By Jennifer Beatty Long *
Recently, Federal Reserve Chairman, Alan Greenspan delivered an address applauding economist Adam Smith saying that, “the revolutionary philosophy on human self-interest, laissez-faire economics and competition had been a force for good in the world. The incredible insights of a handful of intellectuals of the Enlightenment. . . .[Smith] created the modern vision of people free to choose and to act according to their individual self-interest." (1) An investment strategy based on this philosophy has proven profitable for the United States. However, the application of Smith’s innovative thoughts and theories to Chinese investment, banking, and the trade market may be difficult. The question remains what would an Asian trade policy rooted in Smith's ideas and the national interest entail?
Contrasting Market Philosophy
China considers market control an extension of government operations. Smith viewed the government primarily as an instrument for extracting tax to subsidize elites and for intervening in the market to protect monopoly. The security and control of the government in China affirms tight control over nearly every aspect of life in China. Smith made no mention of government intervention to establish and enforce minimum social, health, worker safety, and environmental standards in the common interest—to protect the poor against the rich.
China now has the world’s fastest-growing economy and is undergoing what has been described as a second industrial revolution. As one of the world’s top exporters, it is attracting record amounts of foreign investment. Having gained admission to the World Trade Organization, China will benefit from increased access to foreign markets. There is some expectation however, that the increased opportunity for private enterprise will hasten the demise of state-run industries.
Historical Perspective
In a world of instant communication and travel, China represents an untilled field of opportunity for many foreign investors. After joining the World Trade Organization in 2002, many global investors saw this act as a green light for pending involvement in the global markets. The large state-owned banks insulate themselves from the threat of foreign investment insecurity with tidy investment fees. One major state-owned bank demanded over a billion dollars for foreign investment opportunity. Because of the Chinese government’s aversion to vulnerability in the form of foreign investment, these smaller market investment opportunities are emerging. Greater foreign investment is sweeping smaller commercial institutions once designed only to serve municipalities in China. The books are cleaner, and, “above all—a modest outlay gets a foreign investor a big say in the bank. . .” (2), such that Chinese overseas direct investment has grown twenty-seven percent.
The municipal banks were created after the collapse of Chinese markets in the late 1990s. Regulators view this as one reason that foreigners are being encouraged to invest. Oversight is the key to success. “Just last month, a court case showed how a single customer allegedly swindled $892 million from a branch of the Bank of China, the country’s biggest bank. Some $240 million is still missing.”(3) The amount of corruption balanced against the legitimacy of the new system of banking suggests that the foreign investor assists in determining the fate of the investment. Critics warn that many investors could end up wishing that they had never gotten involved with these smaller municipal banks in China. China lacks a “checks and balances” system. In the United States, administrative bodies like the Securities and Exchange Council, albeit flawed, provide some level of protection for investors in the United States.
Conclusion
In 1898, scholar Yan Fu (4), translated Smith’s ideas into Mandarin with the hope of modernizing China through marketization. Putting the theory into practice is a whole different matter. Writing more than 2,000 years before Adam Smith, the great Chinese philosopher Lao Tzu, in the Tao Te Ching, advocated the principle of noninterference (wu wei) as the basis for good government and a harmonious social order. Although he did not provide a detailed theory of the “invisible hand” of the free market, he did recognize that there is a natural tendency for mutually beneficial trade if people are left alone.
Smith laid the intellectual framework for the West that still holds true today. The expression “the invisible hand,” can be applied to China so long as China incorporates Smith’s theories into its traditions. Alexis de Tocqueville wrote, “Trade makes men independent of one another and gives them a high idea of their personal importance; it leads them to want to manage their own affairs and teaches them how to succeed therein.” (5) As China slowly evolves towards greater market participation investors can benefit.
For more information please contact Daqin Zhang at dzhang@kmclaw.com or Michael Chen at mchen@kmclaw.com.
* Jennifer Beatty Long at is an intern attorney in Kirton & McConkie’s International Law Section. She can be contacted at jbeatty@kmclaw.com.