Not all money is equal under authoritarian capitalism

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Jack Ma, Founder and Executive Chairman of Alibaba Group Holding, addresses the media during the inaugural Gateway '17 event at Cobo Center in Detroit on June 20, 2017. Photo: Reuters / Rebecca Cook

With his stop sign to further overseas investments by Chinese private players, Xi Jinping is sending massive shockwaves through much of the Western hemisphere. Currently, Italian soccer fans find themselves wondering what will happen to two leading Serie A clubs – Inter and Milan – both owned by Chinese shareholders. Moreover, domestic media are asking whether HNA, a bidder for Italy’s carrier Alitalia, has seriously ended on Xi’s “black list.”

Angela Merkel is probably facing similar questions for Deutsche Bank, as HNA owns a sizeable stake. Some of this kerfuffle is partly because the names at stake – Wanda, Anbang, HNA just to mention a few – are indeed glamorous ones. Moreover, the October People’s Party Congress in Beijing is not making things easier at all for many of China’s tycoons whose businesses skyrocketed under previous nomenklaturas – not under Xi’s watch, to be sure.

Gone are the days in which commentators in the West safely assumed that China was on the right path to become a Western-style specimen of democratic capitalism, and its tycoons were cherished as harbingers of a new era. China is not a democratic capitalistic system.

It is an example – the world’s largest – of authoritarian capitalism. At the pinnacle of its power pyramid are the political-military élites – not tycoons. Tycoons exist, but their role and development is only accepted and fostered as long as they project and amplify the will of the political-military élite – not when they ship capital abroad and run their own agendas.

To be sure, the traditional ownership-based distinction between state players (imposing political conditionality) vs private players (purely profit-driven) remains more notion than fact. In fact, as argued by Curtis Milhaupt and Wentong Zheng in their Spring 2015 paper Beyond Ownership: State Capitalism and the Chinese Firm: “Large firms in China exhibit substantial similarities in their relationship with the state in ways that distinctions based on corporate ownership simply do not pick up.

Indeed, as preparations for the initial public offering of Alibaba on the New York Stock Exchange in 2014 revealed, it can  be  difficult  to  draw  a  clear distinction  between a  “state-owned”  Chinese  firm  and  a  “private”  one  with extensive ties to politically powerful backers”.

Hence, the real point is not to observe the fact that ties exist between Chinese political patrons and private firms, but rather to understand how stable those ties are when a new political nomenklatura takes over.

Not so long ago Joseph Nye, the Harvard professor who coined the very expression “soft power”, clashed with Wanda’s Wang at the World Economic Forum summit in Davos. At the time, Nye proclaimed that Wang’s ambitions in cinema were an example of a Chinese soft power instrument. Today, he might need to revise his statement.

Not long ago, Russia’s Vladimir Putin, another champion of authoritarian capitalism, had to rein in Russian oligarchs who, having made a fortune by stripping assets from what was left of the Soviet Union, no longer thought they owed anything to the Kremlin. Blood was spilled, and eventually most oligarchs pledged loyalty to Putin. Little of that was felt outside Russia, at least not on a scale comparable to what is happening today with Xi and China’s tycoons.

The rise of authoritarian capitalism has also caused political risk specialists and government advisors to rethink their own modus operandi. When democratic capitalism was the dominant standard, political risk specialists would simply consider developments in the host country.

Now that authoritarian capitalism actors compete on par with their Western peers, it is up to host country governments to carefully consider the situation of the investor’s home state before taking the money.

Paradoxically, “private” investments from authoritarian capitalist countries appear to entail higher political risk than those made directly by sovereign entities such as sovereign wealth funds, central banks or SOEs. The latter are by definition aligned with political power, while the former are cyclically linked and may sporadically undergo quite brutal re-alignments with the emergence of new political élites.

Italy, for its part, has long been the recipient of significant investments from authoritarian states – think of Libyan stakes in a variety of listed Italian blue chip companies. Even after the end of Gaddafi’s regime, that money remained in Italy. So, by chance, it turned into a great deal for the Belpaese – money, lots of, without strings attached.

But Chinese tycoons are different. For one thing, they have bought stakes all over the place, and, according to PEW surveys, China’s popularity in Italy went up as Chinese FDIs in Italy rose. Also, an expectation has been created that Chinese investors would ride to the rescue if and when needed. Chinese tycoons – “yellow knights” instead of traditional “white knights” – quickly become a favorite small talk subject whenever a house is on fire in Italy.

In Spring 2016, for instance, the Italian publishing house RCS – the owner of Italy’s daily Corriere della Sera – was struggling under its debt burden. Almost immediately, Italian media fancied the idea that Alibaba’s Jack Ma could acquire RCS. After all, hadn’t Amazon’s Jack Bezos done the same with the Washington Post? Why, then, couldn’t “Asia’s Jack Bezos” do the same with RCS?

Xi’s iron fist is a rude awakening for many dreams of this sort. In fact, it is a powerful reminder that “yellow knights” are more exposed to political risk in their home state than other investors – so they may not fix situations at all, but rather end up making them even more complicated. To make a long story short: not all money is equal, not even that coming from authoritarian states. Western governments better be advised, there is no such a thing as money without strings.

Francesco Galietti, PhD (Founder of Policy Sonar, a Rome-based political risk consultancy, and former senior advisor of the Italian Ministry of Finance)

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