This is Not Your Father’s Capitalist System

In the Hutong
Watching the kid play with his first plastic soldiers
1352 hrs.

Catching up on my reading, I just finished an excellent piece by Andrew Hupert over at Diligence China on China’s Statist Entrepreneurship.

Hupert gives the single best, most pithy, most insightful overview of the nature of China, Inc. that I’ve ever read. I won’t excerpt it here because I believe you should take the time to read the 10 paragraphs of the post.

My one issue with the article is that while it is an excellent and accurate snapshot, it suggests that this is the way things will stay.

Problem One: Real Entrepreneurs

I actually see China as becoming more diverse. While policy and administrative guidance remains critical to many enterprises, the economy is growing far too fast for the bureaucracy to retain effective control over all economic activity. The amount of business being done around the margins and outside of day to day state control is growing. As Statist Entrepreneurship grows, real entrepreneurship is flourishing in some remarkable places.

This chunk of the economy is driven by small- and medium-sized firms owned and operated either by foreigners, returnees (sea-turtles) or overseas Chinese. As long as you’re legally established, pay your taxes, keep good books, stick to your approved business scope, and don’t get into any legal hassles, government has very little to do with your business, and it is increasingly possible to run a good business in this space.

This is an especially vibrant and rapidly-growing sector, and will become a growing nexus of growth in the coming years.

Problem Two: Apparatchiks Can’t Dance

Statist entrepreneurship depends on close interaction between enterprise and bureaucrats, and as Hupert notes, stakeholders (read: bureaucrats) rather than shareholders (read: investors) are the primary audience to whom statist entrepreneurs must play.

The challenge is that this interaction – being as it is functional rather than structural – is a painstaking process, and therefore slows the enterprise considerably. If all of the enterprises in a given sector are statist in nature, then no problem – the guy with the best guanxi wins. But if there are players in the sector that operate outside of that model – including companies that are intruding via an emerging business, like the Internet – then all bets are off.

Statist entrepreneurs are constrained by the interests of the bureaucracy, and thus cannot respond to consumer demand, opening the door to more classical entrepreneurial activity.

To the Entrepreneur go the Spoils

Efficiency may not be everything in a place like China. But if nothing else, it is an incredibly caustic chemical, eating away over time at the business of statist enterprises who face rivals who have it when they don’t

Take the entertainment distribution business in China. China Record Corporation, China Film, and companies like them are statist organizations, not only owning great guanxi but functionally owned by the state. These companies, constrained by bureaucratic rule, are unable to respond with any kind of alacrity to consumer demand. Their business is increasingly sidelined by the massive ecosystem of black market (pirated) and grey market (imported) product that simply works around them.

Where is Red Flag Linux, a classically statist venture? Being left in the dust by more nimble upstarts like Red Hat and Canonical.

I look around and I find that my needs are increasingly wells served by classically entrepreneurial companies. I buy my shirts from a tailor working out of a tiny shop. I eat at places like Little Italy, Peter’s Tex-Mex, and Dini’s. All of my business printing is done at Empire Graphics. Groceries come from Jenny Lou, not Wankelong.

Policy, Administration, and the Consumer

Admittedly this doesn’t cover the entire economy, but you get my point. The Chinese economy is NOT the US economy, or is it Japan or Singapore. Chinese businesses take on a huge variety of forms and structures, including SOEs, MNCs, joint ventures (may they be allowed to die soon), statist enterprise, and private enterprise. Each of these exerts an effect on the other in every major industry, and it is the dynamic interaction of these that that is driving the evolution of business in the PRC far faster than the WTO or any form of centrist policy changes.

China slows down when policy makers become uncomfortable with that process. And why shouldn’t they? The process is messy, unpredictable, and often ugly. All of that is anathema to people raised in a paternalistic culture and a central-planning driven polity. Nonetheless, as recent debates about private property and bringing entrepreneurs into the Party show, they know they can slow it but they cannot stop it – unless they are prepared to close a major social and economic safety valve that absorbs a lot of surplus labor.

In the end, the thing to remember is that there are three major forces driving business China:

> Policy, as made at the highest levels of government, that lays out the broader playing field (include in here the codified laws passed by the NPC and similar bodies);

> Administration, or the ways law and policy are interpreted by bureaucrats at local, provincial, and central levels, and how that affects the way they manage SOEs, influence statist enterprise, and tolerate or ignore private enterprise; and

> Consumers, who by sheer dint of buying power and a growing consciousness of the influence they can exert on business and administrators, are becoming in increasingly vocal and potent force.

Plus ca change

My friends and I like to remind ourselves that in China, everything is possible, but nothing is easy. In other words, the status quo has a vote, not a veto. As important as it is to understand Hupert’s well-made argument, it is equally important to understand why things won’t always be this way.