‘State Capitalism’ and Murdoch’s retreat from China

Ian Bremmer, political scientist and president of the political risk consulting firm Eurasia Group, defines emerging market as ‘a country where politics matters at least as much as economics to the market.’ His new book, The End of the Free Market, singles out states such as China and Russia which practice ‘state capitalism’, a system in which governments use markets to create wealth that can be directed for political ends. The ultimate motive is not economic but political, i.e. ‘maximizing the state’s power and the leadership’s chances of survival.’

This week, Rupert Murdoch’s News Corp announced that it would sell a controlling stake in three Chinese TV channels to a fund backed by China’s state-owned Shanghai Media Group and China Development Bank. This marked a major retreat by the media giant from China after years of difficulties. As to why Mr Murdoch’s love affair with China ended, the Financial Times traced the answer to his speech in 1993 after taking over British Sky Broadcasting:

Advances in the technology of telecommunications have proved an unambiguous threat to totalitarian regimes everywhere. Fax machines enable dissidents to bypass state-controlled print media. Direct-dial telephony makes it difficult for a state to control interpersonal voice communications. And satellite broadcasting makes it possible for information-hungry residents of many closed societies to bypass state-controlled television channels.

Wang Dan: foreign businesses are misjudging China

As Murdoch would have realized by now, in China, politics matters as much as economics, and the rules are very different from those found in a free market economy. Failure to recognize this would lead to costly mistakes. Wang Dan, a leader of the Chinese democracy movement, made three points regarding Murdoch’s misjudgements:

First, China’s opening is policy-directed. In other words, it is a limited opening. In particular, control over speech and press is the government’s bottom line. It is vital for an authoritarian regime to survive. The Chinese Communist Party (CCP) is very clear about that. In China, control over thinking reaches virtually every aspect of life. This includes such fields as entertainment, fitness and cosmetology where foreign capitals think that they can have a free hand. If the CCP detects anything that is not under its control, it will not hesitate to interfere. The recent ‘anti-vulgarity campaign’ is a good example. Under this logic, how can foreign capitals occupy a place in China’s media market? For all its efforts, News Corp’s two-decades-long venture in China ended in failure. This shows that without any political changes, China’s media market will be closed for foreigners.

Second, even if we don’t consider political factors, foreign businesses will still face strong competition from local interest groups. The private equity fund which acquires News Corp’s channels is backed by Chinese groups with strong financial and media background. In fields like infrastructure construction and finance, capitals, technologies and management are important. However, media is different. It requires cultural background, guanxi and familiarity with local conditions. On these, foreign companies cannot compete with local groups. In other words, ‘one with great power cannot defeat a local villain.’

Third, many foreign companies have misconceptions about China’s reform and opening. Seeing that China is becoming more market-oriented, they think that the country can be judged by the standards of a market economy. In fact, they fail to see other aspects of China which have changed very little. China’s emphasis on political stability has undermined the development of institutional guarantees. Changes in the general political environment, policies or even key leaders can have massive effects on the market. This is especially so for the media. Simply said, this is an uncertain market. I believe that Murdoch and News Corp must have the same feeling.

In many ways, China now seems to be more hostile toward western multinational corporations. This is a theme expanded upon in The Death of the China lobby? by Daniel W. Drezner in Foreign Policy. Many foreign businesses worry that, after three decades of strong economic growth, China believes that it can now afford to be less welcoming toward foreign investments. This is shown by China’s employment of policies of ignoring intellectual property rights, forced technology transfer and government procurement skewed towards domestic companies. On the other hand, by alienating western companies, China risks weakening the strong pro-China lobbies led by these corporations in Washington and Brussels.

He Qingling: western multinationals will eventually kowtow to China

However, He Qingling, a Chinese author and economist who is critical of the Chinese government, thinks that foreign businesses would eventually kowtow to the CCP because of their profit calculations. Below are a few extracts from her opinion piece in BBC Chinese:

Over the years, foreign businesses have made a lot of investments in China. Now is the time to ripe the profits. Take the examples of Google, Goldman Sachs and General Electric, the three representative US companies in IT, finance and industry. After the announced high-profile retreat from China, Google is now making efforts to get permission to operate in China, as it hurts too much to abandon a market it has nurtured for years. Goldman Sachs, which has long been appeasing the CCP, also keeps quiet on the accusation of its ‘sucking up money everywhere in China’ by the Chinese media. As for General Electric, although its CEO Jeffrey R. Immelt has recently criticized Chinese foreign policies, it is virtually impossible for it to retreat from China.

According to my years of observation, Beijing has mastered the way of dealing with foreign corporations. By employing a ‘divide and rule’ strategy and showing the cake of the Chinese market in front of them, foreign businesses will neither form an alliance in negotiating with China nor pull out from the country. As long as they can stay, the Chinese government does not need to worry that they will not lobby for it in their home countries.

China is a country which worships power to the extreme. There is no exception to any single group. In front of this power, domestic companies are like eggs against a giant stone. As the main force of the pro-China lobbies, multinational corporations are no more than iron-skinned eggs. Their difference with domestic groups is that, when they collide with the Chinese Dragon, they can still preserve the yolk, although their iron skin will inevitably be scarred.