If you’re thinking about investing or opening up a business in China, it can be incredibly important to understand the differences between the two government structures. Heading in with the expectation that it will be “business as usual” could lead to costly mistakes. This is especially true when governments have such stark differences, as is the case with the United States and China. Before any decisions are made, you want to have a good understanding of how each government operates and how you can expect your business to be impacted.
We’re sure you know that the United States is a democracy and China is communist*. However, this article will dive deeper into what that really means and how the differences can impact you.
These are a few ways manners in which the US and Chinese governments differ.
The United States – Democracy
If you grew up going through the United States public education system, we’re sure you’ve learned about the three branches of government. However, if you need a refresher, those branches are the legislative, judicial, and executive. Each of these branches exercises different powers of each other to ensure that no one branch/individual can ever gain too much control over the country:
⦁ Legislative branch – This branch is in charge of making laws and is broken down into two bodies: the Senate and the House of Representatives. The Senate is comprised of 100 members (two senators from each state). The House of Representatives is currently made up of 435 members with each state getting a different number of representatives depending on its size. Each of these two bodies has exclusive powers that allow them to check each other’s power over each other as well as the executive branch. Legislation must go through many different approvals and voting processes to get passed
⦁ Judicial branch – The Judicial branch is in charge of upholding the rule of law. They decide the meaning of laws and whether or not a law breaks the constitution (the highest law in the nation). In total, there are over 1,700 judges across 209 courts in the federal court system
⦁ Executive branch – The Executive branch is in charge of carrying out laws that are created by the Legislative branch. This branch is comprised of the president, vice president, and members of their cabinets. The president acts as the ruler of the country but his power is checked by the other branches
This separation of powers is meant to ensure that no person or entity can dominate when it comes to controlling the country.
China – Communist
The People’s Republic of China is under the exclusive leadership of the Communist Party of China, which has been in control since 1942. Their power has generally gone unmatched and they rely on three different bodies to enforce their rule. These three bodies are control of personnel, control of propaganda and control over the People’s Liberation Army. The senior decision-making group of the country is known as the Politburo and these members do not face competitive elections.
In China, personal relations generally matter much more than job titles. This is a cultural difference that carries over into the business world as well. Trust is given very sparingly, is very interpersonal and is critical to succeeding in business.
The Chinese Communist Party convenes every 5 years at its National People’s Congress (NPC) to agree on major policies moving forward as well as choose the Central Committee. The Central Committee consists of about 370 members and acts similarly to a board of directors. The Central Committee then selects the Politburo, comprised of 25 members.
Comparing this method of government to the U.S., it is worth noting that over in the United States, there is a significant emphasis on separation of powers. No one person or party has total control over the other and Democrats/Republicans are constantly playing tug of war. The president could be a republican but the House of Representatives and Congress might both be dominated by democrats.
However, in China, there is really only one party (the Chinese Communist Party). This party is then responsible for setting all major policies and choosing all senior leadership such as the Central Committee and Politburo. These elections are generally backdoor elections carried out by high ranking officials.
It should be noted that despite the fact that the Communist Party of China has complete control from a national perspective, individual provinces in China enjoy a good amount of autonomy. Provincial leaders (who are appointed by the central government) have almost complete control over their immediate province.
Each Country’s Approach to Business
The United States – Capitalist
On the business side of things, free-market capitalism is a huge part of American culture and the economy is dictated by a free-market enterprise. You could make a strong argument that this is what fueled America to become the world’s number one economy. According to Forbes, 8 out of the 15 largest companies in the world are American (however, China is gaining fast and has 5 of the top 10 on that list).
A free market is defined as one where voluntary exchange and the laws of supply and demand are responsible for driving the economic system. In this sense, the market is exempt from any government intervention (price controls, production controls, etc.) That being stated, no market is ever purely free from government intervention.
In the U.S., the government will step in if there is an industry that is viewed as anti-competitive (more on this shortly). Additionally, the government sets mandates that must be met to ensure workers are treated fairly.
Free market systems run off of competition. Companies are constantly competing with one another to win over customers. This competition drives companies to offer the best product at the lowest price, which ultimately ends up as a win for the consumer. If an industry is seen as anti-competitive, then that means that only a few companies dominate the industry.
U.S. Government Intervention
The U.S. has a strong history rooted in entrepreneurship, capitalism, and the American Dream. The American Dream is a strong cultural idea that anyone, regardless of their circumstances, can achieve success. Upward mobility is possible for everyone as long as they’re willing to make sacrifices and work hard. For the most part, this mentality carries over into the government and allows private enterprises to operate independently from the government. However, it would be naive to believe that this is 100% true.
First, private enterprises in the U.S. are known to lobby government officials into passing favorable legislation. Additionally, occasionally the U.S. government will pass legislation that impacts businesses directly. A few of the most recent examples of this are the talks surrounding breaking up “big tech” or Donald Trump’s trade war, which had direct impacts on American companies.
Although breaking up big tech hasn’t happened yet, some government officials are expressing concern that tech companies wield too much power and stifle competition. The government wants to break up these companies. Similar stories have happened in the past with companies such as Standard Oil, AT&T, and JP Morgan.
Let’s take a look at how all of this compares to China.
China – Mix of State-Run and Free Market
Despite the central government’s dominance, China is still technically a combination between both capitalism and socialism when it comes to their private enterprise. After deregulations in 1979, they began to allow for private enterprise to take over independently of the government. It was this decision that has allowed the Chinese economy to grow at the rate that it has. In this sense, it has been about 4 decades since China was a purely state-owned economy.
To quote the Chinese economist, “China’s reform started with an all-powerful government under the planned economy. The reason China could have sustained economic growth during the process of reform was that the government managed less and the proportion of state-owned enterprises decreased, not the other way around. It was precisely the relaxation of government control that brought about market prices, sole proprietorships, town and village enterprises, private enterprises, foreign enterprises, and other non-state-owned entities.”
If you’re thinking about setting up shop in China, it’s important to remember that certain regions operate under their own autonomy. Obviously, the central government will get the last word but you will still have to be ready to deal with the local government as well, as they will call the shots in their region.
To sum things up, the United States is primarily a free-market country with a little bit of government intervention. China, on the other hand, is primarily a state-run country with a little bit of free-market capitalism. There are definitely opportunities for businesses to make a name for themselves, however, you can fully expect the Chinese government to be looking over your shoulder.
We hope that you found this article valuable when it comes to understanding the difference between each country’s government. To read more, we would strongly recommend visiting our “New Here?” section or for a “tailor-made” experience, the ChinaFund.com team of consultants is at your disposal.