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Does China Have a "New Economic Policy" for Dealing With Foreign-Owned Enterprises
Raymond Richman, 6/21/2012

Dr. Derek Scissors  of the Heritage Foundation in testimony before the U.S-China Economic and Security Review Commission in March, 2011 described the fall and subsequent rise of Chinese state-owned enterprises. From 1993-2001, the state sector shrank but from 2008 it grew and currently predominates over the private sector. What is the future of the private sector in China?  We believe there is a good likelihood that all foreign enterprises in China will eventually be nationalized.

The Chinese Communist strategy can be divined by studying  Lenin’s New Economic Policy (NEP), which lasted from March, 1921 to 1929. It became necessary because of the shortages of food that reigned as a result of the policy of forcing farmers to “sell” all their product to the government at a price that gave farmers no incentive to produce more than they could consume. The new policy permitted peasants to sell their products on the open market after meeting some obligatory transfers to the government. Its success led to the denationalization of small-scale industry, and  even permitted foreign companies to build factories. Lenin insisted that the NEP had to be pursued "seriously and for a long time." Under NEP the Soviet economy revived reaching in the middle 1920s to its pre-war levels or close to it. A capitalist class was emerging, creating demands by ideological communists for an end to NEP. It was ended by Stalin in 1929, with tragic consequences for the independent farmers and ultimately for the Soviet Union itself.

If the orthodox communists in China behave similarly, China may have a similar experience. China has clearly adopted its own NEP which, if it learns from Russia’s experience, it will pursue “seriously and for a long time” at least until it surpasses its major competitor for world supremacy, the USA.

As for capital, every aspect is dominated by the state. All large financial institutions are state-owned, the People’s Bank assigns loan quotas every year, and, within these quotas, lending is directed according to state priorities. Interest rates are also controlled, and last year real borrowing costs were barely above zero.

The naivete of Democratic and Republican leaders respecting the political goals  of communist and other totalitarian groups is illustrated by Pres. George H.W. Bush  and congressional leaders whose community input requirement in the Community Reinvestment Act of 1977 ordered open hearings. This was the greatest gift to organizations and neighborhood groups who used the hearings to blackmail large banks. ACORN became a mortgage agent of the banks, making millions in the process. So rich did it become that the brother of the founder was able to embezzle over a million dollars. He was never prosecuted which has never been explained.  The funds were returned by a rich supporter whose identity has never been revealed.  The CRA, unbelievably, still exists with a bigger bureaucracy than ever..

Ben Bernanke who, as Chairman of the Federal Reserve Board, is the chief administrator of the CRA recently commended the performance of the non-governmental agencies who assisted in the implementation the Act. How naïve!

We raise these issues to call your attention to the fact that the people in control of the government in democratic regimes can have a powerful negative effect on the economy. Who knows how well the USSR might have grown had NEP been continued by Stalin? Would the USSR have grown as China has grown? Ideology may bring the Chinese “miracle” to an early end. It certainly is possible.

Socialism can succeed in theory if it is guided by free market rules. Let all state enterprises face competition from other state enterprises and cooperatives. There is no secret to the efficiency of a market economy. It is competition from other enterprises and firms producing competitive products that compete for the consumer dollar. Does it require a private profit motive? It certainly requires some incentives to boards and managers to make “profits”. In a private economy, rewards are in the form of increased incomes and wealth. Is it possible for socialists to create other incentives to avoid creating vast disparities in income and wealth? We doubt it because our profit and income incentives have proven effective in achieving growth. And also because demagogues can be Pied Pipers as the wasteful expenditures trying to reduce carbon emissions show.

Reason and rationality are in short supply everywhere.