Global reset – Economic decoupling (Part 1: China’s socialism big bang)
Phuah Eng Chye (18 December 2021)
From the 1990s, a confluence of events set the stage for globalisation-driven growth underpinned by China’s industrialisation and exports. First, the breakup of the Soviet Union made the West optimistic that capitalism was indomitable and this encouraged them to lower their guard against China’s development. Second, many MNCs were attracted to establish manufacturing operations in China due to its competitive costs, extensive supply chains, skilled workforce and large markets. This allowed China to establish itself at the center of global production chains. Third, recurring financial crises and the need for coordination fiscal and monetary interventions fostered an era of global cooperation.
The era of China-driven globalisation reached its limits as it became evident that China is on course to overtake the US as the largest economy in the world and match the US in many aspects of global power. The US has figured that deepening inter-dependence has worked to their disadvantage, and the different ideologies and deepening mutual suspicions has prompted the US to implement policies to decouple the two economies.
On its part, China recognises decoupling, the pandemic and information disruption are changing global conditions and relationships. New barriers are being erected to impede the flow of goods, services, data, people and capital and this is weakening cooperation and coordination among governments, firms and markets. In any case, it is timely for China to shift from export-led[1] policies as it facing growth obstacles posed by the middle-income trap[2].
From a traditional macroeconomic perspective, Michael Pettis argues “over the past decade or more, Beijing has developed a clear understanding of the limitations of its once highly successful growth model…the country’s reliance on high savings to fund high investment no longer made sense…Chinese policymakers largely recognize that China must transform its growth model into one in which the consumption share of GDP rises substantially. But while Chinese policymakers understand the limitations of the country’s current growth model, they have failed to present a coherent alternative…the problem with trying to address Western-style income inequality in China, where income inequality is a less significant contributor to the country’s major income distortions. Until Beijing begins to transfer income from local governments to households – either directly, or indirectly in the form of social welfare programs – it will be impossible for consumption to play a more normal role in driving the next stage of Chinese growth”. Regardless of the prognosis, it is evident China needs new policies to guide its transition from manufacturing to services, from savings to consumption and to accelerate financial deepening and liberalisation.
In 2021, it became evident that China has opted for non-traditional approaches with the launch of what could be described as China’s socialism big bang. The new policy direction was marked by a deluge of warnings, guidelines and laws[3] that left many shell-shocked. Tanner Greer asks “what accounts for the target list? What do K-pop fan groups, after school tutoring companies, Meituan delivery men, online algorithms, plastic surgeons, overheated housing markets, celebrity ranking lists, and tech monopolies have in common?” It is anybody’s guess as to why so many reforms are being rushed through within such a short space of time.
My view is that China thinks conditions are opportune for massive reform given the significant challenges on both internal and external fronts. In this regard, China views decoupling as a US-led strategy to encircle[4] and restrict its access to information, resources and markets. In this context, the socialism big bang can be construed as a socio-economic version of China’s Long March[5] – an initial retreat to reorganise internally by reducing domestic vulnerabilities (technology, financial, social, cultural) and building alternative international networks (to bypass sanctions and US-dominated networks) to be followed by breaking through chokepoints (technology, finance).
China’s advantage is that it enjoys greater policy degrees of freedom. It has greater room for expansion because it is still a middle-income country. It is not wedded to decoupling and can pursue “selective” decoupling which gives it room to craft a “winning” global strategy. China can lean into containment to implement painful domestic reforms, use tension to accelerate progress in targeted areas and open up to tap external resources it needs. As decoupling deepens, China no longer feels bound by existing international norms and will push to reform international relations.
In my view, China shaped its new policy direction based on their analysis of crises in other countries. China’s policy-makers are determined to avoid errors on two fronts. On the financial front, they were concerned by the economic depression that followed the asset price collapse and banking crisis in Japan[6], the economic collapse after the break-up of the Soviet Union and the 1998 Asian financial crisis. Hence, China has controlled the pace of financial liberalisation. In 2021, China is moving aggressively to pre-empt stability risks by puncturing its own bubbly prices (equities, property and commodities), curbing abusive and manipulative practices (fintech, commodities), house-cleaning public and private dodgy assets, and clamping down on informal channels (cryptocurrencies) used to bypass China’s oversight. These initiatives pre-empt contagion risks from loose monetary policies in the West and make it difficult for foreign investors to attack China’s financial system and currency by triggering episodes of capital flight. This lays the groundwork to accelerate liberalisation and internationalisation of its financial industry and markets.
On the social front, China’s planners[7] are concerned by polarisation and societal dysfunction in affluent economies. Rising social dissatisfaction is linked to widening inequalities as reflected by the declining labour share of income[8], Baumol’s cost disease[9], and the effects of concentration (monopolies) on business vibrancy, and diminishing protection of labour and consumer rights. The inability of market economies to address these social ailments is well noted. In its backyard, China’s planners think Hong Kong’s failure to deal with high property prices and inadequate housing[10] as contributing to the pro-democracy unrest.
