Will China’s Collectivist Capitalism Beat America’s Socialist Capitalism?

This weekend’s reading comes from my colleague Gary Alexander, and draws from his tour of China 25 years ago with a group of investors.  He reflects on what he saw then to what we are witnessing now with China‘s emergence.  This is a thoughtful weekend read that may shed some light on policy initiatives and the market’s response.

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China’s Adoption Of Capitalism

Capitalism is the only system that works – it’s just a matter of which type of capitalism works better, the  “Asian” model of authoritarian leadership and energetic, unfettered (less regulated) capitalism, or the Western model with regulation and democratic political control. China exemplifies the first, America the second, but both economies are clearly a mixture of socialism and capitalism – or “mixed” economies.

China will continue to be our most significant global competitor, but they had to adopt capitalism to reach the #2 slot. They learned the hard way that socialism doesn’t work. In 1978 (Data from this section comes from Foreign Affairs, Jan/Feb 2020 issue, “The Future of Capitalism,” mostly from the first essay, “The Clash of Capitalisms” by Branko Milanovic), almost 100% of China’s output – what little there was – came from the public sector. The public sector now produces under 20%.

In 1970, the West produced 56% of global output vs. only 19% in Asia (including Japan). Fifty years later, Asia produces more than the West – 43% vs. 37% – due mostly to China’s adoption of capitalism. Then came the Four Tigers, then India, Vietnam, and other Asian economies. From 1990 to 2017, China averaged 8% annual growth rates, Vietnam averaged 6%, while the U.S. averaged only 2% per year.

Despite its top-down political system, China’s economy is more capitalist than ours in some ways. For instance, their top capital-gains tax rate is 20%, while President Biden is trying to double our rate to around 40%, even though the Tax Foundation said that such a high capital gains tax rate would reduce tax revenues by $124 billion over the next 10 years. Even the Penn Wharton Budget Model, often used by Democrat economists, said tax revenues would fall $33 billion under that load, so who is more capitalist?

Entrepreneurial Spirit

When our group of 30 investors was touring out-of-the-way spots in China 25 years ago, we saw China’s entrepreneurial spirit first-hand. This contrasted sharply with a similar trip about 30 of us made to Soviet Russia in 1986 under the leadership of free-market economist Lawrence Reed. Hardly anyone looked us in the eye there. Russians seemed to have zero business initiative, but in China, businesses were popping up everywhere, and nearly everyone looked us in the eye and waved hello. Buildings were popping up everywhere – the crane was “the national bird” of China. However, there was no protection of property rights along the way. Fake “Disney” or “Apple” products were clearly visible in several Chinese cities.

It’s easy to find fault with China’s product theft and human rights abuses, but I try to look at China as America was 100 years ago. China went through its own Civil War – a terrible time of starvation (1959-62) then Cultural Revolution (1966-76), about a century after our own Civil War and Reconstruction.

Previously, several European nations (notably England, France, Germany, and Russia) occupied China, as six foreign flags once tried to take over North America. Likewise, China staged an industrial rebirth under Deng and his successors (1979-2014) just as America staged its own Industrial Revolution (1879-1914).

In 1912, America elected a southern collectivist President, Woodrow Wilson: 1913 gave birth to Income Taxes, the Federal Reserve, and the birth of big central government. Likewise, a century later, China chose Xi Jinping in 2012 and he has revived the military, detained and tortured minorities, and escalated debt.

Imagine China as a young United States a century ago…

If you imagine China today as America was a century ago, perhaps there is some hope. America grew out of its past excesses, and maybe China will, too. America was not fair or just to all its people 100 years ago. Our businesses often ran unfettered and unregulated. Maybe China will learn its lessons, as we have.

Deep Scars from the Cultural Revolution Provide the Greatest Hope for Peace

In the last two weeks, I delivered two rather downbeat reviews of China/U.S. relations, but I want to conclude this series on a more hopeful note, since today marks the 25^th anniversary of the end of our three-week China tour in 1996, which doubled as the 30^thanniversary of China’s Cultural Revolution and the 20^th anniversary of its end. Those painful memories are our best insurance against its repeat.

Before describing the tour, let me introduce our guide, whose life experiences made our tour possible. Keren Su was born in Hangzhou in 1952. He remembered the starvation of the Great Leap Forward (1958-62), when his classmates often “disappeared” (30 million died of starvation). The Cultural Revolution struck in May 1966, when he was 14. It destroyed his family and lasted 10 painful years.

On May 16, 1966, Mao Zedong’s wife, Jiang Qing, issued her stunning circular against “scholar tyrants.” Within days, by May 20, young (teenaged) Red Guards were closing down schools, starting with middle schools. Keren Su’s parents, teachers, were arrested, and all schools became deserted. Keren Su was soon sent to a labor camp in the far north, in frozen Harbin, for eight years. In winter months, the temperature seldom rose above zero in Harbin, and they had little or no heat. He still suffers the residual effects.

