Eye on China: In control of the outcome

In the context of North Asia, where the likes of Japan, Korea and Taiwan have enjoyed such economic success, China has a particular distinction. It's the only country not to have benefited from large infusions of Western foreign aid.

While most of North Asia (at least, those countries that weren't battlegrounds) benefited economically from the Cold War between the West and the former Soviet Union, China had to go it alone. But it does benefit from vast amounts of foreign direct investment (FDI), which last year totalled more than US$60 billion ($87.9 billion), making it the world's biggest of recipient of such funds.

The possible problem with FDI is that, by its very nature, and unlike sharemarket portfolio investments, it leaves large parts of your economy influenced by foreigners or even dominated by foreigners.

This is a bizarre situation to be in when so much of China's rise to power has been based on regaining its independence in the face of overwhelming Western might. After all, the 1911 revolution, which toppled the Qing Dynasty, was triggered by resentment against foreign ownership of certain provincial railway lines.

This leads one to a number of reflections about how countries approach similar problems.

Renowned China scholar John K. Fairbanks often drew attention to the balance between wen (culture) and wu (war) throughout China's history.

China has always had a far less romantic view of martial glory than Europeans. China's view of the application of military force, like its attitude to business, evolved in a different way to that in the West.

Instead of a war-loving aristocracy, China often sub-contracted warfare to its more violent neighbours. These acted as mercenaries, but often relatively well armed and organised ones thanks to Chinese administrative and technological skills.

Even better was when fighting could be avoided altogether. That could be effected either through the payment of huge bribes (leveraging China's relative advantage, its more advanced economy) or of fomenting dissent among its enemies. Chiang Kai-shek did this superbly with the Americans and the Japanese during World War II, husbanding his resources for the fight against the communists he knew would follow the defeat of Japan.

Thus the Chinese state conducted a paradoxical but frequently successful policy of leaving fighting to others while managing to keep a great deal of control over the outcome. It has a similar attitude towards commerce.

As many historians have shown, the traditional Chinese state was averse to commerce as undertaken outside the approved Government monopolies and organs.

An essentially static world view was threatened by the vigour of an independent merchant class.

Merchants threatened to undermine the state in several ways. Wealth led to a love of luxury and a turning away of the self-discipline required for Confucian self-improvement. It also led to the creation of a powerbase outside the traditional hierarchy.

Consequently, merchants throughout Chinese history had to put up with periodic and violent purges against their ranks, and just as the Army was ranked low in the choice of acceptable careers, so was commerce.

But how does this apply to modern China, when so much of the economy seems under the sway of multinationals? Foreign cars, high-speed trains and planes clog up the roads, tracks and skies, foreign electronic items flood the market and supermarkets increasingly reflect Western diets and living habits.

It's tempting to see this as being in keeping with China's historical tradition. An advantageous by-product of the system is that foreign companies don't provide any political risk.

Unlike a rich and powerful domestic merchant class, the foreign element is not seeking political representation. Generally, the foreign investor focuses on profit, not any increase in rights or representation.

Of course, the generation of wealth to sustain the empire was always important. But many of these activities took place under Government monopolies, such as the vital and immensely lucrative salt monopoly.

In modern times, one can see parallels with successful state giants such as the telecom players and oil majors. They are essentially Government monopolies or duopolies generating enormous wealth for the Government while remaining well within its scope of control.

What emerges alongside this centralised and non-market-friendly system is a business culture where the role of the "broker" is the preferred one. The Government acts very successfully as a broker. It brokers the flows of foreign funds into China and lets the actual generation of wealth be taken care of by foreign companies, who have the management and technological know-how to deal with this.

The most successful brokers are the ones that mediate internationally, between the rich countries and China itself. Within this group are the US-educated Chinese who have become the "super-brokers" and who have met with some resentment from the less fortunate brokers.

Access to licences and information becomes key under this system, which is ripe for abuse by the bureaucratic gatekeepers. That's in contrast to the "disintermediation" beloved in the West and fostered by the internet.

It's possible to exaggerate the extent of Western influence. UBS China economist Jon Anderson wrote in a recent report that the foreign-funded portion of total exports had risen from 25 per cent in 1993 to almost 60 per cent now. He also estimates that the domestic content of processing imports has fallen from a peak of 35 per cent to less than 20 per cent.

However, Anderson goes on to point out that exports are only 20 per cent of China's total industrial output.

Anderson explains that within the domestic economy, foreign companies - over the past eight years - have a market share of just around 20 per cent. Import penetration has been steady at around 10 per cent.

But to take his first point, a great deal of Chinese mainland output is put out in the form of Government investment, which confirms the idea the Government plays a powerful role as broker in the domestic economy as well as in the international economy.

What could change all this is the emergence of a powerful private sector on the Western model. But despite all the attention the Chinese private sector has obtained, it's impossible to quantify. For the time being, at least, China's seems to be evolving according to a far more ancient historical pattern.

* Dan Slater is a journalist based in Beijing.