As compared with the traditional services-based developmental model, China’s new economic policies are predicated on using technology and data-driven innovation, deployment and regulation to escape the middle-income trap. This implies technology and data-driven initiatives must generate sufficient economic activity to offset the slack from the decay and destruction of legacy activities and organisations. From just a decade ago when it was derided as a low-cost, low-quality producer, China has harnessed technology, data, scale and speed to move rapidly up the value curve. It has adopted the philosophy of “moving fast and breaking things”[11] and used a policy sledge hammer to get things done. Hence, China can be considered the world’s biggest economic experiment and is possibly among the countries moving fastest on the journey to an information society. Broadly, China’s socialism big bang is spearheaded by three strategic thrusts; namely dual circulation, common prosperity and regulation of the platform society.
Dual circulation
There are several accounts on how dual circulation came about. James Crabtree notes in August 2019, “Chinese President Xi Jinping…In the coming period, we will face more and more headwinds…we must promote the formation of a new development pattern, in which domestic and international cycles are the mainstay, and the domestic and international dual cycles promote each other…the dual circulation strategy Xi outlined actually represents a radical new understanding of globalization and of China’s place within it…describes the deeply pessimistic worldview that has settled over Beijing. Once China’s leaders saw opportunity in globalization. Now, they expect the U.S. and its allies to deny China the technology it needs to build a modern socialist country by mid-century, meaning a wealthy superpower fit to rival the U.S…Trump’s tariffs, as well as his campaigns against companies like Huawei and Tok-tok, have given new impetus to the modern form of self-reliance Xi dubs internal development”.
James Crabtree believes “Xi’s new theory now sits at the heart of the country’s 14th five-year plan, which covers development from 2021 to 2025…will accelerate China’s decoupling from the West, while also increasing the importance of trading links forged with other parts of the world – for instance, via Xi’s signature Belt and Road Initiative…Xi quietly unveiled an economic strategy fit for a new Cold War. Both for China and for globalization itself, the results are likely to be profound”. He argues “the idea splits the world into two systems. First comes external circulation, meaning China’s global trade, but also the way it invites foreigners into its domestic economy…The second component is then internal circulation, meaning domestic demand from Chinese consumers, but also domestic supply chains and made in China technologies…The new development pattern is not a closed domestic circulation, but an open domestic and international dual circulation…Instead, China’s intention is the gradual creation of a new economic sinosphere,” in which global networks of trade and innovation that once focused on the industrialized West flow back and forth to China instead”.
Zhou Xin reports in January 2021, President Xi Jinping was quoted as finding “the global supply chain witnessed a partial breakdown…as the coronavirus was spreading throughout the world. As a result, part of China’s domestic economy stopped functioning, as “many local companies couldn’t source much-needed materials from abroad, overseas personnel couldn’t get into China, and cargos couldn’t be shipped out”. The situation helped him conclude that “the circumstances have become very different”, and that the old model of importing massive amounts of materials to process for re-exports is no longer workable. As such, Xi determined that China must rely less on the outside world…A recent joint statement from the US-led G7 group confirmed Beijing’s perception that the world will be less accommodating in the face of China’s increasing assertiveness. As long as we can stand on our own and be self-reliant, and maintain a vibrant flow of goods and services domestically, then we will be invincible no matter how the storm changes internationally…We will survive and continue to develop, and nobody can beat us or choke us to death”.
Alicia García-Herrero suggests “the Communist Party has acknowledged that the outside world now is more of a risk than an opportunity…dual circulation being the buzzword for China’s economic response to the US, which ultimately equates to self-reliance”. This meant “first, domestic demand needs to be further boosted as external demand is increasingly unreliable”. “Second, faster technological upgrade is needed to avoid potential bottlenecks in China’s economic development”. “Third, national security becomes an overarching concept given the increasing aggressiveness of the United States’ policies and those of its allies”. Fourth, “China’s worldview will need to be incorporated in global governance, as China will no longer be ready to accept pre-existing rules”.
Chen Gang notes dual circulation marks a transition from an open economy to a self-reliant one. “Contrary to what some people think, China’s dual circulation strategy does not signal that it is turning inwards. Instead, it aims to highlight its earlier weak points of weak domestic demand and R&D, and allows China to adapt to the altered global landscape. China’s trade war with the US has shown Chinese leaders how vulnerable China can be due to an over reliance on external technologies and markets”. China also recognises “in the long term, as China gradually becomes a high-income nation, the main driver of its economy would be domestic demand”. In tandem with this, “as China continues to open up new sectors to foreign investment and develops its economy, more foreign companies will invest in higher value-add industrial activities in the country…Presently, it is moving faster to invest in the manufacturing sector of some developing countries. Rather than a passive receiver, China is actively involved in reshaping the global supply chain”.
