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SEIFFE:  China, Investment And Eminent Domain

Friday, January 13, 2006

By Ralf Seiffe

News that the Chinese government has seized a privately developed oil field validates those of us who worry about the political and economic meaning of the Chinese miracle. By seizing the wells, the Communist masters who still run the country demonstrate that there is still much to fear in the Middle Kingdom. Too bad the same problem is developing here.

The seizure was widely reported and according to the Congressional–Executive Commission on China , the facts are these. One Feng Bingxian, a petroleum engineer and some 60,000 fellow investors, developed a number of oil wells in the Shaanxi province. In 2003, the wells became productive. The government noticed and seized the wells without what Feng considered appropriate compensation so he sued to recover the property’s value. When he organized a protest demonstration last year, the engineer was arrested and was indicted for his activity. Like many totalitarian judicial systems, the charges appear laughably insignificant but the fact that he’s been held without bail indicates their gravity.

Contrast this tawdry event with the observations of any visitor returning from the Far East . They will confirm the region’s awesome economic progress and the role China plays as a nation and as a contributor to its neighbors’ GNP. Ethnic Chinese entrepreneurs contribute to every Pacific economy from California to Bangladesh and that same congenital talent serves China as a sovereignty. The country has four times the population of the United States and they work hard. They can replicate our economy each time they increase per capita GNP by about $6,000----less, as the value of the Yuan improves.

The obvious reasons for the world to invest in China are these: it is the world’s largest potential market and the cost of making things in China is low, compared to manufacturing costs in developed economies. But these are facts are not new and do not explain the progress; China has always had an out-sized population and, therefore, labor costs have always been low. Something more must explain it. Two, more recent developments better explain China ’s economic levitation. First, the old men that run the Communist Party opened the economy to foreign, primarily Western participation. Second, these investors perceive diminished political threats to their assets as Mao Zedong’s influence has faded.

Indeed, the vibrant economy that flourished in Hong Kong prior to the Chinese take-over at the end of the last century provides all the contrasting evidence one needs. This tiny enclave was entirely surrounded by China but it managed to create one of the world’s highest living standards. The customs the British established there supported the notion of private property; these traditions include the rule of law and what Paul Craig Roberts identifies as “the rights of Englishmen”. To this day, the economic contribution Hong Kong makes is so important to the rest of China that the government allows it special liberties denied other Chinese to ensure that contribution continues.

The same situation, on a larger stage, also occurred on Taiwan . Private property has been honored there, more or less, since the Kuomintang Nationalists arrived after Mao took control of the Mainland in 1949. Meanwhile, the economy just across the border or the straights in “Red” China was in shambles until it began to “liberalize” and draw foreign investors. The bets these industrialists make in China have just eclipsed the investments they make in the United States . As a practical matter, foreigners will continue to fuel China ’s growth as long as they believe the political risk remains low.

As long as they are comfortable with the perception of sovereign risk, automobile companies will continue to send dollars and technology there. Consumer product manufacturers will continue to abdicate manufacturing by turning it over to their Chinese suppliers. Even our colleges and universities are establishing Chinese campuses to trade in our core, intellectual secrets.

The seizure of the oil wells is such a signal development because it shows the reality of that risk. It concretely demonstrates, more than any pronouncement on theoretical property rights issuing from the People’s National Congress, the state’s real relationship with individual or corporate property-holders. One hopes that before one of our automobile companies invests another billion in Chinese assembly jobs and before another drug companies gives its secret formula to a low-cost chemical plant, they take notice of the Feng Bingxian case and assess its implications.

The Chinese oil field case is an example of a government taking one group’s property with the express objective of increasing its own revenues. Conservatives abhor such conduct but isn’t this exactly what our own Supreme Court just decided to permit in the Kelo case? Americans commonly believe that we are secure in our homes and that our government won’t steal our property simply to raise revenues. Despite that, the news is filling with local examples of the same behavior as that of the Beijing mandarins; look no further than the wholesale seizure of Riviera Beach, Florida. How does the Chinese story differ from this developing seizure by political goons in Florida ?

Perhaps the real lesson in this tale of two seizures is that governments tend to be more the same than they are different.

© 2006 Ralf Seiffe

Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader and Illinois Review.