How to Determine the Critical Difference Between ‘Markets’ and ‘Reforms’ in China

Chief executives may be forgiven for being confused about what is happening between the U.S. and Chinese governments when it comes to use of the terms “markets” and “reforms.” As a recent article in the Wall Street Journal suggests, President Obama’s administration is expecting that Chinese President Xi Jinping will make commitments to more market-oriented reforms when he visits Washington this month.

However, as an old China hand, I can report that the two sides are talking past each other. Neither understands what the other is saying, as evidenced by the Chinese government’s treatment of some 200 people it arrested for their role in the rapid deep decline in the Shanghai stock market. If the Chinese leadership believed in “markets,” as we in the West understand them, they would have let the market find its own level. But in fact the market was a creation of the Chinese government. They built it, encouraged individual investors to borrow against their homes to invest in it, and so they had to defend it against any naysayers.

When the Chinese say they want to make markets a “decisive factor” in their economy, what they mean is that they want to use market forces to support the goals of the Communist Party. It’s much the same with their currency, the yuan. They want it to respond to market forces and become an international reserve currency–up until the moment that it threatens their goal of stabilizing exports. Then they act and act suddenly to reverse market forces.

Reform is another tricky word. The Chinese are doing what they consider reforms—they are trying to move from being dependent on cheap labor and manufactured exports, which causes their incredible pollution. They want to move to a vision of a society where consumers spend more, services play a greater role in their economy, and they move up to higher technologies that don’t pollute as much. That’s what they mean by reform.

They don’t believe reform means imitating Western practices. One key test of their intentions will be when they announce new policies regarding state-owned enterprises later this month. My betting is that they will insist that state-owned enterprises will remain captives of the Party and the State. All the body language emanating from President Xi is that he believes in control, not anything we in the West regard as liberalization. CEOs should base their China strategies on this central recognition and not get caught up in the wishful thinking floating out of Washington.

Holstein was based in Hong Kong and Beijing for United Press International from 1979 to 1982. His most recent book is entitled, “Has The American Media Misjudged Misjudged China?” For more of his work visit www.williamjholstein.com.