China uses regulation to protect state-owned companies and increase authoritarian rule.
China joined the World Trade Organization (WTO) 10 years ago this month, pledging to uphold the rules and practices of open market economies. By some measures, China has met its WTO commitments. China today bears little resemblance to the Communist command economy of its past. It does not restrict most foreign direct investment (FDI) as did South Korea and Japan during a similar stage of development.
Regulatory developments across the Chinese economy, however, have put into question whether China’s leaders ever had any intention to fully comply with their WTO commitments, even as they embraced globalization. Instead, they have pursued market reforms that promote the development of strategic industries, protect national champions, and retain authoritarian control. This is starkly evident when we examine the Chinese telecommunications industry, a testament both to the benefits of market liberalization and the power of the Chinese regulatory state.
Throughout the 1990s many of the world’s telecommunications equipment makers and global service providers operated in China and enjoyed significant domestic market share. But this embrace of market competition abruptly halted in 1998. After foreign technology and knowledge transfers helped to modernize telecommunications networks, central leaders forced the divestment of FDI in basic telecommunications services in order to retain ownership and management in state’s hands.
Surprisingly few stood up to call China on its double play; not the least when China successfully negotiated with the United States and the European Union to enter the WTO in 2001. The Chinese government promised to liberalize nearly all market segments of telecommunications equipment, and to approve up to 49 and 50 percent of FDI in telecommunications basic and value-added services, respectively, after an initial phase-in period.
Yet, today foreign telecommunications operators do not operate independently in China and hold less than 10 percent stakes in the internationally listed subsidiaries of Chinese state-owned operators. The managers of these carriers are centrally appointed and despite China’s WTO commitments to create an independent regulator, the Communist leadership periodically restructures the carriers to manage competition, resolve bureaucratic disputes, and achieve strategic goals, such as the adoption of indigenous networking technology.
On the heels of China’s 10th anniversary accession to the WTO in early November, the government announced an investigation of China Telecom and China Unicom, two of its state-owned carriers, for monopolistic practices in national broadband pricing. This well-timed move to “order competition,” which follows carrier restructuring in 2008 to manage competition and implement TD-SCDMA (China’s homegrown technology), is more about resolving interdepartmental disputes between incumbents and new entrants than a genuine attempt to ensure a truly level playing field or decrease tariffs for consumers.
Additionally, export-credit financing and state-owned banks routinely help support the global purchase of telecommunications equipment produced by Chinese companies, such as Huawei and ZTE. In telecommunications value-added services, new regulations since the mid-2000s encroach on the business scope of foreign companies and enforce previously unobserved licensure rules, such as a joint venture requirement. These rules are designed to manage the business of information dissemination and promote the economic interests of an increasingly politically powerful and protectionist domestic industry.
Both Google and Yahoo have already become victims of these new rules. In 2010, citing sophisticated cyber attacks and restrictions on Internet free speech, Google relegated itself to offering only limited services in mainland China and directed users to its uncensored Hong Kong-based Chinese language search engine. In 2011, Yahoo’s joint venture partner Alibaba Group unilaterally spun off the most lucrative part of their collaboration, justifying the move on the grounds that it was simply complying with a new government rule stipulating that only Chinese-owned companies could be licensed to engage in electronic-payment.
Ten years after joining the WTO, China is more liberal and global. At the same time, the Chinese government is in firmer control of developments in the industries and issue areas that matter the most, including telecommunications, renewable energy, financial services, and automobiles. By playing by its own rules, China has managed to defy the traditional tradeoffs between market competition and state intervention, and between foreign ownership and government control.
As the economies around the world assess the effects of neoliberalism – synonymous to deregulated markets and privatization – China has embraced a mixed economy unlike no other we have seen before. Instead of turning China into a liberal market economy, with all its attendant problems, WTO membership has allowed China to achieve steady economic growth in the shadow of the global debt and financial crises of the 2000s. The Chinese leadership has pursued state priorities, including the modernization and management of information infrastructure, hailing free trade yet not complying by its WTO commitments. What the Chinese experience has made clear is that in the age of globalization, it is very possible to have freer markets and more authoritarian rule.