Business Analysis: Why the West misunderstood China

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When the West countries first contacted China in the early 1990s, it was very different from what they see today.

Everyone in China wore Mao suits and cycled everywhere; only senior Chinese CCP officials used cars. But over the next 30 years, thanks to policies aimed at developing the economy and increasing capital investment, China emerged as a global power, with the second-largest economy in the world and burgeoning middle class eager to spend.

One thing hasn’t changed, though: Many Western politicians and business executives still don’t get China. Believing, for example, that political freedom would follow the new economic freedoms, they wrongly assumed that China’s internet would be similar to the freewheeling and often politically disruptive version developed in the West. and believing that China’s economic growth would have to be built on the same foundations as those in the West, many failed to envisage the Chinese state’s continuing role as investor, regulator, and intellectual property owner.

Why do leaders in the West persist in getting China so wrong, both politically and financially? False assumptions are to be blamed. Those assumptions reflect gaps in the leaders’ knowledge about China’s history, culture, and language that encourage them to draw persuasive but deeply flawed analogies between China and other countries.

Assumption 1 – Economics and democracy are 2 sides of the same coin

Many westerners assume that China is on the same development trajectory that Japan, Britain, Germany and France embarked on in the immediate aftermath of WW2 – the only difference being that the Chinese started much later than other Asian economies, such as South Korea and Malaysia, after a 40-year Maoist detour. According to this view, economic growth and increasing prosperity will cause China to move toward a more liberal model for both its economy and its politics, as did those countries.

It’s plausible, but not necessarily true. In a speech in 200 former U.S. President Bill Clinton declared, “By joining the WTO, China is not simply agreeing to import more of our products, it is agreeing to import one of democracy’s most cherished values: economic freedom. When individuals have the power… to realize their dreams, they will demand a greater say.”

This argument overlooks some fundamental differences between China and the United States, Japan, Britain, Germany, and France. Those countries have since 1945 been pluralist democracies with independent judiciaries. As a result, economic growth came in tandem with social progress (through, for example, legislation protecting individual choice and minority rights), which made it easy to imagine that they were two sides of a coin.

In China, however, growth has come in the context of stable cummunist rule, suggesting that democracy and growth are not inevitably mutually dependent. 

In fact, many Chinese believe that the country’s recent economic achievements – large-scale poverty reduction, huge infrastructure investment, and development as a world-class tech innovator – have come about because of, not despite, China’s authoritarian form of government. Its aggressive handling of Covid-19 – in sharp contrast to that of many Western countries with higher death rates and later, less-stringent lockdowns – has, if anything, reinforced that view.

China has also defied predictions that its authoritarianism would inhibit its capacity to innovate. It is a global leader in AI, biotech, and space exploration. Some of its technological successes have been driven by market forces: People wanted to buy goods or communicate more easily, and the likes of Alibaba and Tencent have helped them do just that. But much of the technological progress has come from a highly innovative and well-funded military that has invested heavily in China’s burgeoning new industries. This, of course, mirrors the role of the U.S. defense and intelligence spending in the development of Silicon Valley. But in China the consumer applications have come faster, making more obvious the link between government investment and products and services that benefit individuals. That’s why ordinary Chinese people see Chinese companies such as Alibaba, Huawei, and TikTok as sources of national pride – international vanguards of Chinese success – rather than simply sources of jobs or GDP, as they might be viewed in the West.

The past decade has, if anything, strengthened Chinese leaders’ view that economic reform is possible without liberalizing politics. A major turning point was the financial crisis of 2008, which in Chinese eyes revealed the hollowness of the “Washington consensus” that democratization and economic success were linked. In the years since, China has become an economic titan, a global leader in technology innovation, and a military superpower, all while tightening its authoritarian system of government – and reinforcing a belief that the liberal narrative does not apply to China. That’s why its current president and party general secretary, Xi Jingping, announced in 2017, that the “three critical battles” for China’s development would fall in the areas of reducing financial risk, addressing pollution, and alleviating poverty, he also made it clear that the objective of these reforms was to solidify the system rather than to change it. The truth is that China is not an authoritarian state seeking to become more liberal but an authoritarian state seeking to become more successful – politically as well as economically. 

In much Western analysis the verb most commonly attached to China’s reform is “stalled.” The truth is that political reform in China hasn’t stalled. It continues apace. It’s just not liberal reform. One example is the reinvention in the late 2010s of the Central Commission for Discipline Inspection. Empowered by Xi to deal with the corruption that had become so prevalent early in that decade, the commission can arrest and hold suspects for several months; its decisions cannot be overturned by any other entity in China, not even the supreme court. The commission has succeeded in reducing corruption in large part because it is essentially above the law – something unimaginable in a liberal democracy. These are the reforms China is making – and they need to be understood on their own terms, not simply as a distorted or deficient version of a liberal model.

