Communist China – Part 3

How the CCP regulates property rights, freedom of thought, and prospects for political and economic reform.

Continuing this essay series on communist China, using Arthur Kroeber’s China’s Economy: What Everyone Needs to Know, Michael Pillsbury’s The Hundred-Year Marathon: China’s Secret Strategy to Replace America as the Global Superpower, Chris Miller’s Chip War: The Fight for the World’s Most Critical Technology, and Elbridge Colby’s The Strategy of Denial: American Defense in an Age of Great Power Conflict, this essay will focus on China’s regulation of property rights, its policies on freedom of thought, and prospects for political and economic reform.

In modern China, controlled by the Chinese Communist Party (CCP), there is a large difference in how property rights are implemented in rural and urban areas. As Kroeber writes:

Chinese farmers do not own their land, but they do generally have long-term contractual rights to use it. The issue of rural land tenure is one of China’s most intractable policy problems, and the chasm between rural and urban property rights is one of the most important sources of inequality in wealth and income … [The CCP] continued to insist that ownership of the land itself resided in the collective, which meant that individual farmers had no right to sell or mortgage their land. For another, it tolerated the practice of city governments acquiring large swaths of nearby rural land for a modest sum, then reselling it to property developers for a large markup. This meant that virtually all the profit from converting low-value agricultural land to high-value urban land went not to rural families, but to city governments and urban property developers (who also reaped huge gains from the housing and offices they built). The sums involved were staggering. The World Bank estimated that in 1990–2010, local governments expropriated land from farmers for a total of Rmb 2 trillion less than its market value (around $300 billion at the present exchange rate). If farmers had received the full market value of their land and enjoyed normal investment returns, by 2013 they would have had an additional Rmb 5 trillion (roughly $650 billion, or 8 percent of GDP) in household wealth.10 One motive for this “cheap land” policy was to enable the growth of cities, since by the early 2000s the government had decided that the way to maximize economic growth was to move as many people as possible, as quickly as possible, off the farm and into higher-productivity urban jobs. To appreciate the full impact of this policy on wealth and income distribution, one must understand the great discrepancy between rural and urban rights to real property. Urban land is all owned by the state, in the same way that rural land is owned by collectives. When an urban family buys a house, it is really buying a long-term leasehold, typically for 70 years. Other than the length of the term, this may not sound much different from a farmer with a 30-year use right on his farmland. But in practice the difference is enormous. The farmer has no right to sell his land to someone willing to pay a high price in order to convert it to a more valuable use. All he can do is sublease his cultivation rights. An urban homeowner can sell her property to anyone, for whatever price the market will bear. As more and more people move into the cities, the value of a given piece of urban real estate almost invariably rises, and the urban homeowner is perfectly free to realize that increased value. A farmer can own the rights to only one piece of land for personal cultivation; an urban resident can buy as many houses as she can afford, generating rental income or using the property as security for a mortgage to finance a small business. This inequity in property rights may be the single biggest cause of the huge wealth and income inequality between urban and rural areas … [F]actors specific to China that have made its inequality problem far worse than those experienced by other fast-growing East Asian countries—especially Japan, South Korea, and Taiwan, which managed the industrial transition without big rises in inequality. Chief among these factors is the differing property rights regimes for rural and urban households, which led to unequal access to capital. Urban households enjoyed a gigantic wealth transfer in the 1998–2003 housing privatization.

Kroeber notes that most observers of China are pessimistic about prospects for political reform:

