Chinese capitalists for Trump

In his tariff war with China, U.S. President Donald Trump has hidden allies. Just about every complaint U.S. trade negotiators raised in Beijing last week — not to mention their doubts about the sincerity of China’s concessions — are shared by Chinese entrepreneurs, who feel as underappreciated and unwelcome as their foreign counterparts. Their common enemy: the Chinese industrial state, an animus summed up in China by the lament “guo jin, min tui”: the state advances, the private sector retreats.

This reality underscores how tough it will be for the Trump administration to roll back a set of statist industrial policies that are rooted more in politics and ideology than economics. At the same time, it presents Trump with an opportunity — to leverage internal Chinese pressure to open doors both for international investors and a domestic Chinese constituency with a vital stake in playing by global trading rules.

In his efforts to ensure Communist Party control over every facet of Chinese life, Chinese President Xi Jinping has smothered the animal spirits of the country’s private businesspeople, who account for more than 60 per cent of economic output and 80 per cent of employment. Even though the party welcomed capitalists to join in 2001, entrepreneurs have had an uneasy relationship with state authority. Many have been caught up in Xi’s anti-corruption campaign, paying the price for a pervasive rent-seeking culture in which bribing officials was necessary to secure business deals, land and bank loans.

Some are moving their money offshore because they fear their earnings will be confiscated. Others are putting off hiring and investing as the economy slows. Fred Hu, founder of Primavera Capital Group, compares their current mood to the years after Tiananmen Square in 1989, which were marked by “tremendous uncertainty, concerns and worries” about the future.

The fact is that the world needs Chinese private enterprises to succeed if China is to remain a driver of global growth. Conveniently enough, their demands mirror those of multinationals: better access to services markets that are dominated by state monopolies in energy, finance, telecommunications and transport; better protection for intellectual property; a reduction in the subsidies, cheap financing and other advantages enjoyed by the state sector; and being left alone by meddling bureaucrats.

Local players, too, would love to get rid of the party cells implanted in their companies. What’s more, a policy shift away from state enterprises, which dominate oldline industries, towards private businesses, which excel at innovative services, would help boost Chinese domestic consumption and reduce the household savings glut that shows up in external imbalances. It is these distortions that have destabilized the global trading order and sparked protectionist backlashes in much of the West.

Xi will never willingly dismantle the state-led industrial structure he sees as key to the survival of the party. Privatization of state enterprises is not on the table, even though they suck up 50 per cent of all credit despite accounting for just 20 per cent of GDP — a colossal misallocation of financial resources.

Still, there are two reasons to think Xi may be ready to make genuine concessions. First, as China’s recent sombre headlines make plain, the economic slowdown, exacerbated by trade tensions with the U.S., has stunned Beijing’s leaders. Until a few months ago, the People’s Daily was bombarding readers with stories lauding “Made in China 2025,” a blueprint for Chinese high-tech supremacy, and boasting of a “China Solution” to global challenges. Moviegoers were treated to a documentary called “Amazing China” that extolled Xi’s accomplishments in science, technology and poverty reduction. Today, China’s industrial ambitions get scant mention in the media. Cultural czars have pulled the propaganda film from cinemas. If nothing else, Trump has got Beijing’s attention.

Second, opening Chinese markets wider to both domestic and foreign competition would be the surest way for Xi to revive flagging growth. Private enterprises produce three times the return on assets compared to state companies and, as the providers of almost all new jobs, they’re critical to boosting consumption and weaning the economy off its reliance on credit-fuelled investment. The IMF calculates that while China’s per capita GDP, measured in terms of purchasing power, is similar to Brazil’s, its consumption per capita is comparable to Nigeria’s. If Chinese consumed like Brazilians, their spending would double.

The government understands the need to appease the private sector. Since last year, it’s been trying to encourage banks to lend more to private companies. Its efforts have made scant progress, though, in large part because the traditional banking system simply isn’t set up to issue such loans. Meanwhile, trying to head off a potential financial crisis, Beijing has also been cracking down on the shadow banks where small firms used to seek financing.

The good news is that a comprehensive blueprint for economic reforms that would energize the private sector already exists. Five years ago, when Xi ascended to power, he unveiled a 60-point plan that pledged “to let the market play a decisive role in the allocation of resources.” That document has been gathering dust ever since. Resurrecting those abandoned pledges in the name of rescuing private enterprises would give Xi the political cover to accede to some of Trump’s demands. A two-for-one bargain is available: China would be wise to take it.

THEIR COMMON ENEMY: THE COMMUNIST INDUSTRIAL STATE.

Bloomberg Andrew Browne, the editorial director of the Bloomberg New Economy Forum, was formerly China editor for The Wall Street Journal.