Capitalism According to the Chinese

Can it be true? Has China become a capitalistic country? In this blog I look at the history of the transition of China's economic system. In the next blog I will explore how China uses its new-found economic power and wealth to exert influence over other countries, including the U.S.

The Cultural Revolution in China ushered in a decade of social, political, and economic upheaval between 1966 and 1976. It officially ended with the death of Mae Zedong, chairman of the Communist Party.  After Mao's death in 1976, forces within the party that opposed the Cultural Revolution, led by Deng Xiaoping, gained prominence, and most of the political, economic, and educational reforms associated with the Cultural Revolution and its excesses were abandoned by 1978. The Cultural Revolution has been treated officially as a negative phenomenon ever since. The people involved in instituting the policies of the Cultural Revolution were prosecuted including Mao, Lin Biao and the "Gang of Four." 

In China, the traditional State-owned enterprise (SOE) has been undergoing a process of “corporatization” since 1984 when these enterprises were encouraged to expand production and earn profits.  The traditional model of state-owned and state-managed enterprises became two-fold: state ownership of property with management rights in SOEs separated out. Compared with traditional SOEs, the ownership structure of SOE-corporatized corporations includes better defined shareholder rights than its traditional counterpart along with increased efficiency and accountability. The modern corporate model presents more sophisticated and difficult governance issues as China continues to transition from a planned economy to a market economy. 

The Chinese government controls about 70 percent of the stakes of publicly listed companies on stock exchanges with the largest exchange in Shanghai. The government still exerts considerable influence over the operations of Chinese companies even as the country moves toward a western form of capitalism. Companies that seek a listing on a stock exchange are required to adopt sound corporate governance practices, such as the inclusion of independent directors on the board of directors. Indeed, China has been influenced by corporate governance policies developed in the UK  in the aftermath of scandals at companies such as Barings Bank that was the oldest merchant bank in London until its collapse in 1995 after one of the bank's employees, Nick Leeson, lost £827 million ($1.3 billion) speculating primarily on future contracts. The scandals in the U.S., including at Enron and WorldCom, and the passage of the Sarbanes-Oxley Act also have led to governance improvements and increased transparency in the Chinese economic system. Still, it has a long way to go to overcome years of secrecy.              

One problem with the current Chinese economic system -- SOE-corporatized corporations --  is the influence of the state shareholder in managing Chinese enterprises. The government champions the state-owned firms and a truly market-oriented economy may by years off in the future. However, the achievements of a more western style economic model in China cannot be overstated given that it is the second largest economy in the world and, in my opinion, will surpass the U.S. as the leading economy within the next 20 years.