Dual circulation is a stepping stone for President Xi Jinping’s “Chinese dream” for “the great rejuvenation of the Chinese nation”[12]. This includes “achieving socialist modernization by 2035, and establish China as a rich, strong, democratic, civilized, harmonious, beautiful modernized socialist world power by the middle of this century”[13]. This will be supported by the five-year plans. Gabriel Wildau reports the latest plan reflects dual circulation emphasis on innovation and “identifies seven front line technology sectors where China should increase its indigenous innovation capabilities: artificial intelligence; quantum computing; integrated circuits; neuroscience and neuromorphic engineering; genetics and biotechnology; advanced clinical medicine; and deep sea, deep space, and polar exploration. The government will use tax incentives, bank lending, and policy support for venture capital as specific policy tools to promote technological upgrading and indigenous innovation. The plan also calls for implementing a manufacturing great power strategy and for policies to guide key links in (manufacturing) industry chains to remain within China – a clear reference to policies designed to resist pressure from western countries for supply-chain decoupling. The plan identifies eight specific manufacturing sectors that will receive policy support: advanced new materials; advanced equipment used for shipbuilding, aviation, machine tools, aviation, nuclear power plants, and offshore energy exploration; intelligent manufacturing and robotics; aircraft engines and gas turbines, applications of Beidou, China’s indigenously developed GPS navigation system; new energy cars and smart cars; and high-end medical equipment and pharmaceuticals”.
Overall, dual circulation aims to leverage on global dependencies on China as a counter-weight to containment strategies. Economic benefits from bilateral flows with China would be re-routed from “unfriendly” to “friendly” countries and firms while external consumption (tourism, education and investment) would be corralled into boosting domestic consumption and investment.
Foreign businesses in China are concerned by the implications of dual circulation. Joe McDonald notes “the party’s plans are straining relations with Washington and other governments that complain they violate its trade commitments. President Xi Jinping’s government risks stifling innovation by tightening restrictions on internet and other private sector companies and trying to create replacements for U.S., European and Japanese processor chip and other technology, the EU Chamber warned. Beijing is prodding banks, automakers and others to use Chinese technology when foreign alternatives might be more effective”. The European Union Chamber of Commerce in China has “appealed to Beijing to reverse course and open state-dominated markets wider…China should increase integration into the global economy and steer away from self-sufficiency”.
Common prosperity[14]
Common prosperity signals a re-focus on the social aspects of economic development. As Xie Jun notes on July 2021, “China declared that it has reached its first centenary development goal – building a moderately prosperous society, or xiaokang, in all respects”. President Xi Jinping announced “we are now marching in confident strides toward the second centenary goal of building China into a great modern socialist country in all respects. Chief among the developmental targets under the second centenary goal is achieving common prosperity for all, which has profound implications from economic development to people’s living standards, to social fairness and justice”.
Zhang Hongpei and Li Xuanmin note China’s development inequality – in terms of the urban-rural income gap, regional imbalance and gaps across different industries – has been widening due to accelerated urbanization, industrialization and increased market orientation with monopolistic features. In August 2021, the Central Committee for Financial and Economic Affairs called for the government to “ramp up efforts to properly deal with the relationship between efficiency and fairness, make basic institutional arrangements on income distribution, expand the size of the middle-income group, increase the earnings for the low-income groups, adjust excessive incomes and prohibit illicit income to promote social fairness and justice. Hailing the importance of advancing a balanced, coordinated and inclusive development, the meeting stressed that China should improve the socialist market economy, strengthen balanced development among regions and promote coordinated development across industries”.
Luo Zhiheng notes “five shifts have taken place in China’s mid-and long-term development philosophy. These include the shift from growth rate to security; from efficiency to fairness; from early prosperity for some to common prosperity; from capital to labour; and from real estate and finance to science, technology and manufacturing. These changes are manifested in recent policies related to school district houses, after-school tutoring, property tax pilot programs, anti-trust and reckless capital expansion…China is making strategic shifts that indicate a reversal of the capital-labour relationship. At present, there is a labour shortage and a capital surplus, hence we are seeing the fiscal and taxation policy adjustments on real estate, the antitrust campaigns in the industrial sector and the intervention in intergenerational education inequality caused by the wealth gap”.