For as long as China has tried to combine a dynamic and ever more market-driven economy with an authoritarian political system, observers from the West and numerous domestic critics have argued that this combination was unsustainable. Eventually, the argument goes, China would have to change its political system to become more open and representative, or the economy would stop growing.10 This prediction is based on plausible precedents. In nineteenth-century Europe, industrialization and the rise of an urban middle class led to the destruction of old aristocratic orders and the gradual emergence of representative government. In Asia after World War II, both South Korea and Taiwan experienced rapid growth under authoritarian regimes, and then they made the transition to democracy in the late 1980s and early 1990s as their growing middle classes demanded more voice in government. The most successful postcommunist countries in eastern Europe, such as Poland, Hungary, and the Czech Republic, embraced capitalism and liberal democracy together. Of the fifty-eight economies whose per capita gross national income (GNI) exceeded the global average in 2018, all but seven are at least nominally democracies, in the sense that they hold regular contested elections for the country’s top leader in which all adult citizens can vote. The exceptions (including Brunei, Saudi Arabia, and several other Middle East emirates) are all countries with small populations whose economies depend mainly on exports of oil and gas, a natural formula for authoritarian oligarchy. Among the major economies, the only one other than China that is not really democratic in any meaningful sense is Russia. It seems likely that the Communist Party’s twin desires to turn China into a great economic power and to retain its own political monopoly are incompatible, and sooner or later one of those goals must give way … So far, though, this prediction has proved wrong. Xi Jinping’s top-down reform program aims at a sort of “Leninist capitalism” in which the economy will be driven more by market efficiency, while the party’s power will be strengthened, not weakened … [T]he natural class advocate of a more open political system is not obviously interested in change. The urban middle class is generally seen as the group that pushes hardest for political openness. This group has been growing fast in China, but it is still a minority: it may comprise 300–350 million people, or less than a quarter of the population. On the whole, members of this group benefit disproportionately from the current system—notably through the privatization of state-owned housing, which gave them a valuable tax-free asset; and through the quotas for university admission, which are heavily skewed in favor of urbanites. So there is a fair chance that Xi’s “Leninist capitalism” strategy will succeed in sustaining China’s unique combination of market economy and authoritarian political system well into the 2020s. But this strategy is far from cost-free. The obvious victims of this approach are innovation and creativity. Although its leaders often mouth the idea that China must become a more innovative society, it is impossible to imagine creativity blossoming as long as the state places draconian restrictions on the right of people to express their views, share information, organize independently to solve social problems, challenge authority, and freely collaborate with like-minded people from other countries.

As a result, according to Kroeber:

[O]ne must entertain severe doubts about the innovative potential of a society that has moved so aggressively in recent years to restrict the free exchange of ideas, which under any definition is surely an indispensable requirement for sustained innovative achievement. The Communist Party has always been relatively repressive of public information flows. But under Xi Jinping it has become much more so, by shutting down independent voices in social media, increasing censorship and blockage of both foreign and domestic websites, and harassing or closing down civil society organizations that receive foreign funding or are suspected of propagating ideas from abroad. It has also launched a campaign to cleanse university textbooks of foreign ideas and to encourage university professors to promote “Chinese” ideas in their teaching.

Nor is there much optimism regarding reversal of China’s economic aggression. An opening for that aggression occurred when China was allowed to join the World Trade Organization, which facilitates trade among member nations. As Kroeber writes:

[T]he most important reforms of the 1980s and 1990s had to do with reorganizing China’s internal markets and gradually allowing the market to determine prices for a host of goods and services that had previously been tightly rationed, under prices set by the state. This meant that Chinese people were able to buy many products that had been unavailable before, so their standard of living rose. But neither Chinese people nor Chinese companies had much extra money to buy imported products or to spend or invest outside of China. After 1997, this changed, dramatically. Some analysts would put the inflection point a few years later: in 2001, when China joined the World Trade Organization (WTO).

China is a member of the WTO despite its deviation from global trade norms. As Kroeber writes:

[S]ome of China’s practices clearly diverge from established global norms of fair competition, and as China has grown, these divergences have become much more problematic. Practices that richer countries could afford to ignore when China was a relatively small economy producing mainly low-technology goods seem far more threatening now that China is the world’s second-biggest economy and Beijing has set ambitious targets for Chinese leadership in high-tech industries such as semiconductors, electric vehicles, and artificial intelligence … Subsidies are clearly an issue, especially the guidance funds being used to promote Made in China 2025, which are thinly disguised subsidy programs. Under WTO rules, subsidies are prohibited for export promotion but permitted to support production for the domestic market. Formally, guidance funds support production for the domestic market. But this seems like a fig leaf given the global market share (that is, export) targets under Made in China 2025 for many of the supported sectors … [D]espite the large role foreign companies have played in China’s development, it is true that China has some of the highest barriers to foreign investment of any major economy, as measured by an Organization for Economic and Cooperation and Development (OECD) index. Some of these restrictions are in the industrial sector: for instance, the requirement that foreign automobile and petrochemicals companies operate through joint ventures with Chinese firms. But the most onerous restrictions on Chinese investment are in services. These include censorship-related rules that make it virtually impossible for most international internet companies to do business in China.

