China (ii)

It seems to me that if there’s a single unifying principle in Chinese politics, it’s to do whatever is necessary to keep the Communist Party in power.

In macroeconomic terms, this originally meant state control of all productive assets, both public and (formerly) private. Under Mao’s rule (1949-1976), businesses and local governments functioned under the stewardship of a structured hierarchy of leading Party members, all of whom ultimately took their orders from, and reported results to, a central committee of party elders in Beijing.

When I started investing in Hong Kong in the early 1980s, I quickly learned that this system had become totally dysfunctional by the time Deng took over in 1978. The central planning goals were nonsense. And there was a widespread conspiracy among local government leaders and company bosses to fabricate reports that showed them meeting or besting the required performance. Company A might be told to make, say, 100,000 diesel engines for trucks. In reality, it might make 10,000, none of which worked very well. Still, it would invoice Company B, which made trucks, for the full 100,000. Company B would make 10,000 faulty trucks, all of which might remain at the factory. But Company B would invoice Company C, a distributor, for the full 100,000. C, in turn, would invoice Companies A, B and a bunch of others, for 10,000 of non-existent trucks each.

The wheels, so to speak, of this gigantic charade were greased by local banks, run by minor party officials eager to curry favor with higher-level cadres, that provided a stream of loans to keep the scheme from collapsing in on itself.

Deng’s attack on this mess was to declare that the time had come for Communism “with Chinese characteristics,” meaning a slightly modified form of western capitalism. New firms were allowed to be created, even by non-Party member entrepreneurs, and with only light Party supervision. These would either compete directly with Party-controlled firms or enter into newer, more innovative lines of business.

Foreigners would be allowed in as well. They’d be provided with land for factories and the promise of available labor plus the road networks, clean water and power needed to make and distribute their output at home and abroad.

This decision kicked off a decades-long economic expansion in China. It also addressed the problem of dysfunctional state-owned enterprises, which were forced to either create genuine economic output or die.

Then came 2012 and the ascendence of Xi Jinping.

more on Monday

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