Luo Zhiheng explains “as China’s economy enters a new development stage where absolute poverty has been eliminated, the further widening of the division between the rich and the poor…will distort the incentive mechanism. And if the fruits of economic development are excessively concentrated in a small number of people, the masses, who can only get a small piece of the pie, will lose the incentive to keep on striving for a better life. At the same time, economic vitality will decrease and the momentum of innovation will be weakened, which will eventually result in a low-desire society like in Japan. The polarisation of the rich and the poor will also increase social anxiety and cause other social problems. Severe income polarisation is often accompanied by a narrowed space to advance in society, increasing the risk of the middle class slipping downward. And as the anxiety of class slippage increases, the arms race in children’s education intensifies. Japan and South Korea, where class solidification is more severe, have both developed extracurricular tutoring, as reflected in Japanese and Korean dramas. And when competition among young peers becomes more intense and opportunities for advancement more remote, fertility rates decline. In an ideal society, people should be hopeful that they can improve their quality of life, and should not have to worry about their basic needs. In addition, for the disadvantaged groups, the social safety net should also provide basic livelihood protection. Only in this way can our society flourish and develop in a healthy and stable manner”.
Xie Jun notes Zhejiang province “has been picked as ground zero…called for Zhejiang to raise its per capita GDP to the standard of moderately developed economies by the year of 2025. It also instructed that Zhejiang should form an olive-shaped social structure in which middle-income households are the mainstay of the economy, while striving to reduce disparities between rural-urban income and living standards”. It was noted Zhejiang was a good role model because despite mediocre geographic and natural resource advantages, Zhejiang’s GDP reached 6.46 trillion yuan in 2020; with a GDP per capita of 100,620 yuan – 1.38 times that of China’s national level and close to Poland. The richest region, Hangzhou’s Binjiang district, had a GDP per capita of 406,173, surpassing Singapore, Australia, Sweden, and Denmark. Yet, Zhejiang’s rural residents’ average disposable income was 31,930 yuan, the highest among all domestic provinces for the 36th year and its urban-rural income ratio reached 1.96:1, shrank eight years consecutively and is among the lowest for Chinese provinces.
Xie Jun reports in June 2021, Zhejiang detailed plans to develop a common prosperity pilot zone and “set a number of economic targets, such as raising its per capita disposable income to 75,000 yuan by 2025, lowering its urban-rural income ratio lower than 1.9:1, while 80 percent of the province’s households should have an annual disposable income standing between 100,000-500,000 yuan”. The provincial government has designated 28 localities to carry out pilot programs in six areas. For example, Hangzhou and Yiwu have been tasked with narrowing urban-rural gaps, while Ningbo will be responsible for delivering high standard public services. Initiatives highlighted include “rural land reforms, a plan to let resident income double in 10 years, and train 100,000 rural entrepreneurs, as well as push a number of scientific plans with special focus on Internet plus, life science, and new materials”. Other ideas include pilot tax reforms (e.g. on house properties) and higher government investment in education and healthcare facilities.
In relation to this, Michael Roberts relates “there was growing public anger at how the rich in China, as in the rest of the major economies, have gained hugely from the financial and property price boom during the pandemic, while the majority struggled through the lockdowns and faced increased costs in education, health and housing and a serious risk to decent jobs for graduates and others. Education, health and housing are the three mountains that all Chinese households aim to climb to get a better life – and yet costs for these were spiralling while the rich made millions”. The rising costs of education, healthcare and housing are a thorn in affluent societies. China is attempting to manage inequality and Baumol’s cost disease largely through supply-side interventions to promote house ownership[15], cool property prices[16] and control healthcare costs.
Zhao Yusha notes since July 2021, “the Chinese government has rolled out a slew of measures, dubbed double reduction, also described as the most stringent in decades by Chinese analysts, to ease burdens and anxiety for students and parents alike, including suspending off-campus curriculum subject tutoring courses for students on national holidays, and reducing the frequency of exams. Analysts said the reform not only turned the tide against the growing unrestrained competition in children’s education, but also guaranteed China’s next generation a healthier, more balanced and diverse upbringing”.
The private sector[17] has jumped quickly on the common prosperity bandwagon. Lianhe Zaobao reports Pinduoduo announced pledged to invest RMB10 billion towards modernising farming and revitalising villages through technology. Tencent set aside RMB50 billion for its initiative to revitalise villages, increase the incomes of the lowly paid, improve grassroots healthcare systems, and ensure balanced development of education. “For companies that have taken concrete actions, even though they still faced jibes like they are doing it to save their own skin, public opinion towards them is generally more cordial, with comments such as this is how large enterprises should behave after becoming successful, by helping those lagging behind improve so as to achieve common prosperity, and hopefully, more [companies] in the industry will try to surpass Tencent’s efforts. Chinese businessmen have also increased their donations to charities.
