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Thursday, October 15, 2020
China's "State Capitalism" in the Eyes of the West
ANBOUND

As the confrontation between the United States and China continues to escalate, the two sides are engaging in "battles" in various fields, from trade war to technology war, physical investment to the financial sector, from issues regarding Hong Kong, Taiwan, South Sea to the restrictions imposed on TikTok, WeChat, and Huawei, as well as from the prevention and control of COVID-19 to global warming. Although the geopolitical confrontation initiated by the United States has strong political implications for its general election, the comprehensive and continuous escalation of confrontation has also made Western countries feel insecure.

The American think tank CSIS recently conducted surveys on the American public and thought leaders in the United States, Asia, and Europe to find out their views on China's policies. These surveys covered a wide range of issues, including trade, security, human rights, and the trajectory of U.S.-China relations. The survey shows that the majority of the American public holds a negative attitude towards China and generally believe that China poses the greatest challenge to the United States (54%), followed by Russia (22%). Thought leaders in the United States, Europe, and Asia agreed that China poses a security threat to Western countries and the best solution is to strengthen cooperation with like-minded countries (80.9% of American thought leaders holding this view, American allies 73.6%, and the American public accounted for 44.7%). Interviewees from Southeast Asia and parts of Europe want the United States to cooperate internationally but would themselves remain neutral.

In this context, how will China and the Western world get along in the future? This is not only an issue to be considered and studied by China, but also a matter of great concern to Western countries and the greater public. To cite a recent example, China's so-called "state capitalism" is discussed in a cover article of the latest issues of The Economist. Although the article's views on China's economy is from the perspective of Western mainstream media, the changes in point of view, opinion, and mentality reflected in this article are representative of Western countries. Hence, such article enables China to understand and grasp how the mainstream Western public views China.

In Western countries' understanding of the Chinese economy, although the Chinese economy is growing, it depends on unsustainable debt expansion, subsidies, powerful capitalism, and intellectual property "theft"; as long as the outside world exerts sufficient pressure, the Chinese economy may collapse, which will force its leaders to make concessions and open up its state-led system. This notion is of course, overly simplified, and even The Economist, a constant critic of China, thinks of such an understanding as rather naive. The journal believes that the damage to the Chinese economy caused by the trade war is very limited. The Chinese economy has shown strong resilience against the impact of COVID-19. The IMF expects that the Chinese economy will grow by 1% in 2020, while the U.S. economy will decline by 8%. The world's best performing stock market this year is the Shenzhen stock market and not the New York stock market.

Why does the Chinese economy still show tenacious resilience under various shocks? The Economist believes that an important reason is China's state capitalism. The article believes that facing the 2020s, Chinese leaders are reshaping state capitalism and through the combination of China's economic control, technology, and vitality, China's economic growth can be sustained for many years to come. The Economist also admitted that underestimating the Chinese economy is not new in the Western world. Despite the suspicions of the West, an objective fact is that since 1995, China's share of the global economy has increased from 2% to 16%. Similar to "Abenomics" of Japan in the past, The Economist believes that "Xinomics" is emerging in China. Xinomics has three elements: First, tight control over the economic cycle and the debt machine. It is worth noting that China's post-pandemic stimulus policy is restricted, and the stimulus scale only accounts for 5% of GDP, which is less than half of the U.S. stimulus scale. Secondly, China is a highly efficient administrative country, and its rules are uniformly applied to the entire economic field. China is gradually establishing a commercial legal system, and its response to enterprises is more sensitive. The formulation of bankruptcy and patent regulations has increased fivefold since 2012. Predictable rules make the market run more smoothly as well as increase economic production. Finally, the last element is to blur the boundary between state and private firms. State-owned enterprises are forced to increase financial returns to attract private investors. At the same time, the state has also strengthened the implementation of strategic control over private enterprises.

The Economist also believes that Xinomics has performed well in the short term. Although China's debt growth has begun to slow down under the COVID-19 pandemic, it has withstood the two major impacts, i.e. the trade war and COVID-19, and it has not experienced financial crisis for the time being. However, the real test is yet to come. China hopes that its technology-centric form of central planning can maintain innovation, but history shows that decentralized decision-making, open borders, and freedom of speech are the main contributors to innovation. Obviously, in the eyes of mainstream Western public opinion, China's "state capitalism" model is not sustainable.

Based on the above analysis, according to The Economist, the United States and its allies must prepare for a longer period for the "struggle" between the open societies (i.e. the West) and China's state capitalism. However, the strategy of containing China will not work. Unlike the Soviet Union during the Cold War, China's huge economy is closely intertwined with the global economy. Western countries on the one hand, need to create a certain degree of diplomatic space, establish new stable rules and cooperate with China in certain areas, such as responding to global warming and the COVID-19 pandemic. At the same time, Western countries must firmly defend human rights and national security. Interestingly, The Economist gave a reminder that China's US$14 trillion state-owned capitalist economic strength cannot be wished away, and it is time to dispel the illusion that the suppression and obliteration of the Chinese economy would work.

From the CSIS survey to the analysis by The Economist, it can be seen that under the geopolitical confrontation against China as promoted by the United States, the concerns of thought leaders and the public in Western countries about China and its national security threats have increased significantly. There is reason to believe that this kind of "antagonistic" and "hostile" view of China will exist in Western society for a long time, and may even worsen. However, there are still relatively major differences in Western countries' views on how to deal with China's "threat" and economic scale "oppression". Our follow-up observations have found that American politicians have the most extreme and hostile views, while the "antagonism" of other countries' views of China is relatively weak. The West has the most forceful views on China in terms of human rights, politics, and values, but has a relatively objective view of China's economy and its influence. They believe that the West cannot truly decouple from China, nor can they contain China like the Soviet Union. Regarding relations with China, the mainstream public opinion in Western countries still holds the dichotomic division, which is to remain tough and confrontational in human rights, values, and national security, but maintain cooperation with China in areas such as economy, global climate change, and the battle against the COVID-19 pandemic. The public opinion of Western countries remains wary of China's "state capitalism". From the perspective of Western countries or companies, the Chinese government's mechanism of participating in the market competition through state-owned enterprises has formed a deformed phenomenon of political and economic mixing. They believe this has created unfairness in market competition, hence the attacks and criticisms from the West. This, in fact, is why Trump's trade war policy has been able to be maintained, as well as the persistent difficulties in the EU-China negotiations.

Final analysis conclusion:

The West and mainstream Western public opinion believe that China's economy is turning to stronger state capitalism, hence its power and influence cannot be underestimated. This is the Chinese economic power that Western economic entities will need to deal with in the future.

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