One reason that many people misread China’s trajectory may be that – particularly in the English-language promotional materials the Chinese use overseas – the country tends to portray itself as a variation on a liberal state, and therefore more trustworthy. It often compares itself to brands with which Westerners are familiar. For example, in making the case for why it should be involved in the UK’s 5G infrastructure rollout, Huawei styled itself the “John Lewis of China,” in reference to the well-known British department store that is regularly ranked as one of the UK’s most trusted brands. China is also often at pains to suggest to foreign governments or investors that it is similar to the West in many aspects – consumer lifestyles, leisure travel, and a high demand for tertiary education. These similarities are real, but they are manifestations of the wealth and personal aspirations of China’s newly affluent middle class, and they in no way negate the very real differences between the political systems of China and the West.

Assumption 2 – Authoritarian political systems can’t be legitimate

Many chinese not only don’t believe that democracy is necessary for economic success but do believe that their form of government is legitimate and effective. Westerner’s failure to appreciate this explains why many still expect China to reduce its role as investor, regulator, and especially intellectual property owner when that role is in fact seen as essential by the Chinese government.

Part of the system’s legitimacy in the eyes of the Chinese is, again, rooted in history: China has often had to fight off invaders and, as is rarely acknowledged in the West, fought essentially alone against Japan from 1937 until 1941, when the U.S. entered World War II. The resulting victory, which for decades the CCP spun as its solo vanquishing of an external enemy, was reinforced by defeat of an internal one (Chiang Kai-shek in 1949), establishing the legitimacy of the party and its authoritarian system.

Seventy years on, many Chinese believe that their political system is now actually more legitimate and effective than the West’s. This is a belief alien to many Western business executives, especially if they’ve had experience with other authoritarian regimes. The critical distinction is that the Chinese system is not only Marxist, it’s Marxist-Leninist. Many Westerners don’t understand what that means or why it matters. A Marxist system is concerned primarily with economic outcomes. That has political implications, of course – for example, that the public ownership of assets is necessary to ensure an equal distribution of wealth – but the economic outcomes are the focus. Leninism, however, is essentially a political doctrine; its primary aim is control. So a Marxist-Leninist system is concerned not only with economic outcomes but also with gaining and maintaining control over the system itself.

 That has huge implications for people seeking to do business in China. If China were concerned only with economic outcomes, it would welcome foreign businesses and investors and, provided they helped deliver economic growth, would treat them as equal partners, agnostic as to who owned the IP or the majority stake in a joint venture. But because this is also a Leninist system, those issues are of critical importance to Chinese leaders, who won’t change their minds about them, however effective or helpful their foreign partners are economically.

This plays out every time a Western company negotiates access to the Chinese market. We have both sat in meetings where business executives, particularly in the technology and pharmaceutical sectors, expressed surprise at China’s insistence that they transfer ownership of their IP to a Chinese company. Some have expressed optimism that China’s need for control will lessen after they’ve proved their worth as partners. That, however, is not likely, precisely because in China’s particular brand of authoritarianism, control is key.

A Leninist approach to selecting future leaders is also a way the CCP has maintained its legitimacy, because to many ordinary Chinese, this approach produces relatively competent leaders: They are chosen by the CCP and progress through the system by successfully running first a town and then a province; only after that do they serve on the Polit-buro. You can’t become a senior leader in China without having proved your worth as a manager. China’s leaders argue that its essentially Leninist rule book makes Chinese politics far less arbitrary or nepotistic than those of many other, notably Western, countries (even though the system has its share of back-scratching and opaque decision-making).

China uses its particular authoritarian model – and its presumed legitimacy – to build trust with its population in ways that would be considered highly intrusive in a liberal democracy. The city of Rongcheng, for example, uses big data to give people individualized “social credit scores.” These are used to reward or punish citizens according to their political and financial virtues or vices. The benefits are both financial and social. Those with low social-credit scores may find themselves prevented from buying an airline ticket or getting a date on an app. For liberals, this is an appalling prospect; but for many ordinary people in China, it’s a perfectly reasonable part of the social contract between the individual and the state.

There are other assumptions that Westerners make towards China, which are absurdly wrong. We will be talking about those assumptions in the following articles. Stay tuned.


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