Thursday, July 9, 2015

Property Rights in China: On the Separation of Ownership and Control in the Stock Market

It is too simplistic to say that economies around the world converged as capitalistic after the collapse of the Soviet command-and-control economy. Even the notion that China’s communist party has embraced capitalism does not do justice to the ways in which China’s capitalist system is unique. This became particularly apparent in early July 2015, when the bubble burst in the Chinese stock market.

Already down by more than 30% since early June 2015, the benchmark Shanghai Composite Index lost another 5.9% on July 8, 2015 and Hong Kong's Hang Seng index closed down 5.8 percent.[1] Hundreds of companies halted trading in their stock after emergency measures announced by the central government the previous weekend failed to stop the rout. The measures themselves are particularly noteworthy, for they illustrate the unique way in which capitalism under communism regards property rights.

The Chinese government directed “state companies and executives to buy shares, raised the amount of equities insurance companies can hold and promised more credit to finance trading.”[2] On July 8th, the Cabinet agency that oversaw China's biggest state-owned companies said it had told them to avoid selling shares and to buy more "in order to safeguard market stability."[3] Ordering companies and their senior managers to not only not to sell stock, but also buy more, runs against the assumed linkage between economic liberty and property rights. Because the managers of state enterprises are essentially state employees, the government’s encroachment on freedom to buy and sell assets is mitigated.

However, “(i)n a separate order, the securities regulator told directors, executives and senior managers of publicly traded companies who have sold shares in those companies within the past six months to buy them back and said they are barred from selling. It said they are required to buy more if the price falls by more than 30 percent in the next 10 days.”[4] Here, the government reaches individuals receiving money from private companies—albeit publically traded ones having charters granted by the government.

To force people to buy and sell assets does not mean that their respective markets are replaced by a Soviet-style command-and-control economy. Changes in supply and demand still affect pricing. The value of an asset of which some of its buyers and sellers have been forced to buy or sell is at an intersection of a supply and demand that does not reflect preferences and thus utility curves—not only for the given asset, but also, moreover, for economic liberty in being able to make and implement purchase-decisions. Put differently, the preference of the government, both regarding the asset-class and control, is also in the mix.

Because the individuals ordered to buy rather than sell stock in their respective companies owned the stock, private property is cleft from control pertaining to the buying and selling of the stock. Were the purchased an asset usable, such as a car, the owners could still control that sort of use, so economic liberty is not lacking; rather, it has been restricted. We can conclude, therefore, that private property and private markets can exist and function even when economic liberty is limited.

In 1932, Berle and Means wrote a book pointing to the separation of (stock) ownership and (managerial) control in American corporations.[5] The control here pertains to policy decision at the corporate level. In the Chinese case, the control at issue pertains to being able to buy and sell stock; such control remains intact in the American system of managerial capitalism.

The Chinese government’s order may seem counterintuitive  not because ownership is distanced from control, but, rather, because of the type of control—that over buying and selling rather than use per se. Moreover, the order calls into question earlier academic predictions that the fall of the U.S.S.R. and China’s adoption of capitalism would lead to a singularity or isomorphism of the world’s economic systems. Simply changing what is to be controlled separately from the ownership can make an economic system look quite different. Lastly, this case demonstrates just how interlinked political and economic variables are. The twentieth century witnessed empiricism take hold both in economic and political “science”—the reductionism itself distancing the two disciplines from each other.

1. Joe McDonald, “China Stock Market Plummets As Sell-Off Continues,” Associated Press, July 8, 2015.
2. Ibid.
3. Ibid.
4. Ibid.
5. Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (New York: Macmillan, 1933).  The book's theme is the separation of ownership from control of the modern corporation and its consequences. Berle and Means point out the divergent interests of directors and managers, and of each of these from the owners (i.e., stockholders) of the firm.