Meg Rithmire is an F. Warren MacFarlan associate professor in the Business, Government, and International Economy Unit at Harvard Business School. She is the author of “Land Bargains and Chinese Capitalism” and “Precarious Ties: Business and the State in Authoritarian Asia.”
Federal Newswire
Tell us about your experiences in China.
Meg Rithmire
My first trip to China was in the summer of 2000, and I landed in Shanghai as a 19 year old. I spent the summer in Xi’an, which is one of China's ancient capitals, [and I] learned Chinese and Chinese history, and encountered this society for the first time.
What was so interesting to me was that at that moment, no one really knew what the rules were in China. You could see it everywhere from the street. I visited a factory for the first time just by virtue of having said “yes” to a Chinese classmate that I met who said, “do you want to see my father's factory?” I thought, “yeah, I'll go see anything, actually.”
It was a factory that made bra clasps, of all things. But you first get this insight into, “oh my goodness, look at the scrappy scale of what these entrepreneurs are doing in Chinese cities, how does this work, how do they find the other firms to sell these products, and get the orders?”
I became interested in that, but I was really most interested in humanities. At that point I was interested in Chinese literature and Chinese history, and so I came to political economy gradually. At that moment, people were very optimistic about the future.
I went to Tibet that summer. You had to fly, you couldn't take the train yet. Many people I encountered in Tibet had never seen foreign students before. I thought, “I could study this forever and never really understand how people are thinking.”
The other interesting thing to me was how nostalgic people were about the past, but how little they were willing to talk about it in detail. You got the sense that people had these experiences, they had them in common but they didn't want to rehash them, because they had their eyes trained on the future.
Federal Newswire
How has your focus on China changed?
Meg Rithmire
I spent about six and a half years in China. I traveled to every province, except for Hainan, because I couldn't afford the airfare as a graduate student. [I saw] different parts of China and the pace of change. I would start in Beijing and travel for two months, come back to Beijing and the hotel I had stayed in two months ago was gone.
I came of age as a China scholar doing my PhD in the era of Hu Jintao and Wen Jiobao, where things were a lot more open. My first book, “Land Bargains and Chinese Capitalism,” was about the political economy of real estate, urbanization, and land politics. I was able to access municipal and provincial archives, do site visits with local government officials, and talk about the ways in which land policy was changing, and how the urban borders were changing. None of that would be very easy now.
Toward the end of the Hu Jintao Administration, a lot of those archives that I used in 2006 to 2008 were closed…even to Chinese researchers. It became a very different time, and we didn't realize at the time how lucky we were as a China scholar community that things were becoming more open in the archival research and field work.
The present is very different, and I worry a lot about training the next generation of China scholars, because certainly there's a lot of data on China outside of China, but whether that data is [allowing us] to pursue the kinds of intuition you get right from fieldwork, that's something I'm particularly concerned about.
My co-authors Margaret Pearson, Kellee Tsai, and I have done a lot of work on the shift of China's political economic model. Almost everyone would agree China has shifted. It's more of a politics and command model under Xi Jinping, rather than an economics and command model.
A model emerges not just as a result of Xi Jinping as a personality. We're sometimes overly fixated on him personally. Early Xi Jinping seemed to be willing to do more market-oriented things until he discovered that they generated instabilities he wasn't happy with.
The China we have now is fundamentally different from the one that we had in the 2000’s, and the one we expected to emerge.
Federal Newswire
What does your department at Harvard specialize in?
Meg Rithmire
I'm in the one department at Harvard Business School that decidedly does not focus on how firms make money. We teach macroeconomics, political economy, politics about revolutions, and…democratic backsliding…Basically anything that affects the environment in which people do business, which is, it turns out, quite a broad remit.
My particular department comprises economists, political scientists like me, and historians…It's been a really fun, intellectual kind of place for me to be, in the sense that I get this interaction from colleagues, like economists, who want me to explain what happened [with] the town and village enterprises in China.
That's what I really wanted to know…during my job interview here. I thought, “oh fine, these people think broadly.” I'm happy to talk about that and the historians who want to say, “is it okay to call China an empire?” I feel it's been really fun to be pushed in those directions and then to be pushed to compare China, because I don't teach just courses on China. I teach broad courses on globalization, political economy, and trying to figure out what China is. [It] actually pushed my work to be more comparative.
My second book, Precarious Ties, which was published this year is comparative. It looks at Malaysia, Indonesia, and China. The question there was really how authoritarian regimes have financial systems. How does that work? The answer is, it doesn't work very well.
Federal Newswire
What does the Chinese government do to exert control over businesses, particularly regarding the unique blend of state capitalism and communist ideology, and how are these methods different from other economies?
Meg Rithmire
My coauthors and I call it party state capitalism. We mostly mean it differs from state capitalism. State capitalism is a term that is applied to India, Brazil, China, Russia, and…even Norway. India, Brazil, and Norway are democracies, so sometimes people say state capitalism is this thing where you have the commanding heights of or are in globalized sectors like oil or finance.
You have these national champions, which are subsidized by the state, but what we emphasize is that at least under Xi Jinping, what we see in China is this focus on risk management and politics and command.