Regulation of the platform society
In the initial phase, the government provided much latitude to platforms to disrupt the traditional sectors. However, as the platforms became dominant, the government became concerned with the business, social and political implications of private sector control over technology and data. Michael Roberts notes “a December 2020 meeting of the Chinese Communist party Politburo vowed to end what it called a disorderly expansion of capital. The Chinese leaders were worried that the capitalist sector in China had got too big for its boots. Companies like Jack Ma’s Ant Group had expanded into consumer financing and looked to raise foreign funds to do so. In effect, the Ant Group aimed to take over household lending from the state banks. Ant was going to do what it liked and said so with a lot of fanfare in the press. Ant and other Chinese capitalist tech and media companies were increasingly engaged in typically Western-type mergers, secret contracts and other financial irregularities. China’s regulators had been turning a blind eye to all this for years”. “Now the Chinese leadership has been forced to zigzag back from disorderly expansion and respond to the public backlash through a crackdown on the consumer tech and media giants and by introducing curbs on private education and speculative property development. It has also banned cryptocurrency operations”.
Hubert Horan points out “Beijing’s attitude towards its rapidly growing tech industry reflects its understanding of the longer history of tech industry growth in the US, and the impacts of US policies toward the tech industry…As long as the stock market keeps rising it does not matter if massive investment has been funnelled into the production of cat videos or if an excessive focus on short-term stock prices have crippled the semiconductor and aircraft manufacturing industries. Years of non-enforcement of routine laws and regulations under laissez-faire, and the ability of a handful of tech companies to achieve unprecedented sizes produced an outcome where both political parties strongly support the interests of the tech industry. This effectively blocks policies (e.g. tax rules, labor laws) that could materially hurt the tech industry. It also means that it is virtually impossible to address externalities created by these policies. These include things like the rapid growth of inequality, the destruction of traditional channels of political discourse and the rights of individuals to privacy and to control their personal data. It also includes the awful, widespread fallout that would result if (when?) the Everything Bubble created by these policies bursts. Beijing may have come to believe that a system where the Jeff Bezos’ Mark Zuckerbergs and Travis Kalanicks of the world were given unfettered freedom to flaunt any rules they didn’t like may not have been producing efficient outcomes for the rest of society. It is one thing to allow investors who have developed major product and efficiencies to become rich, but a quite different thing if those investors suddenly capture previously unimaginable levels of wealth without actually improving overall economic welfare”.
Hubert Horan explains “the tech industry plays a much different role in the economy in China than in America…The tech industry represents the breakthrough case where private capital accumulators could achieve enough power to circumvent or thwart central government policies they didn’t like, and industry leaders clearly wanted to entrench a US-type approach. This was the point where Beijing had to decide whether to re-establish some type of meaningful control, or allow the tech industry to pursue increasing US-style laissez faire freedom…A growing perception that the benefits of economic growth are no longer being widely shared could do much more to undermine that authority of the CCP than any criticisms from tech titans ever could. If China’s IPO bubble bursts, the CCP would need to move rapidly to ensure damages did not spread throughout the economy. As the manager of the Chinese economy, the CCP appears concerned that giving greater control of the tech industry to more independent, less accountable people could undermine its ability to manage other parts of the economy. Much of the power and growth of the tech industry stems from the Alibaba and Tencent financial payments companies. Beijing may be fearful that increased power and independence could limit Beijing’s ability to control its currency and trade policies, or to fix problems with its fragile shadow banking system or to funnel capital to industries (such as semiconductors or Belt and Road investments) deemed to be major development priorities…Beijing clearly had no desire to go further down the US laissez faire path where private capital accumulators would steadily more powerful. It presumably believes that the benefits of reigning in its tech industry clearly outweigh costs and risks…Beijing’s announced investigations directly focus on longstanding tech industry abuses but it is wildly premature to predict that Beijing’s new policies might turn out to be a major boost for competition and Chinese consumer welfare”.
Martin Chorzempa notes “until this shift, Chinese Big Tech companies had faced nearly zero antitrust scrutiny and a loose and unenforced regulatory regime except, of course, for the aggressive Communist Party censoring of content. In part, this is because tech companies and their leaders had immense influence within society and the Party. One senior Chinese regulator even described them to me as our oligarchs. Their power has held back sensible regulation, such as allowing Jack Ma to go over the central bank’s head in 2014 to neuter rules on what were then quite insecure QR code payments. Didi, meanwhile, refused to hand over data to authorities after people were murdered using their service, dropping off boxes of printed paper instead. China’s tech companies have long ignored the law requiring them to report acquisitions, and the so-called Variable Interest Entity loophole has long allowed overseas IPOs with limited oversight. China’s campaign to regulate Big Tech, of course, entails political threats, from silencing business opposition to party overreach, which is lamentable. On the economics, however, what has been implemented thus far is more a useful corrective than a shutdown…None of the new tech antitrust, privacy, or fintech policies in China are as drastic as the ideas currently floating through the U.S. Congress to break up companies such as Google, Facebook and Amazon. Ant Group and others were operating immensely complex fintech empires, without proper regulatory oversight – a danger that needed to be addressed…Sometimes even authoritarian governments are right to increase economic regulation. In the area of Big Tech, China’s recent measures are more of a correction than an overreach though there is no denying that these regulations are designed in part to expand party control as well. Many of China’s goals in this sector are the same as those attracting attention from policymakers in democratic countries, like less concentration of power and greater privacy. Surely many of Beijing’s tools would be unacceptable in democratic societies. Still, China’s progress addressing genuine issues of common concern is worth clearly assessing, rather than dismissing them as simply a power grab”.
