Since the end of the Cold War, the world's powers have generally agreed on the wisdom of letting market competition -- more than government planning -- shape economic outcomes. China's national economic strategy is disrupting that consensus, and a look at the ascent of solar-energy magnate Zhu Gongshan explains why.
A shortage of polycrystalline silicon -- the main raw material for solar panels -- was threatening China's burgeoning solar-energy industry in 2007. Polysilicon prices soared, hitting $450 a kilogram in 2008, up tenfold in a year. Foreign companies dominated production and were passing those high costs onto China.
Beijing's response was swift: development of domestic polysilicon supplies was declared a national priority. Money poured in to manufacturers from state-owned companies and banks; local governments expedited approvals for new plants.
In the West, polysilicon plants take years to build, requiring lengthy approvals. Mr. Zhu, an entrepreneur who raised $1 billion for a plant, started production within 15 months. In just a few years, he created one of the world's biggest polysilicon makers, GCL-Poly Energy Holding Ltd. China's sovereign-wealth fund bought 20% of GCL-Poly for $710 million. Today, China makes about a quarter of the world's polysilicon and controls roughly half the global market for finished solar-power equipment.
Western anger with China has focused on Beijing's cheap-currency policy; President Obama blasted the practice at the G-20 summit in Seoul last weekend. Mr. Zhu's sprint to the top points to a deeper issue: China's national economic strategy is detailed and multifaceted, and it is challenging the U.S. and other powers on a number of fronts.
Central to China's approach are policies that champion state-owned firms and other so-called national champions, seek aggressively to obtain advanced technology, and manage its exchange rate to benefit exporters. It leverages state control of the financial system to channel low-cost capital to domestic industries -- and to resource-rich foreign nations whose oil and minerals China needs to maintain rapid growth.
China's policies are partly a product of its unique status: a developing country that is also a rising superpower. Its leaders don't assume the market is preeminent. Rather, they see state power as essential to maintaining stability and growth, and thereby ensuring continued Communist Party rule.
It's a model with a track record of getting things done, especially at a time when public faith in the efficacy of markets and the competence of politicians is shaken in much of the West. Already the world's biggest exporter, China is on track to pass Japan this year as the second-biggest economy.
Charlene Barshefsky, who as U.S. trade representative under President Bill Clinton helped negotiate China's 2001 entry into the World Trade Organization, says the rise of powerful state-led economies like China and Russia is undermining the established post-World War II trading system. When these economies decide that 'entire new industries should be created by the government,' says Ms. Barshefsky, it tilts the playing field against the private sector.
Western critics say China's practices are a form of mercantilism aimed at piling up wealth by manipulating trade. They point to China's $2.6 trillion in foreign-exchange reserves. The U.S. and the European Union have lodged a series of WTO cases and other trade actions targeting Beijing's policies, and hammer China's refusal to let its currency appreciate more quickly, which they argue fuels global economic imbalances.
Top executives at foreign companies have started griping publicly. In July, Peter Loscher, Siemens AG chief executive, and Jurgen Hambrecht, chairman of chemical company BASF SE, in a public meeting between German industrialists and China's premier, raised concerns about efforts to compel foreign companies to transfer valuable intellectual property in order to gain market access.
Some observers think Beijing's vision is rooted in a desire to avenge China's 'century of humiliation' that started with the 19th-century opium wars. Such critics believe that China's focus on 'indigenous innovation' -- nurturing home-grown technologies -- entails appropriating others' technology. China's high-speed trains, for instance, are based on technology introduced to China by German, French and Japanese makers.
'The Chinese have shown that if they have the ability to kill your model and take your profits, they will,' says Ian Bremmer, president of New York-based consultancy Eurasia Group. His book, 'The End of the Free Market,' argues that a rising tide of 'state capitalism' led by China threatens to erode the competitive edge of the U.S.
So far, though, multinationals aren't staying away, because China remains a vital source of growth for companies whose domestic markets are saturated.
China's strategy echoes the policies Japan employed in its economic rise -- policies that also rankled the U.S. But China's sheer scale -- its population is 10 times Japan's -- makes it a more formidable threat. Also, its willingness in recent decades to open some industries to foreign firms makes its market far more important for global business than Japan's ever was, giving Beijing much greater leverage.
Chinese leaders have begun to acknowledge the backlash. At the World Economic Forum in Tianjin in September, Premier Wen Jiabao said that the recent debate about China among foreign investors 'is not all due to misunderstanding by foreign companies. It's also because our policies were not clear enough.'
'China is committed to creating an open and fair environment for foreign-invested enterprises,' Mr. Wen said.
The state has always played a big role in China's economy, but for most of the reform era that started in the late 1970s, it retreated as state-owned collective farms were dismantled and inefficient state industrial enterprises closed. Accession to the WTO in 2001 represented a big bet by the leadership on liberalizing markets further. The gamble paid off, with growth rocketing much of the past decade.
But the state is again ascendant. Many analysts say the pace of liberalization has slowed, and point to vast swaths of industry still controlled by state companies and tightly restricted for foreigners. The government owns almost all major banks in China, its three major oil companies, its three telecom carriers and its major media firms.
According to China's Ministry of Finance, assets of all state enterprises in 2008 totaled about $6 trillion, equal to 133% of annual economic output that year. By comparison, total assets of the agency that controls government enterprises in France, whose dirigiste policies give it one of the biggest state sectors among major Western economies, were 539 billion euros ($686 billion) in 2008, about 28% of the size of France's economy.
The government's increased involvement in sectors from coal mining to the Internet has spawned the phrase guojin mintui, or 'the state advances, the private sector retreats,' among market proponents in China. A January report by the Organization for Economic Cooperation and Development said China's economy had the least competition of 29 surveyed, including Russia's. Prominent Chinese economist Qian Yingyi of Peking University has said he worries over what appears to be 'a reversal of market-oriented reforms in the last couple of years.'
