Capitalism in China

What is the future of capitalism in China? Unexpectedly, there is quite bit of decentralization in decision making in China, grassroots democracy is quite apparent, where municipal and provincial decision making powers are quite strong.  This is quite evident with increasing power for individuals to defend their rights (e.g. labor laws, property laws).  In fact, among all OECD countries, China is the most decentralized country.  For most matters that affect infrastructure and investment, the local and  governments have the decision making power.  They even compete with each other to attract Foreign Direct Investment.  At the same time, the central government has metrics to measure the successes of each municipality and province.  The article discusses how if China were to become a capitalist society, its system would mirror closest to South Korea’s system of the chaebol, which are conglomerates that are family controlled.  This is because of its Confucian influence and importance of family in business.  However, It won’t be the same system as South Korea for the following three reasons: 1) China’s size; 2) South Korea is a full democracy; 3) China’s lack of scientific innovation. 

One of the challenges China faces is being able to transform from a society that places great emphasis to personalized trust (a trust between people that know each other) to institutionalized trust (a trust in existing systems that ensures transactions among businesses, NGOs, governments and other parties will function).  In China, much business is done between people that know each other, rather than between strangers.  It does not have an existing system where information and laws are readily available and implemented, and therefore institutional trust is difficult to earn.  Companies that handle complex issues may experience difficulties resulting from a lack of institutional trust because without this, delegation is often difficult.

Another barrier would be China’s lack of scientific innovation resulting from its lack of commercialization of science, and lack of sharing this knowledge across business stakeholders (e.g. venture capitalists, capitalists, scientists, etc.).  In other economies such as Germany’s and Japan’s, there is a high level of societal coordination among various parties (business associations, labor unions, etc.) 

Despite all those barriers, will China’s economy hit a wall?  China’s economy is interdependent on a multitude of nations around the world and vice-versa.  As a low cost manufacturing and assembly center, China has a high dependence on external innovation.  To grow, China needs to be involved with a larger chunk of the value chain by utilizing its comparative advantage in low cost manufacturing and labor in medium to high tech sector. (e.g. building tools for high tech sector)  China could be in danger of being trapped in a low-cost commoditized manufacturer.

However, moving higher up the value chain would require more capital investments and more cooperation amongst firms.  China is addressing these deficiencies is by fostering FDI, as well as involving the ethnic Chinese people in the innovation process.   There is also a movement towards Chinese firms acquiring foreign firms to gain knowledge and innovation.  An example, was Lenovo acquiring IBM.  These trends need to continue in the near future, as well as addressing the deficiencies of innovation, cooperation and trust in order for the Chinese economy to thrive.

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