Monday, April 16, 2018

The Xi Jinping turn in Chinese policies

The Economist gets to the heart of US-China trade dispute,
At the heart of the disagreement is China’s industrial policy. The Americans suspect the Chinese government of enticing their firms with the promise of a vast consumer market, only to use regulatory pressure to strip them of their bargaining power and expose them to the theft of intellectual property by forcing them into joint ventures. They spy a plot to undercut and eventually surpass American industry... Upon joining the WTO (and a further eight times since 2010) China’s government pledged not to make handing over technology a condition for market access. But the Americans say Chinese officials continue to pressure firms to do so. Such a claim is hard to prove—all the more so, given the opacity of China’s regulatory processes. And experience suggests that any deal would be devilishly difficult to enforce. The Chinese authorities can say that contracts involving technology transfer were signed voluntarily. They can make life hard for any foreign company that dares say otherwise.
Depending on which side you are on, it is hard not to be impressed by the Chinese playbook. I am surprised why India does not do the same with say, at least its strategic and large procurements - airlines, defence, metro rail, power etc? Or does India not yet have the economic leverage to play this hardball? Or is it that India does not have the stomach to play this game? Or is it not desirable at all?

But all that is beside the main point and to be discussed another time. Staying on the same topic, Chris Balding shines light at the creeping nationalisation of Chinese tech sector and how it could exacerbate trade tensions with the US. Consider this,
Communist Party committees have been installed at many tech firms, reviewing everything from operations to compliance with national goals. Regulators have been discussing taking a 1 percent stake in some giants, including Alibaba and Tencent, along with a board seat. Tech companies have been widely encouraged to invest in state-owned firms, in the hopes of making them more productive. The common denominator of all these efforts is that the government wants more control... One recent report found that 60 percent of Chinese unicorns have either direct or indirect investment from the Baidu Alibaba Tencent (BATs). China's venture-capital sector is dominated not by traditional tech dealmakers but by the state: There are more than 1,000 government-owned VC firms in China, controlling more than $750 billion.
The US is not the only aggrieved partner. Consider the situation as perceived by Germany, China's largest European trade partner. 
Not only has the opening of China shifted into reverse under President Xi Jinping, but Chinese firms have moved up the value chain far faster than many in Germany expected... In private, some executives liken the situation of German industry in China to the proverbial frog in a pot of slowly heating water which ends up boiling to death because it won’t or can’t jump out. Germany’s ambassador to China, Michael Clauss, warned at a meeting with industry chiefs in Berlin last month of “tectonic changes” in the relationship, according to participants... Bauer AG, which employs 11,000 workers in 70 countries, built its first production facilities in China in the mid-1990s. At the time, not a single Chinese firm could make the sophisticated drilling machines it produces – towering yellow structures used to build the foundations for skyscrapers, power stations and airports. By 2013 Bauer counted 36 Chinese competitors able to make such machines, a shift the CEO says was accelerated by European suppliers selling co-designed parts to the Chinese...


Today, what Bauer and other German firms say they are most worried about is the role of the Chinese state in the economy. Last year, China introduced a cyber security law which tightened state control over internet services, including secure VPN connections that are used by foreign firms to communicate confidentially with headquarters. More recently, some German companies have complained of pressure to accept Communist party officials on the boards of their joint ventures. The Bauer boss fears that Xi’s “Made in China 2025” strategy, which identifies 10 key sectors – including robotics, aerospace and clean-energy cars – where China wants to be a leader, represents a direct challenge to German manufacturing dominance. 
This blog, while cognisant of the several critical failings and distortions, has been in general an admiring observer of the awe-inspiring growth of China as well as its ability to put its money where its mouth is and execute both massive engineering projects as well as complex social and industrial policies. It has believed that the Chinese will eventually figure a way out of any problem. But that view may need to be revisited. 

Since its re-integration with the world economy nearly four decades back, the Chinese economic and foreign policy playbooks have been largely about recovering lost ground and catching up. Doubtless this has involved an aggressive industrial policy to nurture domestic industry and keepings it disputes with neighbours simmering as a low-cost strategy to retain its geo-political influence and focus its energies on economic growth and internal policies. 

But such industrial policies were not new. Which country would not have maximised their leverage and resorted to help local firms with subtle ways to force technology transfers or impose local content requirements? The fact is that China is such a big country and market conferred it with unique advantages of scale, unavailable to others. It did not hesitate to exercise the choice available. As mentioned earlier, I am sympathetic to India exercising the same options. Actually, any big enough country which has that leverage would have done. History is littered with such examples. 