Lianhe Zaobao notes Professor Yao Yang, whose “views are deemed to represent that of the Chinese government”, pointed out “that it would be better for companies to shoulder more social responsibility rather than donating huge sums…the 996 work schedule is a huge problem and a corporate social responsibility because it diminishes social well-being and makes everyone nervous”. Professor Yao Yang suggested companies could remove the 996 work schedule so that employees can rest on weekends, or if delivery personnel receive social security contributions…companies should also refrain from using algorithms and systems to monitor how their delivery personnel perform…Platform giants need to move away from being solely driven by profit towards symbiosis i.e., to be able to see the bigger picture of maintaining symbiosis in the ecosystem they reside in with their partners and competitors, instead of being self-centred as this can lead to damaging social outcomes”. Lianhe Zaobao adds that a National Business Daily opinion piece called for “companies to switch from a shareholders-first to a society-first mindset when it comes to fulfilling their social obligations and make maximising the wealth of society their long-term development goals. Companies would also do well to focus more on how to benefit others and less on self-benefits, and to start counting resource-poor segments of society amongst their stakeholders”
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Kai von Carnap and Valarie Tan note many misread the true significance of “the launch of Operation Cyber Sword, a wide-ranging campaign involving 14 ministries and agencies aimed at reigning in China’s tech sector. The regulatory actors were given six tasks: regulating live-commerce platforms, cracking down on unfair competition in online markets, strengthening the supervision of Internet advertising, centralizing control of online sales, and ending illegal animal and plant trade on e-commerce platforms…What has followed over the ensuing 12 months is an unprecedented and ongoing regulatory onslaught. Hundreds of companies have been fined north of USD 3 billion, apps have been taken off stores, and Jack Ma – until then China’s richest man – inexplicably went missing for three months. China’s Cyber Sword is being wielded not just at individual companies or apps but at entire industries and ecosystems”.
Kai von Carnap and Valarie Tan point out “the overall shape of the campaign is only slowly becoming clear because the most significant laws just came into effect over the last two years. What is happening now is that the enforcers are being pushed to use and test these new powers. All this is happening against the backdrop of a digital economy that has celebrated immense growth over the past decade. New business models developed rapidly and labor markets and financial dynamics underwent paradigmatic shifts. However, with these changes came a host of regulatory problems, which the government is keen to tackle using different new bodies applying a number of new laws”. “The State Administration for Market Regulation (SAMR), for example, was only found in 2018 and tackles market regulation. It enforces the Anti-Unfair Competition Law that has been in effect since 2019. The SAMR has successfully investigated more than 3,000 cases of unfair competition and collected CNY 206 million in fines in the first half of 2021. It has also made use of the new E-Commerce Law, effective since 2019, and the Anti-Monopoly Law. Meanwhile, China’s new cyber watchdog, Cyberspace Administration of China (CAC), has focused on implementing the 2017 Cyber Security Law and the 2021 Data Security Law. It found more than 100 apps in violation of collecting users’ personal information and ordered Didi, China’s biggest ride-hailing app, to be taken offline”.
The impact has been sweeping. Offending apps, platforms and activities are severely curtailed, revenues dampened, employees laid off and firms are figuring how to reconfigure their business models. Yet, there are suggestions the reforms are only beginning and more initiatives are expected over the next two to three years; particularly in areas such as algorithms, privacy, data and cyber security where the new laws are still to be fully implemented. The general trend is towards “a consolidation of institutional power and the progressive implementation of a broad legal framework”.
Kai von Carnap and Valarie Tan conclude “these institutional changes are just one part of a grander paradigm shift in China towards technological self-sufficiency, a closely steered government economy and China’s ambition to become a technology superpower. Ultimately, the question of how Beijing wants to define the role of its private sector at large in this new phase of socialism has still to be answered. Foreign operations in China are de facto on a pathway to becoming more like a local Chinese entity rather than integrated in global networks. They are not decoupling from China, but rather decoupling their China operations from their global ones”.
Dylan Levi King highlights “one of the key tenets of Xi Jinping Thought on Rule of Law, which states that China should: Make full use of big data, cloud computing, artificial intelligence and other modern technological means to comprehensively build a smart rule of law, and promote the digitalisation, networkisation, and intelligentisation of the rule of law in China. Optimize and integrate various information, data, and network platforms in the field of rule of law, and promote the construction of the nationwide rule of law informatization project”.
