Are private Chinese companies really private?

Article originally published in The Diplomat.

China has often been criticized for a lack of transparency, especially with regard to its economic and trade policies. While in many cases these criticisms are valid, it belies that fact that in other instances, China is remarkably open and transparent about its intentions and ambitions. 

Such is the case with China’s “Opinion on Strengthening the United Front Work of the Private Economy in the New Era”, recently released by the Central Committee of the Chinese Communist Party (and further elaborated on by President Xi himself). This document tells us in no uncertain terms that Chinese private companies will be increasingly called upon to conduct their operations in tight coordination with governmental policy objectives and ideologies. The rest of the world should take note.

All of this stands in stark contrast to long-accepted concepts of how private companies function in a free market. The overriding purpose of business, according to these traditional precepts, is to earn profits through the provision of value-added products and services, in response to marketplace signals and under the constraint of basic economic realities. Government ideology plays no role in that equation.

But China has a very different vision. Government officials and government ideologies are directly infused into business operations and private sector employees are “educated” on government policies and ideologies, with the expectation that this “enlightenment” will help inform their business decisions. This government-business symbiosis is further cemented by the provision of massive government subsidies (estimated to be about 3% of China’s GDP) to Chinese companies.

To be clear, China – like any other sovereign nation – is entirely free to define the nature of the relationship between the Chinese state and the Chinese private sector, and craft its own economic development philosophies. So there can be no complaint with China for exercising its sovereignty. 

Complaints are justified however when these unique features of China’s economic system impinge on the ability of China’s partners to compete fairly with Chinese companies. In those cases, remedial actions can be pursued, in theory at least, through various channels in the global trade system.

Existing trade rules inadequate

Unfortunately however, these rules – first laid out in the GATT and then its successor organization, the WTO – were predicated on the assumption that there is a clear and immutable dividing line between government and business. The smooth and effective functioning of those rules is contingent upon maintaining the integrity of that demarcation. But China’s state-directed system has blurred the line, and its new “opinion” binds business and government together even more closely, further muddying the waters – and complicating trade governance.

Where does that leave us? The road will inevitably lead back to the US and China sitting across from each other at the negotiating table. Like-minded partners such as the EU could potentially be brought into the mix, but the more viewpoints around the table, the lower the prospects for success. US and EU views are similar but not identical, and China is skillful at exploiting any such fissures.

The impending US presidential election has of course put everything on hold, but as soon as is practical, the two countries need to begin the hard work of hammering out accommodations which recognize and mitigate (at least to the extent possible) the distortions which result from China’s “united front” on business and government. As has happened so frequently in previous bilateral or plurilateral negotiations, the WTO could then subsequently absorb any ground-breaking new provisions agreed to by the US and China on a basis and at a pace of its own choosing.

The West has often been guilty of not listening to China. But China has communicated with great clarity that its definition of “private” business diverges in fundamental ways from the assumptions which underpin our existing global trade rules. It is not in anyone’s best interests to ignore or minimize this glaring and expanding fault line. Pretending that a private Chinese company is essentially the same as a private Australian, Chilean, or American company is simply delusional. If we wish the global trade system to continue to be sustainable, we need to recognize and address this reality head on. A more sustainable trade system will benefit everyone – including China.

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