China’s Economy: The Big Score?

China has long been considered a great prize in the eyes of Westerners seeking to capitalize on the wealth of Asia.  Like the Americas, the colonial powers of Europe seized the land of the once-great and expansive Chinese Empire to feed their ever growing economies with a “free trade” style model.  Ultimately, the reliance on forced, exploitative trade over internal development of domestic industry proved to be a near fatal practice that almost meant the near collapse of France and Britain in the wake of the first World War.  Today, the wealthy capitalist investors and industrialists of the West look to China’s nearly 1.5 billion citizens for cheap labor and a new source of consumption.  In modern times, the nation of China, or at least the government of China, reaps major benefits from access to the global markets , which Beijing hopes to expand upon.
 
In an attempt to discourage the United States from raising tariffs to rebalance a massive and persistent trade deficit, for example, China has offered to lift a ban on US beef and allow foreign investors to own majority stakes in Chinese securities and insurance firms.  The growing wealth of the Chinese Peoples has made beef and pork more of staple than a luxury in the modern Chinese diet.  Sourcing these products from as many countries as possible helps satiate and secure Chinese demand for beef, even though the added global demand means higher prices for Americans.  Opening China’s financial sector to greater foreign investment will, however, do far more to enrich and empower Chinese investors as well as the government.  For foreign investors and the world’s population, there are many downsides to doing business with a Communist government that must be considered.

By allowing foreign investors to buy majority stakes in Chinese financial firms, Chinese corporation will follow in the footsteps of what were once American firms to become transinternational corporations. Struggling with an unstable stock market due to a lack of confidence in the Chinese economy made worse by Beijing’s interference in the market, the globalization China’s corporations will help attract the capital and the confidence of global investors.  It will also allow the current stake holders in Chinese firms to pocket huge sums of foreign dollars for the sale of their shares.  In turn, this will allow Chinese investors to pursue new opportunities in the global market.  In terms of boosting the global supply of capital and foreign investment, this is a net benefit; however, this adds competition for investment returns, which is not necessarily a problem in itself.
 
Unfortunately, China is a society where nepotism is the rule and not the exception while competing against Chinese investors and firms means competing against the wealth of China as a nation.  Those who are politically favored and those who are part of the Communist Part have been enriched by the development of the Chinese economy far beyond anything the average Chinese citizen has seen.  Expanded foreign investment allows affluent Chinese to cash in on their political influence.  For decades, economic reforms in China were seen as a gateway to political reform, but Beijing has only tightened its grip on the Chinese Peoples as Communist Party members use their political power to enrich themselves.  The concern for the average person is the spread of Beijing’s economic power and the ability of the Communist Party to dominate the global economy.
 
Some might argue that this means the wealthy of China will be able to free themselves from the influence of Beijing, but the influence of Moscow over the oligarchs of Russia demonstrates the reach of authoritative governments.  As for global investors buying into the Chinese economy, the worst case scenario is that someday the Chinese government decides to nationalize ever foreign owned business and industry, which is something socialist governments tend to do.  Assuming Chinese investments offer more than just a superficial paper value, at best, the ability to do business in China will be highly dependent on the mood of Beijing. Chinese business are be over and improperly regulated for political agendas.  
 
How much a business can succeed depends greatly upon how much Beijing allows a business to succeed.  In other words, Beijing picks the winners and losers.  Unfortunately, Beijing is a heavy proponent of discrimination against non-Chinese and favoritism toward Chinese, which means Chinese owned firms are more likely to win.  Withdrawing investments from the Chinese economy should investments fail to delivery returns also requires the blessing of Beijing.  China is a very tempting prize, but that prize is most likely meant for someone else.  Moreover, China’s economy offers a lot of potential upside, but the far more probably downside makes foreign investment in China’s economy more threatening than alluring.