Dylan Levi King notes “Tu Zipei, the former Alibaba executive and theorist of social governance, has called the proposed Chinese model single-particle governance. The model integrates data from government and commercial sources into individual master files that become the elementary particle. This idea doesn’t come from Maoist egalitarian politics or Dengist market horizontality, but from online shopping and social media platforms. Fittingly, it will run on software developed by commercial digital technology firms, like Huawei, Tencent, and Alibaba”. “Such a system would fundamentally change the political culture. Horizontality requires not just individual autonomy, but also a sense that local communities or interests can be organized and exercise some kind of collective agency…Xi’s verticality only requires a population that can be effectively managed. The state can fulfill the interests and express the will of a broad population of abstracted social individuals without having to rely too much on the human judgments of local cadres at all. Despite the party’s centralism, it has always operated through a huge matrix of institutions: schools, planning committees, workers’ organizations, cultural groups, trade boards, and many others. A person’s political identity was linked in part to the collective bodies in which they participated. But with an urbanizing population that is increasingly integrated into service economies instead of life-long economic or social roles, the bases for these collective expressions of political identity are disappearing. As the population atomizes, the government seems intent on creating a stronger civic Chinese identity and wants its citizens to politically relate primarily to the national government. Their aggressive cultural assimilation policy in Xinjiang is one example of this. But so is the new rhetoric about data-driven governance: it presumes a population where the individual is a data-generating automaton whose activities are input for the state to work with, with few or no intervening social structures. The logic of big data governance at its highest scale appears horizontal in flattening the inputs into decision making. It de-emphasizes the importance of political, economic, and intellectual elites but also of local government. It also increasingly removes the possibility of a cadre-managed collective autonomy in goals and decisions”.
Dylan Levi King argues “Xi has based his position on continuing China’s claim to follow an independent ideological path from the West. Part of his impetus for a re-centralization of party-state authority has been a desire to avoid convergence with the liberal atomization associated with Western decline. But for all of both Chinese and Western bluster about not wanting to be like the other, the structural realities are shockingly parallel. Both have undergone extensive social atomization in this period. Since the 2010s, both have seen new crackdowns on local autonomy and independent discourse using commercially-derived surveillance and social control technologies. Xi’s invocation of the fourth industrial revolution puts him in a path of explicit convergence with the surveillance individualism that has come to characterize Western liberal democracies. The causes and rhetoric differ, but the result seems remarkably similar: an increasingly powerful national state, ideologically and structurally centralized around the national elite, governing an increasingly atomized population. In this new ideal of digital governance, the individualized population is rendered into legible, data-generating citizens strictly governed by a single centralized discourse of possibility. Western commentators have worried that the Western elite is quietly copying the Chinese surveillance model, but their Chinese counterparts could as easily worry that the party is simply copying the Western model”.
China’s socialism big bang is consistent with its view of itself as a “platform society”. The guiding philosophy can be gleaned from its regulatory initiatives. First, China believes data and technology are basic resources that belong to the public rather than to the private sector; consistent with its philosophy on communal ownership. Hence, even as the government expands its oversight and access to data, it is imposing strict controls on private sector usage of data. Second, rather than rely on anti-trust to break up dominant companies to diffuse platform monopoly power, China focuses on curbing anti-competitive practices and on promoting compliance (and ring-fencing) with sector regulation.
To think of it though, China’s government have more in common with global tech firms than with communism. The global tech firms also deploy authoritarian business practices and use data extensively to surveil and “exploit” customers and employees. Both tech firms and the Chinese government are willing to experiment and innovate on the fly and have the capabilities to execute and scale rapidly. China’s policies are data-driven, disruptive and transformative and fit into the narrative of an information society.
The debate on China’s socialism[18] big bang
In the past, China drew policy lessons from the German industrial model and the Singaporean social model. China’s socialism big bang demonstrates its willingness and confidence to move ahead (of Western societies) with experimental policies to address intractable modern socio-economic challenges such as inequalities, Baumol’s cost disease, aging demographics and platform concentration. Would China’s radical reforms succeed in addressing problems where conventional policies in the West have failed? This has spurred a vigorous debate.
Gu Qingyang notes China wants to sharpen the focus on industrial development by ramping up “regulations on sectors such as housing, healthcare, and culture, to limit the over-extension of capital in these sectors and bring the focus of finance back to the real economy…Those familiar with China’s progress would know China’s system and institutions are far from perfect, and timely major reforms are truly needed. China’s economic policy direction has not changed. But what is different is that China will be more conscious of rules and order. The recent regulatory measures should be seen as part of China’s long-term system building. The intention is not to suppress the power of the market, but to allow the market to perform a greater function in a climate of fair competition. Only when there is the rule of law, commercialisation, and equal opportunities, can there be stimulation of innovation and productivity”.
