Sep 25, 2010

Alan Abelson builds the skeptic's case against China

In a kind of backhanded recognition of the country's status as a growing economic colossus is the fear, voiced occasionally by market mavens, that should the perpetual China boom go bust, the result would be widespread havoc. As it is, of course, Corporate America and investors here are wild about China.

All of this is a prelude to recommending a piece on China by Ian Johnson in the Sept. 30 issue of the New York Review of Books. Johnson, now based in Beijing, is a former Wall Street Journal writer and bureau chief (we never met him), who has collected a number of awards, including a Pulitzer. His take on China is not only informed but extraordinarily revelatory and compelling.

Early on, he points to "the spectacular misperceptions about China, a key one being that the government has been privatizing the economy." Actually, he says, what it has been doing is turning state-owned enterprises into shareholder-owned companies but—and this is rather a big but—with the government holding a controlling stake. And, he adds, "even today, almost all Chinese companies of any size and importance remain in government hands."

Throughout the '90s and into this decade, he recounts, prospectuses for IPOs of Chinese companies written by Western lawyers fudged the fact that the Communist Party's Organization Department, rather than the company, would remain in control of all personnel decisions. The ability to hire and fire is scarcely trivial. And major Chinese companies, Ian relates, have Party secretaries who manage them in conjunction with the CEO.

China has changed and for the better in many ways, Ian feels, such as largely withdrawing from what he dubs the "personal lives of Chinese citizens," permitting them to "pursue their own ambitions and goals as long as they avoid the high crime of directly challenging the party."

For all the economic growth achieved by what Ian calls China's "conventional mercantilist policies" in the past 30 years, he's skeptical those policies will continue to work in the future. What's badly lacking, in his opinion, is a "more open economic and social system that can foster innovation and creativity." One badly needed reform on this score, he argues, would be to pry loose the Party's iron grip on businesses. But don't hold your breath waiting for that to happen.

The tight ties in China between politics and economics have "created giant state-owned companies that have had spectacular success on foreign stock markets." Those big companies, he goes on, are giants, but merely because of their size. Essentially, they're little more than partially privatized quasi monopolies, not very nimble or inventive or even influential in global markets, except "when trying to buy natural resources."

Ian bemoans the fact that after Tiananmen, the Chinese government "channeled huge sums into better dorms for students, housing for teachers, labs for scientists and junkets for administrators" to little avail. This may have satisfied material demands and lured foreign universities hoping to set up programs in China. But it hasn't produced a bumper crop of "creative and innovative" students that Chinese companies can draw on.

"Even among China's elite universities," Ian claims, the academic level, in most cases, is on a par with one of our "mediocre community colleges."

While economic reform hasn't quite come to a halt, says Ian, the state sector is regaining lost ground in part because of Beijing's policy of "recentralizing control." The powers that be lack any impetus to reform. That would suggest that an awful lot of folks, businessmen and investors alike, in our blessed land who can't wait to get a piece of the Chinese miracle might wake up one day more than a little disappointed.

~Alan Abelson, Barron's magazine, "The Bad News Bulls", September 25th, 2010

No comments: