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Investor dread at China�s left turn: Overseas firms fear a policy shift. (The Sunday Times - Michael Sheridan)
October 29, 2006 8:08 PM
Copyright The Sunday Times
Shanghai
CHINA has taken a turn to the left just as foreign investors are lining up to place their bets on a capitalist future by buying shares in its biggest bank.
A world record $19 billion (£10 billion) was raised in the biggest flotation ever when the Industrial and Commercial Bank of China sold shares to investors ahead of its debut on the Hong Kong and Shanghai exchanges last week.
The state will retain majority control over the bank, making its partial privatisation a model for the way China’s new rulers see the future.
Significant new policies mean a decisive shift back towards state intervention. This is likely to have important implications for foreign investors and manufacturers and may lead to higher wage costs, stronger unions and stricter regulation.
Denise Yam at Morgan Stanley in Hong Kong said: “Administrative controls on lending and capital expenditure in specific industries, as well as stricter rules on land use, appear to have brought down gains in investment.”
She noted that China’s policymakers “all reiterated the need to maintain and even strengthen controls on the economy”.
Two new documents from the Chinese government, disclosed officially but little noticed abroad, left no doubt that “leftist” factions have won the argument to rebalance economic policy after two decades of a dash for growth at any cost.
Even the state news agency, Xinhua, said the new policies responded to “rampant pollution, growing wealth disparity and complaints about the high costs of education, housing and medical services”.
Yan Shuhan, director of “scientific socialism” at the Central Party School, complained to Xinhua that the richest 10% in China controlled more than 40% of the wealth and the poorest 10% had less than 2%.
Reform has lifted hundreds of millions of Chinese out of poverty but now the party’s leaders want to tilt the scales towards equality. The consequences for international capital, labour, trade and investment are only just beginning to be felt.
But they are certain to be on a global scale — almost everything is in China, which has just reported a trade surplus of £58 billion in the first nine months of this year and said that its economy had grown at a rate of 10.7% over the same period.
Among the effects already felt by business are tighter controls on foreign investment, pressure to raise wages, official demands for union recognition in every foreign enterprise, state curbs to cool property prices, restrictions on foreign property ownership and a heavier hand of regulation over commercial activity.
Tax breaks for foreign investors could come under scrutiny next, while the government is already phasing out subsidies for exporters.
“In short,” commented a Chinese financial journalist in Shanghai, “the cost of doing business is going up.”
The reasons range from the Communist party’s fear of rising discontent to nationalism and the renaissance of “New Left” theoreticians. “China has now come to a critical moment in building a comprehensively well-off society,” said vice-premier Wu Yi, a veteran advocate of “reform and opening up”.
The new generation of leaders has reacted to riots and protests with stern repression — but it also sees the need for pre-emptive concessions to stave off challenges.
“If China’s reform doesn’t emphasise socialism, justice and social responsibility, it will fail,” said Liu Guoguang, a professor at Beijing University. “Government must be able to play an intervening role. We should not blindly worship the market and we cannot hand over all the economy to the market.”
All the evidence is that the two men driving policy, president Hu Jintao and premier Wen Jiabao, have listened to these arguments, which are laid out in the two government documents.
They will make uncomfortable reading for some global businesses and investors, such as manufacturers sourcing ultra-cheap goods in Chinese factories, who have assumed there will always be a huge compliant workforce and suppliers willing to tolerate razor-thin profit margins.
But other companies stand to gain from opportunities presented by a more prosperous workforce as the domestic appetite grows for products and services — insurance, financial services, healthcare and human- resources providers could all benefit.
“Support given to the domestic sector, such as raising minimum wages in cities and handing subsidies and support to rural households, have given a boost to consumer demand,” said Morgan Stanley’s Yam.
One of the government documents summarised the proceedings at an executive committee of the State Council headed by Wen Jiabao. It promised aid for farmers and said the state would intervene to stabilise grain and fertiliser prices.
It ordered local authorities to make sure private employers paid migrant workers on time. And it commanded them to curb soaring property prices by imposing controls over land supply, bank lending and market access.
Anger is boiling in Chinese cities over housing costs — speculators and corrupt officials made fortunes while an emerging middle class has been priced out of ownership.
This led to the biggest purge in recent history when Hu Jintao sacked Shanghai’s party chief last month and used the housing crisis to rout the faction most closely associated with freewheeling capitalism.
“Market order should be further rectified,” said vice-premier Zeng Peiyan, announcing a fresh effort to impose regulations on property last week.
The second document, which emerged from a meeting of the Communist party’s central committee, enshrined the theory that unites all these regulatory moves in a coherent doctrine.
This is Hu Jintao’s pursuit of a “harmonious society” in which grievances are smoothed out under the party’s guidance.
The document called for “co-ordinated development, social equity and justice”— a far cry from the great reformer Deng Xiaoping’s reported declaration three decades ago that “to get rich is glorious”.
The new leaders called for “transforming the economic growth pattern” and the premier stated unequivocally that the eradication of poverty was a top priority.
Since 150m Chinese exist on less than $1 a day and 200m migrants have surged into the country’s seething cities, the regime has a lot on its hands. It has told officials to prepare a tough new labour law to level unequal pay, make it harder to sack workers, curb short-term contracts, enforce collective bargaining and raise workplace standards.
The official All-China Federation of Trade Unions, which has already won access to workers at the American retailer Wal-Mart, has called for all foreign companies to recognise Chinese unions. Loud protests from some multinationals are unlikely to win friends or compromises.
In the present climate, many leftists and nationalists are ready to think what seems unthinkable to foreign investors. “I do not mean that we should protect our old industry, but I do mean that if China’s economic lifelines fall into foreigners’ hands, our society will not be able to endure,” wrote Yang Fan, a well-known professor.
Commenting on a popular website, an economist named Jiang Hai said four things struck him about China’s shift to the left on his return after three years abroad.
First, he said dissatisfied young people were leaning to the left “because they have no memories of starvation in Mao’s time”.
Second, ordinary citizens had turned left because they were sick of the bureaucratic corruption that had flourished under reform.
Third, Jiang argued, the barons of state-owned industries were hanging on to their power and trying to stop free-market reform.
And, finally, he said, Hu Jintao and his comrades were afraid of a complicated modern economy but familiar with orthodox ideology.
However, there will be no long march back to socialism. As the official China Daily noted: “The fact that the Chinese Communist party now names ‘building a harmonious society’ as its basic guiding principle suggests that it has abandoned the concept of ‘class struggle’.” And that, surely, must be good for business.
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