He Yafei, former vice minister of the Chinese Ministry of Foreign Affairs, wrote an op-ed in the July 9 English-language edition of the China Daily, titled “Will China and US enter a new ‘Cold War’?” He makes a number of points to bolster his assertion that, indeed, the United States and China are headed into a modern version of the Cold War. Many of his points deserve rebuttal. One of He’s arguments stands out, however, and is worth addressing above all others.
That China has blazed a different trail has made the U.S. realize it overestimated its capability to lead China’s strategic orientation. And the success of the “Chinese model,” which offers other developing countries an option different from the “American model” for economic development, has made the U.S. blind to China’s remarkable contributions to the world and U.S. economies. Instead, it sees China’s development as an attempt to grab global dominance from the U.S.
Led by Xi Jinping, it has become a mantra in Chinese policy circles that the Chinese economic model is one which other developing countries can emulate to achieve the levels of growth and modernization which China has seen over the last three decades. In particular, China now markets its model as a better and more appropriate version of economic development than the “American model.” There is a fundamental fallacy associated with this argument.
If China’s model is so successful, and represents a viable and perhaps more appropriate development “alternative” to the American model, then why is China itself using a completely different economic and investment paradigm than its own in most of the rest of the developing world? If, as He Yafei declares, the Chinese model is so strong that it has allowed China to make “remarkable contributions to the world and U.S. economies,” then why doesn’t it apply the principles of that model in developing countries in which it has strong economic relationships and interests? For example, much of China’s relationship with developing African and Latin American nations suggests that it accepts local terms and practices, and seeks to benefit economically from them.
This is very different from the 1980s and 1990s in China, when China was first becoming familiar with various aspects of business and contract law, and was indeed, inviting foreign assistance in formulating those laws. Along with other factors, this cooperation with the richer, industrialized nations of the world to create at least a semblance of a reliable international business framework and legal foundation, inspired foreign direct investment into China of unprecedented levels, which in turn played a large role in China’s overall development.
Two other key conditions play a large role in the “China model.” The first is the Chinese Communist Party (CCP). China’s economic model rests on a one-party political system, which is part and parcel of the fabric of the country. The CCP is the connective tissue that ties all business, social, and public sectors together in China. Its presence and power had already been established by the time that it decided to let go of strict Marxist principles and allow a modicum — which became a tidal wave — of for-profit business to take root in the country. For good or for bad, there is no denying the pivotal role that the CCP plays in the “China model” of economic development.
China does not, however, any longer openly encourage other developing nations to develop their own communist parties, or to organize under Marxist (with Chinese characteristics) principles. Yet, as He surely knows and would agree with, without the CCP, the China model doesn’t exist.
A second, more technical condition exists in the China model, one which has had a profound importance on the development of business at all levels in China. Chinese companies, whether domestic or foreign-owned, must be capitalized.
In its original iteration, all companies in China were required to deposit in a bank in China an amount of money, called Registered Capital, that authorities in the relevant Industry and Commerce Bureau deemed sufficient to start up, operate, and maintain the business as a going concern for at least a year. Every year, the Registered Capital was reviewed and verified; companies not maintaining the required level in a bank account in China would not have their business licenses renewed.
Changes to this law came into effect in 2014; companies are no longer required to pay in minimum amounts of Registered Capital, and companies may report their subscribed capital, rather than having it verified through accountants, banks, and government authorities. But the principle of capitalizing a company remains, and is and has been a major component and driver of the Chinese economic model. Initially, for all of the barriers that this condition may be said to have created, it also provided protection and oversight for an economy in transition.
Do Chinese companies advise their counterparts in the developing countries in which they operate to require Registered Capital as a component of their company law? A review of the record would suggest no.
There is little evidence that China, in practice, promotes its own model of development in the developing countries in which it operates around the world. Indeed, aspects of the “China model” would be nearly impossible to replicate, as they would require fundamental political change in developing nations, as China knows full well. Instead, China seems content to leverage status quo legal and business systems and practices in those countries, many of which are lax in enforcement and oversight.
As Miria Pigato and Wenxia Tang argue in their 2015 paper, “China and Africa: Expanding Economic Ties in an Evolving Global Context,” “trade with China is having a limited impact on economic transformation and export diversification” in Africa. Unlike the “standard model,” in which a low-wage country (such as China originally was) allows itself to be used as a processor for manufactured goods, thereby also facilitating technology transfer which it can then leverage as its own, “there is very little evidence that China is using Africa as a platform for its global exports.” In fact, as Pigato and Tang say, “few African countries have been able to benefit from large-scale Chinese investment outside the resource sector.”
He Yafei argues that the United States and China are entering a Cold War partly over a U.S. fear of competition from China’s “alternative” development model. His statement that the United States sees “China’s development as an attempt to grab global dominance from the U.S.” based on the strength of that model doesn’t match the logic of the paradigm of the China model. For the “China model” of development, ironically, is truly unique to the “Chinese characteristics,” which have underpinned it.
The China Model may be the one thing that China can’t copy.