As Pillsbury concludes:

China has prevailed in creating asymmetry in its market access. The Organization for Economic Cooperation and Development has determined that China’s foreign investment laws are the most restrictive among the world’s twenty largest national economies.81 China’s antitrust policy is a prime example. China enacted an anti-monopoly law in 2007, but its SOEs are exempt from its terms. Rather, the law is primarily directed at foreign companies trying to acquire native Chinese businesses.

Kroeber describes China’s efforts to turn the rules of world trade further to it advantage:

China also wants a greater say in how the rules of the international system are set and is setting up alternative arrangements in cases where the international system does not meet its needs. This desire is understandable but deeply problematic. The postwar international order was established and run by industrialized democracies with broadly liberal political systems, capitalist market economies, and a relatively low level of state ownership of assets. It is not easy for such a club to accommodate a large new member that has an illiberal, authoritarian political system (which under Xi Jinping is becoming more authoritarian rather than less) and a state-capitalist economy in which a large share of economic activity, both at home and abroad, is subject to direct state ownership and control. The established powers have thus resisted, to some degree, China’s efforts to gain more influence in global rules-setting and have raised the alarm when China has set up alternative institutions. Alternative institutions sponsored by China include the Shanghai Cooperation Organization (SCO), a political and security grouping founded in 2001 comprising China, Russia, and several Central Asian republics; a free-trade agreement with the Association of Southeast Asian Nations (ASEAN) that spawned a broader free-trade agreement, the Regional Comprehensive Economic Partnership (RCEP); and two multilateral lending institutions: the New Development Bank (originally called the BRICS Bank, with Brazil, Russia, India, and South Africa as the other founding members) and the Asian Infrastructure Investment Bank (AIIB). The impact of these initiatives has been marginal. [AK] China’s ability to alter the global “rules of the game” is constrained by its economy’s dependence on international trade and investment flows to support its technological development. Another deterrent is that many other countries in Asia maintain formal alliances or less formal security arrangements with the United States, which they are reluctant to abandon. China’s attempt to remake global infrastructure via the Belt and Road Initiative has hit capacity constraints and political resistance. So, while China’s political clout is clearly growing, it is still rather less than might be implied by its status as the world’s second biggest economy and biggest trading nation, with a 15 percent share of global GDP.

Pillsbury writes that:

When it comes to trade and growth, America is losing to China, and the reason is simple: China cheats. It steals technology, promotes Chinese monopolies, and unfairly insulates its state-owned companies from foreign competition. For decades, it has broken the rules according to which modern nations trade across national boundaries and treat foreign investment within them … Another tool that the Chinese government uses to deny companies market access is its new National Security Review on Foreign Investment. Unlike its American counterpart, the Committee on Foreign Investment in the United States, China’s law added “economic security” and “social stability” to the list of security concerns and reasons for blocking foreign investors in the market. Foreign companies in China face outright bans, caps on foreign ownership, restrictions on hiring, duplicative testing, and long government approval processes for permits.

China is particularly interested in boosting its own innovations, by fair or foul means. As Kroeber writes:

