Could the grand drama playing out in Beijingâ€"a leadership struggle often described as Reformers versus Troglodytesâ€"presage a windfall of change for U.S. business?
It's fascinating theater, but it may not be the best place for business to pin its hopes. The embattled Communist Party aristocracy has plenty of reason to embrace the status quo.
Instead, a better shot at changing the game with China may have emerged last week on the home front. The U.S. announced a revisedâ€"and tougherâ€"format for negotiating investment treaties with other countries. The pacts are meant to spur business and fight market distortions in places like China. The question is, did the U.S. get tough enough?
"It falls far short of meeting the concerns of the private sector and the articulated concerns of the U.S. government," says Alan Wolff, a trade expert at Dewey & LeBoeuf. "It makes some progress, but it isn't a comprehensive answer to the problem of Chinese state-owned enterprises."
"It's disappointing that they worked for three years and didn't address the biggest issue that businesses are worried about, which is state-owned enterprises," says a tech executive with operations in China. The U.S. Chamber of Commerce expressed similar concern.
But first, Shakespeare in the Great Hall of the People:
The defenestration of Bo Xilai, who was gunning for a top Party job, was all about politics and power, not economic liberalization. Mr. Bo tried to gain influence through nationalistic populism. But he made a fatal mistake within the opaque and consensus-driven power elite. He rocked the boat.
"I find it funny reading press accounts about splits between Bo Xilai and the supposed 'reformers' camp of Wen Jiabao and Hu Jintao," the tech exec says, referring to China's premier and president. After the two men gained power a decade ago, they reversed liberalization and put China's state capitalism on steroids. Mr. Wen was the chief pitchman for the country's "indigenous innovation" program, discriminatory policies that shut out many foreign companies.
Mr. Bo beat up on foreign companies, temporarily shutting Wal-Mart's operations in Chongqing. His departure may remove an irritant. But it's the embarrassing tumult over that departure, including revelations of his family's business interests, that has inflamed Chinese public opinion and shaken the Party.
What happens now and how might it affect U.S. business?
Scenario 1: Stasis
The entrenched interests of the leadership, regional bureaucrats and vast network of state enterprises hold fast, offering little new access for foreign business. This outcome may be the most likely because it involves the least change.
Lin Zuoming, president of AVIC, the state-owned commercial and military aviation company, provides a view of this mind-set.
He warned this month of "conspiracies by international enemies to shake the base of the ruling Party." These enemies want to privatize state-owned enterprises, the mainstay of Party strength, he said. They will then "seek the collapse" of China's army. "Party members and cadres of central enterprises must stay on high alert...to crush the conspiracy from the hostile force in the international community."
General Electric, for one, has a joint venture in avionics with the commercial side of AVIC in Shanghai. It had no comment.
Scenario 2: Gradual change
Faced with the limitations of its economic model, China picks up the pace of reform. A growing minority of China watchers buy this scenario. They're encouraged by recent financial-sector reforms, China's coming leadership change, and a report from a government think tank and the World Bank that calls for scaling back state enterprises.
John Huntsman, the former U.S. ambassador to China, says the report is "merely an aspirational document." But he adds that Xi Jinping, the likely next head of the Party, "is on top of his brief. We may have a run between 2013 and 2016 when we can get some things done."
Scenario 3: Big bang
Out of design or desperation (financial crisis, housing collapse), China goes all in on reform. In the past, waves of market liberalization in China have been wide and deep.
The Party used WTO ascension to force big reform in the 1990s. The U.S. might consider its newly revamped bilateral investment treaty in a similar light.
The U.S. has more than 40 of these treaties spurring cross-border business. It put new treaties on hold in 2009 while it added labor and environmental standards. What emerged last week is a new template for future treaties that will be augmented by negotiations with each country. China is on the prospect list.
The new model treaty does tackle some key issues with China. Among them, it addresses coerced technology transfer and transparency in setting product standards.
But as for state enterprises and the market distortions the subsidized firms cause, it is relatively spare. By contrast, the proposed trans-Pacific Partnership, a new regional trade accord that doesn't include China, has extensive restrictions on state companies.
A State Department official says any treaty with China will "level the playing field" and "address the top priority concerns for U.S. investors and U.S. interests."
The new template therefore leaves much to future negotiation. That doesn't cheer business.
While we wait to see how China's political drama plays out, a bilateral investment treaty might be our best shot at setting our own expectations about where this business relationship should head.
We should set those expectations higher.
â€" Write to John Bussey at john.bussey@wsj.com; follow @johncbussey on Twitter.
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