China: The Great Misclassification

By Cliff Potts, CSO, and Editor-in-Chief of WPS News
Baybay City, Leyte, Philippines — April 21, 2026

The Question That Has to Be Asked

Before examining bad-faith contracts, enforcement asymmetry, and hidden risk, a more basic question has to be addressed:

How did the United States come to believe that China was no longer a communist country?

That belief shaped decades of investment, trade policy, and technology transfer decisions. It did not arise by accident, and it carried long-term consequences that are still unfolding.

This essay examines how that misclassification took hold — and why it was wrong.

What China Actually Is

The People’s Republic of China has never abandoned communist party rule.

The Chinese Communist Party controls:

• the state
• the courts
• the military
• strategic industries
• ultimate decision-making authority over private enterprise

Market mechanisms were introduced as tools. Capital was permitted as an instrument. Political control was never surrendered.

China adopted selective market behavior without political liberalization, creating a system designed to absorb foreign capital and technology while retaining centralized power.

How the Story Was Sold in the United States

During the 1990s, a dominant narrative took hold in U.S. political and business circles: that economic engagement would lead China toward liberalization.

This narrative rested on three assumptions:

1. markets produce political reform
2. trade creates convergence
3. integration moderates state behavior

These assumptions were treated as inevitabilities, not theories requiring proof.

As a result, China was increasingly described as “post-communist,” “state-capitalist,” or simply “capitalist,” even as the Communist Party consolidated authority at home.

Why American Capital Accepted the Narrative

U.S. corporations and investors had strong incentives to believe the story.

China offered:

• low labor costs
• enormous scale
• weak intellectual-property enforcement
• state support for favored firms

Labeling China “capitalist” reduced political friction, eased regulatory resistance, and normalized large-scale technology transfer — even when transfers raised legal or security concerns.

Once supply chains shifted, leverage followed.

The Clinton-Era Acceleration

During the Clinton administration, U.S.–China economic integration accelerated rapidly.

China gained expanded access to global markets and institutions while U.S. firms transferred:

• manufacturing techniques
• industrial processes
• software and hardware designs
• dual-use technologies

Some transfers violated export controls. Others complied narrowly with the law while ignoring its intent.

The political consensus framed these choices as modernization rather than risk.

Why the Belief Persisted

Once embedded, the belief that China had “moved beyond communism” became self-reinforcing.

Questioning it meant questioning:

• sunk investments
• elite policy decisions
• globalization assumptions
• corporate dependence on Chinese production

By the time evidence made the reality undeniable, the structural consequences were already locked in.

Why This Matters for This Series

Bad-faith business practices do not emerge in isolation.

They rely on:

• misclassification of political systems
• misplaced expectations of reciprocity
• tolerance of asymmetry in the name of engagement

Understanding how China was misidentified helps explain why opaque contracts, enforcement imbalance, and leverage-driven deals were accepted for so long.

This is not about assigning blame. It is about identifying cause and effect.

What Comes Next

The next essay returns to deal mechanics — specifically enforcement and renegotiation constraints, and how contract design limits borrower options once relief is sought.

The record continues, one piece at a time.

For more social commentary, please see Occupy 2.5 at https://Occupy25.com

This essay will be archived as part of the ongoing WPS News Monthly Brief Series available through Amazon.

References (APA)

Bremmer, I. (2010). The end of the free market: Who wins the war between states and corporations? Portfolio.

Clinton, W. J. (2000). Remarks on U.S.–China trade relations. The White House.

Lampton, D. M. (2001). Same bed, different dreams: Managing U.S.–China relations, 1989–2000. University of California Press.

Rodrik, D. (2011). The globalization paradox. W. W. Norton & Company.