Selling China: Foreign Direct Investment during the Reform Era (review)

In Selling China Huang Yasheng argues that the vast inflow of foreign direct investment (FDI) since 1992 is evidence of significant flaws in the Chinese economy and that the economy has reached a dangerously high level of "FDI dependency," even though domestic savings rates remain high (over 40 percent). China's "hunger" for foreign capital (which accounted for 13 percent of gross capital formation during the 1990s) derives, he asserts, from two institutional distortions. First, a "political pecking order" steers resources, technology, and capital to the inefficient state sector while starving the more efficient private sector. Second, regional fragmentation of the economy hampers the movement of domestic capital among localities and prevents Chinese firms from expanding into other regions. The inflow of FDI has partially compensated for these problems, but at a price. Foreign capital has flowed largely to small private and semi-private enterprises (enterprises that are often nominally collectively owned but in fact merely wear a "red hat" for political reasons) engaged in labor-intensive production of "traditional" Chinese exports. Because these enterprises normally find themselves in weak bargaining positions, they generally must trade equity for relatively small amounts of capital, with the result that China's ineffective domestic capital market has forced Chinese entrepreneurs to "sell" out to foreign control. By 1995, the process of foreign takeover had progressed to the point that foreign invested enterprises (FIEs) accounted for a third of China's total exports and over half of its exports of industrial goods.

Despite its privileged position in China's political pecking order, the state sector has also fallen victim to foreign buyouts. Easy access to state bank funds combined with a deeply set institutional bias toward technological upgrading and large-scale production led state-owned enterprises (SOEs) to invest heavily in new assets during the 1980s. Inefficiency and a failure to adapt to emerging market forces, however, caused SOE profits to contract. As profits fell, enterprises continued to borrow heavily from the state-owned banks, thus causing their debt-service requirements to mount and further squeeze profits. By the time FDI regulations were liberalized in the wake of Deng Xiaoping's 1992 Southern Tour, an increasingly large percentage of SOEs were on the brink of insolvency and became, according to Huang, attractive takeover objects. Unwilling to allow extensive privatization, the Chinese Communist Party (CCP) continued to bar acquisitions by more efficient enterprises in the nonstate sector and thereby forced SOEs to enter into "joint ventures" with foreign investors wherein the Chinese side de facto sold their assets in return for short-term capital bailouts and traded operational control for a share of future profits. Many SOEs thus became holding companies, while their operating subsidies came under foreign control. This resulted, Huang concludes, in a large-scale program of informal privatization. But informal privatization came at a high price to the Chinese economy, in his view, because the best corporations and their assets were frequently sold at fire-sale prices to foreigners while Chinese entrepreneurs were denied the opportunity to bid for these valuable economic resources.

Despite his focus on FDI and China's domestic capital market, in the end Huang's book is about economic nationalism. In the name of preserving socialism by rejecting privatization, he argues, the Chinese Communist Party has sold a substantial portion of the Chinese economy to foreigners. Huang in fact evokes the image of the Opium War in his conclusion, suggesting that China might be headed for another "century of humiliation" at the hands of foreigners (p. 320). He thus suggests that China's "reformers" were not so much "selling" China in the sense of selling it as an attractive investment; they were "selling out" China in that their desire to hold the political line led them to sell off the commanding heights of the Chinese economy—and not just of the state sector but also of the nonstate sector.

For Huang the solution...