Government Report Shows More China Government Control of Markets

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Anyone still fantasizing about China becoming a free market economy needs to read the recently released 2014 report by the U.S.-China Economic and Security Review Commission.

Remember the promises of China's entry into WTO.  Clinton, Bush, the pundits, party leaders all predicted that our trade balance would improve, China would become more responsible on the global stage, the country would abandon communism for the free market, and American's would benefit.  Instead, we enabled more mercantilism, eroded our economy and funded the military growth of a geo-political rival.

China's communist government that owns (or effectively controls the management of) the majority of its industries.

Rather than moving forward with the broad reform agenda proposed by General Secretary Xi when he first took office a year ago—by allowing market forces and financial liberalization to play a ‘‘decisive role’’ in the economy—the government continued to subsidize favored industries and maintain an artificially low value of the renminbi in order to boost exports and inhibit imports. The predictable result: Chinese government spending rose 25 percent in the first half of 2014 while the value of the renminbi tumbled and exports to the United States continued to grow. Meanwhile, the trade imbalance headed toward another record figure for 2014, likely surpassing last year’s record $318.7 billion U.S. trade deficit in goods with China.

This government report details how the Chinese government is using massive subsidies to supercharge its industries, "such as steel, cement, glass, construction, solar panels, and shipbuilding" to harm international competitors.

By way of our trade deficit, America is building the Chinese military to the point where it causes significant danger to U.S. and world interests.

During 2014, China’s military modernization continued at a fast pace, creating additional challenges for the United States and its allies, and China’s neighbors. Most notably, China conducted its first test of a new hypersonic missile vehicle, which could enable China to conduct kinetic strikes anywhere in the world within minutes to hours, and performed its second flight test of a new road-mobile intercontinental missile that will be able to strike the entire continental United States and could carry up to 10 independently maneuverable warheads. Meanwhile, the People’s Liberation Army (PLA) increased its inventory of modern submarines, surface ships, and combat aircraft while upgrading its legacy platforms with new weapon systems.

In the maritime domain, the PLA Navy continued its transformation from a coastal force into a technologically advanced navy capable of projecting power throughout the Asia Pacific. Since the Commission’s 2013 Annual Report, the PLA Navy has expanded its presence in the East and South China Seas and for the first time begun combat patrols in the Indian Ocean. Additionally, China’s first aircraft carrier in January conducted its first long-distance training deployment. The nature of the deployment suggests China is experimenting with multiple types of carrier formations, including those resembling U.S. combined expeditionary groups.

China’s growing confidence in its military capabilities has emboldened Beijing to aggressively advance its territorial ambitions. Since approximately 2009, China has increasingly used coercive military and economic measures to assert control over its territorial claims in the East and South China Seas. Since late 2013, however, China has been more willing to advance its sovereignty claims without seeking to justify its actions as responses to perceived provocations by rival claimants. The three most significant manifestations of this new, even more assertive turn are China’s establishment of an Air Defense Identification Zone in the East China Sea; China’s relocation of an oil rig to waters disputed by Vietnam in the South China Sea; and China’s ongoing attempts to prevent the Philippines from resupplying its military outpost at Second Thomas Shoal in the South China Sea.

U.S. multinationals are finding that all is not well.

[F]oreign companies investing in China faced increased regulatory burdens and barriers to business dealings that do not similarly encumber China’s highly favored ‘‘national
champions.’’ China’s anti-monopoly laws, in particular, appear to be focused on disadvantaging foreign invested companies rather than being applied equitably.

And then there is the Foreign Direct Investment issue:

For the first time, in 2014, foreign direct investment (FDI) from China into the United States exceeded FDI from the United States to China. While this may spur job growth in the United States, investment by Chinese state-owned or state-controlled companies in the United States risks creating a hybrid economy where privately owned U.S.-based business must compete with Chinese state-financed companies motivated more by Beijing’s policy directives than profit. Moreover, there are potential national security concerns associated
with investments by Chinese state-owned or state-controlled companies in U.S. critical infrastructure.

The Commission's executive summary is here.  The full report can be read here.

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