Communist China fails to assure foreign investors

In early November, U.S. mutual fund giant Vanguard finalized its exit from the Chinese market. Vanguard is the latest foreign company to pull out of China, where the world’s second largest economy is struggling to attract foreign companies and investments, amid myriad economic challenges, including a structural slowdown and rising geopolitical tensions. 

Importantly, foreign companies and investors have also grown wary of increasing risks in Communist China. Under a totalitarian regime, dictator Xi Jinping has exacerbated the return of the rule of man. Without a clear and transparent rule of law, doing business in China has become increasingly untenable. There are now rising scrutiny of foreign companies, raids, exit bans and arbitrary arrests.

According to official government data, foreign direct investment (FDI) into China in the third quarter has slipped into the red for the first time since 1998. In addition to dwindling new investment, existing foreign companies are also taking their money out of the country, instead of re-investing in their local operations. Official data are often manipulated to show the regime in a positive light or to minimize a negative situation, so the flight of FDI may be much higher than reported.

Thus far, communist officials have failed to assure investors and stem capital outflows. For example, the latest edition of China International Import Expo, which opened on November 5, an annual event launched by Xi in 2018 to portray China as an open market and to improve trade ties, has fallen flat because by now, most of the world realized Xi has prioritized political control over the economy. 

In other words, Xi’s relationship with the business community is no longer guided by the principles of economic rationality, but rather by his yearning for political power. Xi is willing to subject the economy as his pawn in his quest to consolidate his power domestically, and to project his power on the global stage, with the aim of dismantling the rules-based international order, and overtaking the U.S. as the number one superpower.

The European Union Chamber of Commerce in China, in a statement on November 3, criticized the event. The statement said that “European businesses are becoming disillusioned as symbolic gestures take the place of tangible results needed to restore business confidence.” Carlo D’Andrea, vice president of the chamber, went on to say the event “has proven to be largely smoke and mirrors so far.” 

According to a September survey by the American Chamber of Commerce in Shanghai, only 52 percent of respondents were optimistic about their five-year business outlook, the lowest level since the survey began in 1999.

Fear of arbitrary arrest under the new anti-spying law

The Chinese Communist Party (CCP) has absolute control over law enforcement and the judicial system, and often, it uses both to maintain leverage over foreigners and foreign governments to force them to conform to CCP ideology and politics. 

In July, a sweeping new anti-espionage law came into effect, giving arbitrary discretion to the government to frame anyone as “spies”. This new law allows for all information exchanges to be regarded as potential espionage. The government can now deem any documents, data, statistics and materials as state secrets and to detain and prosecute foreign nationals for espionage, which under Chinese law, will be sentenced to life in prison or execution in extreme cases.

This broadly written counterespionage law, which is counterproductive and will further jeopardize the country’s depressed economy, has sent a chill through the foreign business community. There is no doubt this law and China’s practice of detaining foreign nationals for long periods without a clear explanation, will increase the risks of doing business in China. 

Now, more than ever, foreigners are forced to live with the grim knowledge that they could be detained by the authorities at any time for any reason. Even pro-CCP foreigners, foreign companies and governments willing to toe party line are in danger of being swept up in all the political landmines and shifting winds of change. 

The failed ideology of communism

Xi Jinping has pushed for common prosperity, one of his signature initiatives, and said it is an “essential requirement of socialism and a key feature of Chinese-style modernization”, and defined it as affluence and prosperity for all, rather than the few.

Communism has consistently proven to be an ineffective system unable to provide prosperity for its citizens. Its focus on egalitarian distribution of resources and abolishment of private property may seem appealing in theory, but history has shown that these principles overlook fundamental aspects of human nature, resulting in economic stagnation, lack of personal incentives, and limited individual freedom. 

One of the major problems with communism lies in its disregard for the power of economic incentives. By suppressing individual motivations, it eliminates the driving force behind innovation, creativity and hard work. 

In a communist system, where everyone is entitled to an equal share, there is no incentive to excel or take risks. This lack of motivation stifles productivity, hampers technological advancements, and ultimately leads to economic stagnation.

Communism incorrectly assumes that humans are naturally altruistic and will work zealously for the greater good of society. However, history has repeatedly demonstrated that this assumption is flawed. 

While acts of selflessness do exist, individuals are primarily driven by their self-interests. Communism fails to acknowledge these fundamental characteristics, leading to a mismatch between theory and practice. The system also neglects the fact that humans possess different skills, abilities and levels of ambition, which cannot be successfully homogenized under a communist regime.

One of the most glaring drawbacks of communism is the erosion of individual freedom. It places control in the hands of the party, limiting personal autonomy and infringing upon basic rights. 

Under communist rule, citizens are subject to strict regulations, censorship and surveillance, which impede personal development and stifles creativity. Moreover, the lack of economic freedom denies individuals the ability to make choices that align with their preferences and aspirations.

The free market, with its system of supply and demand, efficiently allocates resources based on consumers’ needs and preferences. In contrast, communism eliminates market mechanisms, leading to the misallocation of resources, excessive bureaucracy, and inefficiency. 

Without the dynamic balance of supply and demand, communist countries struggle to meet the diverse needs of their citizens. This often results in chronic shortages, rationing and a decrease in overall living standards.

Communism’s inherent disregard for private property rights leads to the misuse and degradation of resources. When no individual owns and has responsibility over a particular resource, it experiences the tragedy of the commons. In the absence of incentives for preservation and development, resources are often exploited, overused or neglected, ultimately resulting in environmental degradation and a scarcity of vital resources needed for prosperity.

Communist societies are characterized by centrally planned economies, where the party controls all means of production. This top-down approach concentrates power in the hands of a few, resulting in a lack of economic freedom and opportunity. The absence of competition and the inability to respond to market demands ultimately hinder economic growth. Without market mechanisms, pricing signals and competition, resource allocation becomes inefficient and wasteful.

Photo credit: iStock/ AlexLMX

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