The Communist Party had enough internal checks and balances to prevent the recurrence of a Maoist autocracy and align incentives of Party functionaries across the length and breadth of a large country with the country's development objectives. The Party Politburo was tolerant of the creative tensions on economic and political policy directions.  

Then came Xi Jinping and things have gradually taken a turn in domestic, economic, and foreign policies. This shift in China's policies is a qualitatively different paradigm. Consider the economic policy domain. 

Instead of focusing on improving its own productivity and national income, China is trying to achieve economic supremacy by dominating and controlling the markets of the future and that too by pushing the boundaries of unfair trade and investment practices beyond what may be construed as acceptable. The nationalisation and infiltration of corporate Boards with party functionaries is only one example. There was no need for this. Even without these practices, Chinese makers would have been at least dominant in these markets. 

The centralisation of authority within the Party with Xi is striking. All the safety valves to release the inevitable discontent have been shut. In fact, the discontent is now likely to be aggregated to the top. The different institutional forums to debate different perspectives on economic and social policies, albeit within the acceptable Party line, have been weakened. The internal checks within the Party to prevent the emergence of an echo-chamber have been destroyed.

On the foreign policy side, instead of keeping the disputes simmering, the objective now appears to be settle them at China's terms. More importantly, Beijing now seems to have the intent to engage aggressively with its external partners, neighbours and others. It wants to ring-fence its near-abroad from external influences and bring it firmly under its own control. It has not hesitate to use military brinkmanship to secure this objective. This is surprising since the Chinese can easily afford to be very generous with its ASEAN neighbours. Is Vietnam or Philippines even a remote threat to today's China? It has used economic levers, whether the sovereign loans to countries in Africa and Latin America or the One Road One Belt (OBOR) initiative, in pursuit of its larger global geo-political agenda.

One could always argue that this Xi turn was always likely. It was part of a larger plan to buy time to regain its economic might and then pursue aggressive policies for world domination. Or it is the latest incarnation of the Thucydides Trap - the inevitability of war when one power seeks to displace another. There is no satisfactory way to settle this debate. My personal inclination is to believe that this shift is part of the new paradigm that Xi Jinping has brought to Chinese polity. 

I am inclined to believe that this shift may actually carry the seeds of its own destruction. What was the need for aggrieving countries like Germany with whom the mutually beneficial partnership could have gone on for much longer? What was the need to pursue economic policies in such a nakedly exclusionary manner as to get every developed economy ganged up against China? After all, the global market is large enough to be able to support several firms in robotics, aerospace, drilling equipment and so on!

Anyways this is part of the several wrong turns that Xi has forced China to take during his tenure - aggressively exclusionary economic policies, expansionist foreign policy, repressive domestic policies, excessive centralisation within party etc. If in twenty years China falls short of its ambitions it has today, it may well have its roots in the shifts which are happening now. 

In cricket sometimes when two batsmen are batting very fluently and without a care in the world, it is often said that only way to get them out may be a run out. The Xi Jinping turn may well be the Chinese runout!

Update 1 (18.08.2018)

The Economist points to the Chinese government sponsored or supported attempts to infiltrate the start-up scene in the US by making large investments in start-ups.
In recent years China’s government and several firms have backed more than a dozen accelerators that cultivate startups and have opened “corporate innovation” centres in Silicon Valley. Baidu, the Chinese tech giant that is considered closest to the government, runs a centre focused on AI, and ZGC Capital, a group directly funded by Beijing’s government, has opened an innovation outpost. Next year a Chinese firm will open Oceanwide Centre, the second-tallest building in San Francisco, a symbol of China’s ambition to play a role in America’s technology capital. But China’s main influence comes from investing directly in startups. Estimates are hard to obtain, because venture-capital investments are private and notoriously opaque. But according to an analysis by the Defence Innovation Unit Experimental (DIUx), a group founded by America’s Department of Defence (DoD), in 2015 Chinese investors put $3bn-4bn into early-stage venture deals. Many prominent startups, including the ride-hailing firms Uber and Lyft, the messaging app Snap, virtual-reality firm Unity Technologies, cancer-testing firm Grail, financial-tech firm Sofi, augmented-reality firm Magic Leap and others, have taken Chinese money. From 2015-17, according to DIUx, China contributed 13% of total funds into American venture-capital-backed companies and ranked only second to Europe as the largest foreign source of capital for startups... China’s sovereign, provincial and local governments, state-owned enterprises, firms and individual investors often form their own funds and pool their money in each other’s investment vehicles. Many Chinese funds also have Western-sounding names, such as Westlake Ventures, which is owned by the city government of Hangzhou.

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