You see that in a bunch of different ways. You see it in corporate finance with the rise of corporate shareholding. The CCP actually holds shares, not just in the state-owned enterprises and large firms at the commanding heights, but also minority stakes and a lot of traditionally privately owned firms in China.
You also see it with the party sales, which have always been required by the Chinese constitution. If you have three or more party members, you're supposed to have a party sell, but now that this is more diligently enforced, as well as these laws that we've seen in China, such as the national security and national intelligence law, which have given the state a broader remit to intervene in the assets of firms.
What we don't know is whether any of that works to actually facilitate state control, and so there is an interesting way in which it's interacted with politics elsewhere. For example, in the United States you have people like John Cornyn and others saying, “from the perspective of US national security, there's no difference between the private sector and the state sector.” I don't think that's wrong, because what we see is the party state's potential ability to intervene in any firm.
My favorite part about that is when people say twelve years ago when I would go to DC or something, people would say, “Meg, who really owns Huawei?” Now no one asks that, because they don't think it matters who owns Huawei. It doesn't matter who owns any company, because basically the belief is that the Chinese government can intervene no matter what the ownership structure is, and that's not wrong. The potential is there. It does not mean that there actually is no difference between a private sector firm and the state in all instances.
It's incorrect to read it as everything any Chinese firm does is a reflection of what the Chinese government wants, or even to say that the Chinese state does have control over those companies. They want to take minority shares in frontier firms on the cutting edge of technology, because that's part of the state's strategic goal in industrial upgrading and civil military fusion, and a bunch of different things.
The other logic is that actually the Chinese Communist Party does not trust its own domestic firms. Not at all. They don't trust them to be financially reasonable and prudent. They don't trust them not to subvert the state's interest, and so a lot of that party-state encroachment on firms is defensive and a reaction to distrust.
Federal Newswire
How has the Chinese State intervened or interfered with particular companies?
Meg Rithmire
From the perspective of a domestic Chinese firm, it is very different from the perspective of what you might think of as an American or European headquartered multinational firm.
We actually know very little. We think we know a lot, and we're reading a lot of data indirectly in terms of corporate shareholding–do you have a party sell, and this kind of stuff. But we don’t know the mechanisms through which that translates into firms doing or not doing what the state wants it to do. We know for the larger Chinese firms, like say Ant Financial, Alibaba, Tencent which owns WeChat, etc.
But for the smaller companies, I'm not sure we exactly know how they control those companies or do not control those companies. I would say that's a big black box for us. We're also not really sure about the multinational companies. There's a long history.
China's development model in the 1990’s and 2000’s was really the first time in modern history that a large domestic market was combined with high levels of foreign direct investment. When you look at FDI from the rest of the world, and even the experiences of the east Asian Tigers, Japan, Taiwan, Singapore, or Korea, they had protected domestic markets. Actually they did not have a lot of global competition and global investment in those markets.
They had export-oriented industrialization, but from firms that were protected by those home governments. Whereas in China, you have a lot of foreign direct investment, and a lot of it wanted to access the Chinese market as a sales platform using Chinese labor as a cheaper way of developing products. So China used its own market as leverage.
We want technology transfer as it happens. We want to upgrade our skills and our domestic firms. A lot of that happened naturally in a market sense, in that foreign direct investors were coming in with high-end technology but expensive processes. Then you had the low-end Chinese firms that wanted to compete with them by raising their product quality, and then at the high end they're lowering their quality just a little bit and lowering their costs significantly.
This competition for the Chinese middle market spurred innovation from the top end of the market to make new products, and the famous phrase is, “it's a good enough product for a good enough market.”
Then from the low end, those Chinese manufacturers, the domestic firms upgraded in that way. But the tech transfer part of it, which is currently active in American politics and in really important ways, is that companies basically were sometimes presented with options of, “look, if you're going to get contracts to access the Chinese market, I'm going to need you to contractually commit to giving Chinese firms some of your IP.”
I'm not sure that we can have a broad judgment about that period, whether it was good or bad for international businesses. But certainly the state has always been there, even before Xi Jinping. Companies have to have relationships with local governments. They have to have relationships with sometimes joint ventures on the ground in order to navigate China's institutional environment, and it has helped global multinationals. It has also helped the Chinese economy.
Now I think we're reevaluating a lot of those sacrifices that companies made to figure out whether they were worth it and whether what was good for corporate interests was good for US national interests. I think there's a lot of unanswered questions there actually. It's not easy to say one way or the other.
Federal Newswire
How are multinational corporations adjusting their strategies?
Meg Rithmire
I think one thing that's remarkable is that there is so much knowledge in the US corporate sector and indeed in the corporate sectors globally about how China works that a lot of people don't necessarily have.
For a while there were a lot of people writing these business memoirs about having done business in China and what it was like. Now there's a bit of a political moment where people are afraid to say here's what I did in China, here's how I was successful, because there's a lot of blowback. We're losing access to some of that knowledge.
American multinationals have been pretty savvy about their dealings with China in many different ways.