Then, to make a name for himself, Keren Su bicycled around the circumference of China on a one-speed bike. From that fame, he escaped China to become a noted photographer and tour guide, taking us places no Westerner had ever seen. In the first week, for instance, we spent most of our time in the rural villages of the Maio and Bouyei minorities in hilly Guizhou, China’s poorest province. In one full day, we took a four-hour bus ride each way to a village no Westerner had ever seen to witness a spring festival. Then, we flew up to Chengdu in heavily populated Sichuan Province, where the core of our China story came clear:

• On Sunday May 5, 1996, we visited the Azalea Branch school, but our bus couldn’t negotiate the narrow road, so we set out to walk. As soon as we turned a corner, we were greeted by a quarter mile of children on both sides of a narrow path waving freshly cut blooming azalea branches chanting a song, “Welcome, friends, warmest welcome.” As we reached the school, a group of us stood on a brick wall and spoke to them through Keren Su’s translation. They sang back to us. Then we tried singing back to them. A fellow American and I had prepared a duet, “Hi Neighbor” as our greeting. The assembled children then shocked us by singing Auld Lang Syne in Chinese. There wasn’t a dry eye as we sang it back to them in English. We then toured their school. There was no library, no computer, no teaching aids, and terrible bathrooms. We made a donation of $100 for books, which didn’t seem like much, but they assured us that 800 yuan (the equivalent) could fund a large library.
• On Monday, May 6 in Chengdu, Sichuan Province, twice within an hour we were stopped by older citizens and thanked – for saving their lives! As we boarded our bus, our tour guide brought us a huge bouquet of flowers from local citizens who said, through translators, “We understand there are some among you who fought in World War II. On behalf of the citizens of Chengdu, we offer our thanks to you for saving us from the Japanese.” (Yes, we had some WW2 vets.) Then, an hour later, at a tea garden at lunch, a group of older pipe-smoking Chinese men said the same thing. As it turns out, U.S. General Claire Chennault and the Flying Tigers volunteered for service in China in 1937, long before Pearl Harbor. They were instrumental in stopping Japan’s advances up the Yangtze River.

Later that week, on May 8, in Chongqing, we visited the Stilwell Foreign Language School, which taught English and featured the U.S. and Chinese flags at equal height, in honor of U.S. General Joe Stilwell, who is still honored in China. This underlines why many older Chinese love Americans. Unlike Britain, France, Germany, Russia, or Japan, we never attacked China and often tried to help.

A Mandate from Heaven

What happened in 1976 to end the Cultural Revolution? As strange as it seems in a land of atheists, a “Mandate from Heaven” signaled the change. Heaven spoke first through the largest meteor shower ever seen in China, in April 1976, then the deadliest earthquake in the 20^th Century. It struck at 3:42 am on July 28. A magnitude 7.8 earthquake hit Tangshan, 110 miles east of Beijing, killing over 240,000.

Mao was near death and his wife, Jiang Qing, headed a Gang of Four in line to succeed him. Due to this Mandate of heaven, however – and fatigue from the Cultural Revolution – the Chinese people would have none of Lady Mao. Banners declared “Deep Fry the Gang of Four in Oil.” Mao basically said the same thing: In late 1975, Mao issued his final official slogan, dubbed “Three Mores and One Less:”

“Zhou [En Lai] should rest more; Deng [Xiao Ping] should work more, Wang [Hongwen, youngest of the Gang of Four] should study more; and Jiang Qing should talk less.” – Mao

This Mandate of meteors, quakes, the death of Mao (September 9), and his deathbed admonition to his wife to shut up led to the arrest of the Gang of Four on October 6 and the end of the Cultural Revolution.

As a result of that trauma, today’s older Chinese will never allow another despot to steal their future, but these Baby Boomers, like ours, are aging, so the question remains about how the young will respond. Alas, that future now looks grim as the Chinese Communist Party (CCP) has forbidden discussion of these painful events as “historical nihilism.” The South China Morning Postreported last week that the CCP deleted two million online posts for such nihilism as the centennial of the CCP approaches in July. Imagine forbidding blacks from discussing slavery or Jews from mentioning the Holocaust. Same thing.

On Friday, May 17, 1996, our last day in China, we awoke to the CNN report that this day marked the 30^th anniversary of the start of the Cultural Revolution. They went on to report that older Chinese were celebrating that event through work camp “reunions” all over China, as we met in our closing banquet that night in the Jinjiang Hotel, Shanghai, once known as Cathay Mansions, where Zhou Enlai and President Richard Nixon had signed their historic Shanghai Communique in February 1972.

After three life-changing weeks in this emerging colossus, we offered toasts to our Chinese hosts as two musicians (flute and cello) sensed our departure and serenaded us with “Going Home,” the theme from Dvorak’s “New World” Symphony. We flew home to America, 25 years ago today, wiser about the “real China” and the billion-plus people who love Americans and capitalism. That is our best hope for peace.

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