My first job in China was to manage a joint venture in a remote mining town. Our partner was an old-line Chinese state owned enterprise—a real communist organization. The CEO of the company was also responsible for the entire town, the police, the courts, the jail, everything. So we had a board member who was, in a sense, a CEO, mayor, police chief, judge, and warden, all in one. Weird, right?
Important to understand how China is different
As we pointed out in our last post, in any negotiation or confrontation, it is important to understand the counterparty—how they think, what is important to them, what they can and can’t do. This is true in business negotiations and government negotiations as well. In that last post mentioned that China is different because it is a low income country. Here we want to point out that China is also different because it is a country transitioning from communism to a more free-market oriented economy.
China gradually transitioning from communism to capitalism
In 1980 China was completely communist. The economy was 100% controlled by the government, there was no private property and no private enterprise. Under Deng Xiaoping China embarked on a gradual, step-by-step transition toward the free market. Although precise measurement is difficult, estimates are that China is now about 50-60% private enterprise—foreign invested companies, privatized companies, entrepreneurial companies and the like. The rest is still state-owned or state-dominated companies and sectors.
China’s economy is mixture of free market and state-dominated
So China’s economic structure is mixed. Some sectors—steel comes to mind—still have heavy state involvement. Others, like electronics—the companies that make phones and computers—are highly free market oriented.
One result of this is that people will describe China differently. Some say that the Chinese economy is still completely directed by the government and they’ll point to government dominated sectors to make their point. Others will make the opposite argument, that China is free market already. The fact is China is mixed at present—partly free market oriented, partly state-dominated. For China, the most important point is that it has been moving toward the free market. That is what has been driving growth in China. It is the private sector that is creating jobs and wealth. The state-dominated sector is the weaker part of the economy, the laggard. If China wants to continue to grow and develop, it needs to continue to liberalize its economy. Hopefully the upcoming trade showdown with the US will push them toward more liberalization, which will be good for the US and for China. From the America’s point of view, how it approaches trade relations relative to specific industries will in part depend on how liberalized or free-market oriented that sector is. For those of us following the negotiations, it will be crucial to keep an eye on that factor.