Almost every company who works in China will say, “Well, I have some special relationships there, so I'm protected from this and that,” but if everyone thinks that, how can it possibly be true that everyone is special? It's not true that every company is getting some special deal from China. I think a lot of them right now are reevaluating their relationships to China, and we see that reflected in a lot of data.
Foreign direct investment from China is falling. It's pretty clear supply chains are relocating to Vietnam and to Mexico. Part of that is actually Chinese firms also leaving China, and why they're doing that, we're not entirely sure.
A lot of companies are reacting to the trade conflict between the United States and China. They’re also reacting to a de-risking strategy on the part of the US government, which is pushing companies to develop China-plus-one strategies and to reorient their supply chains, but a lot of it is a reaction to what China is doing.
For the most part, this generation of Chinese people has not experienced the power of the authoritarian state until the Covid lockdowns. Then they did, and the effects of that are everywhere. In terms of pessimism and how people are feeling trust in the government, we have a hard time measuring these things right now. But anyone who's been to China in the last year can attest to a sense of malaise.
Now I'm seeing a lot more pressure to indigenize technology. The Shanghai Port shut down in 2022, which completely jeopardized these global supply chains and made companies really rethink whether they can trust being in China. A lot of that is not necessarily government pressure from the West, but actually the company bottom line saying, “Look, we do have political risk strategies and here's how we're implementing them.”
[On the] human rights side… most companies I find are so deeply afraid of either the reputational or market consequences of being implicated in human rights abuses or things like that. They have pretty serious quality checks.
Federal Newswire
Now there are calls for reciprocity in US-China business relations. What would this look like in terms of economic policy?
Meg Rithmire
We're in a moment where everyone is eager to say everyone was wrong [about] this promise of the 1990’s, which is that China was going to first economically liberalize, then you're going to get a growing capitalist class, and they'll democratize and they'll be a lot like us.
If you give a passing glance at a lot of what the CCP was saying, even in its negotiation and accession with the WTO in the 1990’s, they always said, “It's a socialist market economy, and state ownership is really valuable.” I think it's not true that they've always had this premeditated “hundred year marathon.” It's very fashionable right now to say Deng Xiaoping said, “hide your strength and bide your time,” as if this is all part of a premeditated plan.
I don't think that's true. Nor do I think there was some structural movement or some inevitability about China democratizing or something like that. I think both of those perspectives got a lot of things wrong.
The basic thinking on reciprocity… was [never] on the agenda of the CCP. So this idea that we should only do business with China insofar as they let us do business there, I'm not sure that that's very realistic actually. I'm also just not convinced it's the most important thing in the US-China relationship.
At this point, the US-China relationship is the most significant bilateral relationship in the world. What is hanging in the balance is the future of the planet, the future of how development occurs in the rest of the world’s emerging market debt crises. To me it would be a bit of a shame to see the US government fighting first and foremost for market access on the part of our companies as the most critical thing with the US-China relationship.
At this point, we're not going to be in a world where we are going to reciprocally allow Huawei access to our telecom markets. I don't think so, right? That particular moment, I think in terms of US-China economic relations, is a few years too late. Now we're in a different world of negotiating.
If we want to have the best companies in the world in the United States, how can we without having them compete for the world's largest middle class? China will still be the world's largest middle class.
So is it the economic interdependence that we should preserve for political or economic reasons.
Federal Newswire
We can’t own land there but they can own land here–shouldn’t we have a different approach?
Meg Rithmire
No one would have predicted that American manufacturing would ship off to China on a large scale. What the government failed to predict is how to accommodate that. What are we going to do with people in the Midwest or in steel towns? How are we going to relocate those people, retrain, uptrain, upskill? So it's partly a China shock, but it's partly a US policy shock that there wasn't much done for these people.
But the second thing about that is that China's model is a unique political economic model. It was not anticipated by the WTO. It does not anticipate that we have state capitalism or party state capitalism, no one anticipated the quality of this model in terms of its form or its substance.
So we have to ask ourselves a series of questions about how we react to that. There's a bunch of reactions. Industrial policy is a reaction to that increase screening mechanisms, export controls, debates about land.
My concern as an American citizen is how do we preserve what's very American about what we do with that and not react to China by becoming more like them but rather react to China by preserving what we do right, which is procedural justice?
We do open institutions, institutional clarity, and processes. There's a wide variety of reactions, from everything from obsessions about Chinese land to something like the Department of Justice's China Initiative, which is now shut down. But I would say that's a kind of reaction that doesn't necessarily preserve American universities in an open sense, whereas something like the bipartisan overhaul of CFIUS was really a nice moment of saying we're going to deal with this challenge institutionally and collaboratively.
We as Americans get to choose how we react to it, but the fact that it's a problem is I think undisputed by anyone. How we deal with the China problem really is our set of choices.
Federal Newswire
Where can people go to follow your research, commentary, and publications?
Meg Rithmire
I'm not on Twitter but my work is always published on my website. Both my HBS website and my personal website. Happy to have people read along there.
The China Desk podcast is hosted by Steve Yates, former president of Radio Free Asia.
