The year 2021 marked the start of a new paradigm for the Chinese economy. China is shifting from a model championing GDP growth to one emphasising efficiency, consumer welfare and protection, climate change mitigation, and environmental protection. While Chinese companies’ growth will be less unbridled and more regulated and monitored, the goal of building a global manufacturing powerhouse has evolved into the pursuit of self-reliance in technology.
China’s leaders believe the country is on the verge of transforming into a truly “modern socialist economy”.
Regardless of what epithet they apply to their respective political systems, and despite bilateral tensions, China and the West are facing some similar challenges. Both are confronting increasing income disparities, the boundless growth of Big Tech, and a deepening divide between elites and the grassroots. But unlike the rest of the world, China has decided to tackle these issues head on.
Over the course of 2021, the Chinese government took 20-30 major steps to regulate and discipline an array of leading corporations, ranging from consumer-facing platforms to education companies. The grounds for these interventions were antitrust, data security, and social equality, and sometimes all three.
Even as these moves generated much overwrought commentary in the international media, they merely scratched the surface of the deeper transformation that is underway. Regulatory and enforcement measures are both necessary and welcome in a country where companies’ growth prospects and contributions to GDP have long overridden consumer welfare and protection.
The changes introduced in 2021 represent a “coming of age” for the Chinese economy, signaling that people matter more than aggregate numbers. Under the new rubric of “common prosperity”, the government’s official goal for the coming decade is to create the conditions for the growth of a large, prosperous middle-income group, generate better opportunities for everyone, and elicit more “empathetic” behavior from Chinese companies. The unrestrained Western-style capitalism that has resulted in a “middle-income group squeeze” needs to be avoided in favor of a more “olive shaped” income structure.
Turning point for the economy
Forty years ago, late leader Deng Xiaoping lifted the ideological taboo on individual profit seeking to allow some people to get rich first, and then let the rising tide lift all boats. Today’s Chinese leadership believes that it is time to let the tide come in.
The COVID-19 pandemic has laid bare the inequality between haves and have nots. Big tech companies have grown even bigger and more powerful during the pandemic. With most people homebound and cozily stuck together, from elites to the common people, attention has shifted to domestic issues and the need for national self-reliance and independence.
Contrary to conventional wisdom in the West, China’s push for greater regulatory oversight is not motivated by a desire simply to crack down indiscriminately on the private sector, to cut billionaires down to size, or to limit Chinese companies’ international access. There were 407 public listings for Chinese companies in 2021, and more than 83 percent of them were private corporations, not State-owned enterprises.
Common prosperity is linked to the broader goal of social harmony. One of the greatest ironies in contemporary Chinese society is the hyper-competition in education, which has left parents anxious and children miserable. Families had been spending inordinate amounts of time and money on extracurricular activities, filling children’s schedules with things they don’t necessarily need for the modern economy.
This phenomenon has been likened to a crowded theater in which a few people decide to stand up to get a better view, forcing everyone else to do the same. In the end, no one is better off.
Now that most Chinese people have fully embraced the digital life, there is a growing concern about the misuse of personal data. In a few high-profile cases, such abuses have cost people not only their personal wealth but also their lives. Worse, the Chinese tech giants have shown scant concern for employees’ welfare, leading to a loss of motivation among overworked young people who had hoped to build a family and are now “lying flat” (no longer going above and beyond at their jobs).
China’s authorities have recognised the social tensions and vulnerabilities that come with unchecked market-driven growth. While the market failures and inequities of the new digital age are not unique to China, the Chinese approach to tackling these problems is characteristically different from that of most other countries.
For starters, the responses are often swifter and more dramatic. By contrast, US policymakers have done almost nothing to rein in Facebook, for example, despite serial revelations of the company’s questionable practices and frequent reminders of the deep societal problems its business model has caused.
Another difference is that China is unlikely to adopt the kind of large welfare state that one finds in some European countries. The country prizes hard work as a national and traditional virtue. And, unlike in the United States, the top 1 percent are not castigated, even if some individual shaming (or worse, where law breaking is involved) occasionally plays a role.
Chinese leaders want to eliminate only the “unfair” sources of inequality, such as entry barriers, excessive monopoly powers, and legal loopholes that enable “illegitimate income”.
A convenient critique is that China’s efforts to regulate companies and limit their growth ambitions will kill the incentive for innovations. But this argument ignores the fact that Chinese entrepreneurship is driven by more than monetary reward. To become “important” through a committed career or a major contribution to society is a way to “glorify one’s ancestors”, as the Confucian saying goes. Driven by a larger purpose, Chinese entrepreneurs adapt to the changing circumstances as they tenaciously pursue their goals.
Moreover, for every unhappy billionaire who needs to be “persuaded” to contribute more philanthropically, there are many more happy millionaires who genuinely welcome new regulations on big companies’ size and scope, as these will improve their own chances of becoming billionaires.
Risks, rewards of globalisation
China’s road ahead is fraught with challenges. No country of similar size has fostered a political economy that is both equitable and capable of fully harnessing dynamic innovation and efficiency. There are risks associated not only with de-globalisation but also with a continuation of globalisation that excludes China.
Another big risk, according to some outsiders, is that policies designed to transform the investment climate and business environment will make matters worse or amount to overkill. And an even more consequential risk is that ideology will take precedence over prudent economic management, reversing the mental unshackling that enabled the shift toward a full-fledged market economy over the last more than 40 years. But this is unlikely to happen.
Fortunately, the past year also brought many market-friendly developments, from BlackRock launching its first China fund to the Hong Kong Stock Exchange being cleared to offer A-share futures. Foreign players are gearing up to expand the scope of foreign-funded institutional investments in China, proving that greater economic liberalisation can coexist with stricter regulatory oversight.
Besides, since the phase-one trade deal with the US, China has approved 28 financial licenses and 100 percent of all tariff exemptions requested by US companies. And despite Sino-US tensions and pandemic-related disruptions, trade and financial flows have held up.
Climate commitments have strengthened
China has also strengthened its climate commitments and announced that it will halt external financing of coal-fired power plants. With growing awareness of the issue among corporations and households, the People’s Bank of China, local governments, and financial institutions have pledged to support smaller companies, and regulators have published a green-bond taxonomy as part of a broader effort to integrate climate issues into macroprudential management.
Climate diplomacy remains an important channel through which China can strengthen its ties with the rest of the world and demonstrate global leadership. That means both working with advanced economies and helping other developing countries achieve their targets for net-zero emissions.
But like many other countries, China will have to be mindful of various near-term cyclical issues in the coming year, including the slow recovery from the pandemic, increasing indebtedness and default risk, more frequent natural disasters, and subdued investment and consumption.
Beneath the natural ebb and flow of market economies, however, the country will be moving toward greater equanimity, tolerating lower growth rates with emphasis on quality, and greater cyclical volatility. As such, most Chinese people will regard the sacrifices made to achieve “common prosperity” as both necessary and wise.
Jin Keyu is an associate professor of Economics at the London School of Economics and Political Science, and a World Economic Forum Young Global Leader.
CHINA DAILY/ASIA NEWS NETWORK