re seeing right now.

Youth unemployment is becoming a significant problem in China and it is one that you refer to in your book. Under the Chinese system, what is the role of the government to a problem such as youth unemployment?

An obvious one is in providing skills training for youth so that they are well-prepared for the job market and to help them find jobs. For a long time there has been a complaint amongst companies that universities are not preparing students for the job market. The government obviously plays the key role in setting the curriculum in the education system and should ensure to some degree that it matches that needs of the society.

Another important priority—one which I talk about in my book—should be improving education in the countryside. There’s a serious gulf between the quality of education and the funding for schools in China’s cities and what is provided in the interior of China. An average student in a poorer province like Guizhou receives far worse education than compared to that received by students in Shanghai. The government should ensure a more equitable allocation of resources in public education.

To what extent are you expecting to see a shift away from China in terms of global supply chains and where do you see them going?

It’s already begun. It accelerated during the two-year trade war and supply chains are now struggling through COVID-19. There is a risk in having all of your eggs in one basket, and a lot of companies have really focused on China for their supply chains. It served them quite well in the past, but it’s becoming increasingly problematic. A lot of businesses, too, have become increasingly uncompetitive because of rising labor costs. Other places are now able to offer lower labor costs than China, such as Malaysia or Mexico.

I don’t think it will be easy for other countries to absorb the diversifying supply chains, however. And as factories move to other countries, such as those in Southeast Asia, they will start to drive up labor costs there as well.

Having a good infrastructure is very important. One of the great strengths of supply chains located in China is their access to tremendous infrastructure, something they might not find when they move. Another complicating factor is how supply chains often are made up of a whole ecosystem of different companies making all the components that go into a finished product. If Apple decides they want to have the iPhone manufactured in another country, it’s not just Foxconn that has to move. There are dozens if not hundreds of sub-suppliers that also might have to move.

China has maintained a policy of household registration for population control for decades. How important is the reform of the household registration system in your view?

I think the reform of the hukou is crucial. It’s the heart of the argument in my book: Unless China fully reforms the hukou policy, they cannot continue to grow the middle class. The hukou makes it difficult for migrant workers to settle down permanently where they work. That creates a whole host of complicating issues for them. They’re usually restricted from enrolling their children in city schools. They can’t bring their elderly relatives to live with them because they often can’t get affordable medical care in clinics or hospitals in the cities as well.

This also means that the Chinese migrants don’t spend as much money. They engage in what economists call precautionary saving, because they need to be prepared for possible high education or health care costs. It means they cannot become part of the consuming middle class.

The Chinese government knows they are going through one of the biggest economic transitions in decades. They know they must move from being the “factory of the world” to a much more consumption-driven, service-driven economy. My argument is that you can’t have a more consumption-driven economy if a large proportion of the population is being treated as second-class. And that’s what I think the hukou does to them.

China has had significant success in reducing poverty levels. From a property market perspective, how do you see the overall balance of China’s population shifting in the year ahead?

When I look at the property issue in China, I focus in on the dual-land system. While urban people can buy and sell their property and do so at market rates, that is not true of people from the countryside.

The land in rural China is officially owned by the collective and farmers or migrants who typically have a plot of land in the countryside are usually unable to sell or lease it at market rates. Meanwhile people in the cities have gotten rich from buying and selling apartments. That’s one key reason China is increasingly an inegalitarian country and has seen an explosion in wealth inequality. I see the dual land system as being a real obstacle, like the hukou, to the growth of the middle class.

China is now relaxing some of its rules on foreign investment. What is the level of interest among foreign companies investing in China now compared to the past?

If you look at surveys by both the European Chamber of Commerce and the American Chamber of Commerce over the last couple of years, growing numbers of foreign companies are saying they are consider diversifying their business to other countries. That may seem odd while at the same time some business sectors, such as the financial market, are being opened more to foreign companies. But companies are increasingly facing higher costs in China and in many cases may not be seeing the same growth levels as before, as urban markets become more saturated and it’s not always easy to expand business into lower tier cities and rural China.

What advice would you give to someone wanting to do business in China over the next 10 years?

Broadly speaking, most businesses endeavors in China can be divided into two kinds. While there is undoubtedly a huge overlap, there are those that focus primarily on selling into the domestic market in China and those that are looking at China as an export platform where they can produce goods at an affordable cost. Obviously the trend has been a mingling of these two: a lot of companies that once only used China as an export platform are also trying to sell into the Chinese market now. But depending on what your main focus is, the advice I would give varies.

Many companies that have been producing lower cost goods in China for export now need to look at diversifying elsewhere. Obviously, it’s already happening, with many textile makers, for example, moving production to Southeast Asia, where they can find cheaper labor. For others moving isn’t so easy. China still provides an unparalleled supply base, developed infrastructure and a good workforce. So if you’re not producing really low-cost items, the decision whether to stay or go isn’t so easy.

On the other hand, for a business that focuses on China primarily as a market, they may have to look beyond the well-developed coastal regions and try to sell their products in the interior of China and to the people who hail from there. Those are the people that I talk about in my book a lot, namely the farmers, the migrant workers and people from smaller tier cities across China. The reason why they need to do that is that although we’ve seen impressive growth in urban markets, particularly along the coast in China, to a degree there is now a market saturation. There’s a lot of competition from Chinese brands and fewer numbers of newly minted middle class people to sell to.

Those companies should be focusing a lot more on third and fourth-tier China, as well as the interior. It’s not going to be easy, but if they’re aiming to see growth in sales, that’s where they need to be looking.

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