In some fields, the pace of innovation is retarded by the state’s authoritarian controls on information flows. In sum, China has made impressive technological progress in the past two decades, and its technology firms increasingly occupy leadership positions in their domestic market. Chinese companies produce a substantial and rising share of the value of globalized production chains located in China. The most successful Chinese technology firms are no longer just copycats but are innovators in their own right. A handful of Chinese companies have moved outside their home market and established genuine global leadership positions—most notably Huawei, which is the recognized world pacesetter in 5G mobile technology. But the number of world-leading technology companies from China is far fewer than the number from the United States today … The [Made in China 2025] plan identifies ten high-tech priority sectors, ranging from semiconductors to robotics to new energy technologies and declares that China should assume a global leadership position in most of these industries within one or two decades. And it specifies targets for the share of domestic and global markets in these industries that should be captured by Chinese firms by 2025 or 2035—typically, in the range of 40–80 percent. These ambitions are problematic because they imply that China intends to favor domestic firms over foreign firms in its own market. If true, this would violate the spirit of Beijing’s commitment under WTO to give “national treatment” to foreign companies—that is, to treat foreign companies the same way it would treat domestic ones. Many foreign companies and governments have interpreted Made in China 2025 as a statement of the Chinese government’s intent to discriminate in favor of Chinese firms in order to help them gain a bigger share of the market for high-tech goods. Many fear that it will also be used to justify policies compelling foreign companies to transfer critical technologies to Chinese firms in exchange for access to the China market … A better way of thinking about China’s technological prospects is suggested in the McKinsey Global Institute study, which notes that for a country to move up the technology value chain, four things are needed: large-scale investments, access to large markets, mechanisms for acquiring technology and know-how, and an effective system for encouraging competition and innovation. China clearly has the capacity to make large-scale investments, using both government and private-sector funds. It has a large market of increasingly wealthy and sophisticated consumers. Because of the foreign companies’ extensive participation in manufacturing, China does have good capacity for gaining access to technology and know-how developed elsewhere. Its competition and innovation ecosystem is improving but flawed. While some markets—notably the Internet and electronics manufacturing—are highly competitive, others are distorted by government subsidies, intervention, or policies that limit competition by international companies.

China makes up for the state-control drain on innovation through illegal means. As Pillsbury writes:

Warring States literature and other folklore stories of Chinese cultural heroes have also stressed the importance of stealing ideas and technology from the opponent. Today, Chinese intelligence services routinely steal technology and competitive information, which they provide directly to Chinese corporate leaders.

Kroeber adds:

Protection of intellectual property rights such as patents, trademarks, copyrights, and trade secrets has long been weak in China—as in virtually every other country that has ever tried to catch up with the most technologically advanced nations … China’s treatment of IPR [intellectual property rights] can be criticized on several grounds … China agreed to high-standard protections for IPR when it joined the WTO. So it can legitimately be held to account for its failure to meet its own commitments. Second, China’s IPR violations are on an unusually large scale, and its legal system is unusually weak and subject to political control … [T]hrough both formal measures such as joint venture requirements and informal arm-twisting, the Chinese government has made technology transfer a condition for market access by foreign firms. The Chinese government argues that such transfers are voluntary and not forced, since foreign companies are free not to sign these contracts (at the price of foregoing the profits they hoped to gain by doing business in China). But there is little doubt that China’s efforts to compel technology transfer lie outside acceptable practice in the developed world.

It’s important to recognize that China has explicit laws that require its most significant companies to follow orders from the Chinese Communist Part (CCP). The Democrat Ranking Member on the House select Committee on the Chinese Communist Party, Raja Krishnamoorthi, had this say about Chinese companies at a recent event:

I just want to point out to you why a Chinese company is unlike any other entity that we have seen, at least in my experience “competing,” competing I put in air quotes, in the United States, in providing goods and services. There are two reasons. One is, under the 1993 company law in the people’s Republic of China, every single company has a CCP cell embedded at the top management of the corporation to basically run the company, to inform the management of how to make sure that whatever it does complies with what the CCP wants. The second aspect, which is more recent, is a series of laws that have come forth basically in the form of the national security law, for instance, and others where these companies must be the instrument of the CCP with regard to foreign intelligence collection. So, in the case of Huawei, for instance, because Huawei is a Chinese company, obviously it has a CCP cell embedded in the top management. And because it has reach around the world, it's embedded in various telecommunication systems, it is required to provide a back door into its products for the CCP and its intelligence services should they want to, for instance, eavesdrop or surveil, or gather information, or collect intelligence on their adversaries or anybody.

Under the same Chinese law, Article 177, Chinese companies refuse to comply with financial disclosure rules American law imposes on companies listed on U.S. stock exchanges. As William Barr writes, “To be listed on an exchange, U.S. companies must comply with financial disclosure rules. An appropriate level of regulatory oversight also is needed for foreign companies trading in the U.S. Nevertheless, the Chinese Communist Party has balked at any foreign oversight. In March 2020, China passed Article 177 of its Securities Law, which prohibited Chinese companies from sharing financial information with U.S. regulators absent exemptions from the China Securities Regulatory Commission.”

Chinese nationals here in the U.S. (or their families back in China) could be subject to threats from the Chinese Communist Party if they don’t do what the party wants. As Freedom House reports:

China conducts the most sophisticated, global, and comprehensive campaign of transnational repression in the world. Efforts by the Chinese Communist Party (CCP) to pressure and control the overseas population … spans the full spectrum of tactics: from direct attacks like renditions … to threats from a distance like digital threats, spyware, and coercion by proxy … [T]he sheer breadth and global scale of the campaign is unparalleled … [E]gregious and high-profile cases are only the tip of the iceberg of a much broader system of surveillance, harassment, and intimidation that leaves many overseas Chinese and exile minorities feeling that the CCP is watching them … The parts of the Chinese party-state apparatus involved in transnational repression are as diverse as the targets and tactics of the campaign. The importance of extending the party’s grip on overseas Chinese and ethnic minority exiles originates with the highest echelons of the CCP … [L]eaked speeches from other members of the Politburo high up in the security apparatus are explicit about the priority that should be given to the ‘overseas struggle’ against perceived party enemies. These name specific tactics or goals, like … using diplomatic channels and relevant laws in host countries …

Intellectual property theft is a specific component of China’s economic growth strategy. As Pillsbury writes:

A core component of China’s successful growth strategy is acquiring, often through illegal means, foreign science and technology. China has set up counterfeiting factories employing ten thousand to fifteen thousand people. China’s national industrial policy goals have the effect of encouraging intellectual property theft, and a massive number of Chinese business and government entities engage in this behavior. So dramatic is intellectual property (IP) piracy in China that a software company sold a single program in China and then received thirty million requests for an update. China is at the forefront of IP theft, and regularly hacks into foreign commercial entities and turns over their IP to Chinese businesses, making China the world’s largest perpetrator of IP theft. This allows the Chinese to cheat their way up the technology ladder. Such IP theft represents an estimated loss of $107 billion in additional annual sales and costs 2.1 million jobs in the United States alone … China is not just a source of cyber spying against the United States; it is the primary source. According to some estimates, more than 90 percent of cyber espionage incidents against America originate in China. Chinese hackers regularly infiltrate American businesses and government entities. An abridged list of victims includes Google, Booz Allen Hamilton, AT&T, the U.S. Chamber of Commerce, Visa, MasterCard, and the Departments of Defense, State, Homeland Security, and Energy. Hacking is central to China’s decades-long campaign to steal technologies it can’t invent and intellectual property it can’t create. A report by the Commission on the Theft of American Intellectual Property, led by the former director of national intelligence Dennis Blair and by the former U.S. ambassador to China Jon Huntsman, found that the theft of U.S. intellectual property likely costs the American economy more than $300 billion per year.

A December, 2024 GAO report also noted that “several countries,” including China and Saudi Arabia, have backed patent litigation in the U.S. though the exact extent of this funding is unknown “given the limited available data.” The GAO report also notes that “litigation funding could be used by foreign entities to divert U.S. companies from their core mission by entangling them in costly and distracting legal battles.” The GAO report also states one company noted that in the strategically-important semiconductor industry, a foreign competitor could access sensitive information about the manufacturing process during the patent litigation process and develop their own domestic semiconductor capacity “without the U.S. company’s knowledge.” While litigation funder stakeholders claimed that protective orders and similar court tools would prevent this, there is simply no reason to think that a country engaged in economic espionage would find a protective order a meaningful barrier.

Further, as Pillsbury writes:

A core component of China’s successful growth strategy is acquiring, often through illegal means, foreign science and technology. China has set up counterfeiting factories employing ten thousand to fifteen thousand people. China’s national industrial policy goals have the effect of encouraging intellectual property theft, and a massive number of Chinese business and government entities engage in this behavior. So dramatic is intellectual property (IP) piracy in China that a software company sold a single program in China and then received thirty million requests for an update … China is at the forefront of IP theft, and regularly hacks into foreign commercial entities and turns over their IP to Chinese businesses, making China the world’s largest perpetrator of IP theft. This allows the Chinese to cheat their way up the technology ladder. Such IP theft represents an estimated loss of $107 billion in additional annual sales and costs 2.1 million jobs in the United States alone.

We’re going to be off on summer break all of next week, but in the next essay in this series (starting August 11), we’ll examine some more unique characteristics of China, including its population and geography.