Gu Qingyang argues “for China to realise this new development model (dual circulation), the key challenge is in comprehensive institution-building, particularly instituting the rule of law and a healthy market system, as well as improving its national governance framework and capabilities. China’s development in the past lacked a high-quality system and economic operating environment, which means that if China wants to meet new challenges, the only way is to speed up building its domestic institutions”. He points out the US is currently preoccupied with political divisions and the coronavirus and, “in the short term will not be able to hit China harder. But once the situation stabilises in the US, it is expected to ramp up its containment of China. Meanwhile, China is using this window to fortify itself and strengthen the foundations for its own domestic development to handle potential harder moves by the US”.
Han Yong Hong notes the sweeping reforms “have prompted fears of a new Cultural Revolution…The signs are clear that China is turning to the left with the intention of building a fairer, cleaner society, but people feel differently about this. Some interpret this positively – economically, China has been heading to the right for many years, leading to the pursuit of money, involution in education, and the internet being controlled by capital, so that it is now time to correct the situation. Others recall what happened before, like killing the rich to help the poor and the Cultural Revolution; for some, it conjures up the horrors of the Cultural Revolution and even a deep-seated fear of communism. Yet others seem excited at a revolution”. He points out “Global Times editor-in-chief Hu Xijin, who has always been good at reading the authorities’ intentions…explained that China often talked about self-revolution, but what it really meant was self-motivation, and not a destructive revolutionary movement. Hu also said he was worried that such rhetoric would dredge up certain memories of history and lead to confusion and panic…soothed readers by saying that China’s reform and opening up would not change, adding: Don’t believe in extreme readings of China’s regulatory measures.”
Han Yong Hong concludes “the fact is, China’s moves over the past six months in tackling monopolies and regulating the tutoring, entertainment, and gaming sectors do make sense and should be able to win general approval. China’s current political climate is also very different from what it was before the Cultural Revolution; politically, there is no need to initiate another Cultural Revolution…At present, the government’s crackdown on the disorderly expansion of capital, the tumultuous path of promoting common prosperity, the mixed voices in public opinion, and the upheavals faced by industries that are being regulated are still worrying from time to time. After all, when power is not curtailed by a system of checks and balances and is at the same time striking hard every time it makes a move, even bystanders would be shocked and alarmed. But based on the past few years of experience, China will not change its path just because people are debating about issues or are worried. Instead, China will continue taking big steps towards the correct path that it has chosen for itself”.
The notion that China’s government is pushing back on Western cultural influence has also been debated. Interestingly, Tanner Greer argues “yet the majority of firms and media products targeted by Mr. Xi’s new campaign are not Western, but Chinese. The drivers of this campaign are also domestic. In Chinese eyes, each of its targets is associated with a longstanding social ill…The new restrictions on video games…are less a reaction to the popularity of Western games (China’s blockbuster titles are for the most part homegrown) than the humiliating reality that the amount of time the average Chinese wastes on gaming is double that wasted by the average citizen of any Western nation. One can forgive the gamers for their addiction: Urban Chinese life is atomized, tech-addled and status-anxious”.
Nonetheless, China’s government is concerned about the cultural aspects[19] of rising prosperity and generational change. Youth cultures – a younger generation that doesn’t listen to their elders and that is social media savvy – are drifting away from the family and cultural (Confucian) or political (Marxist) values rooted in China’s history. Thus, the wide-ranging cultural reforms – targeting “undesirable” behaviours related to youths (online gaming addictions[20], tang ping or lying flat[21] cultures, tutors), entertainment (fan and artist cultures) and workplace cultures (social drinking, sexual harassment, excessive overtime) – is an attempt to re-impose societal discipline.
The tremors from China’s socialism big bang are being felt far and wide. The loss of foreign culture and openness may boomerang on China. Regulatory crackdowns, even limited ones, affect the incentive for risk-taking, stifle innovation and entrepreneurship and dampen economic growth, corporate profits and asset prices. The stock prices of affected companies in China and the US have already fallen sharply and resulted in massive losses for investors worldwide. There are worries the fall-out from property defaults could derail not only the Chinese economy but also the global economy as well.
Yet, there may not be a better time for massive reform. The irony is that the US’s “whole-of-government” containment approach makes China’s bold and bitter reforms possible because it obstructs defections among China’s entrepreneurs and talents and leaves them with little choice but to align themselves with national aspirations.
Dan Wang explains China’s impressive technological achievements “have as often been driven in spite of state interference as they have because of it…China’s entrepreneurial companies have sometimes benefited from the state’s largess and protection, but they have also worked to keep the state at arm’s length. In order to be truly competitive globally, firms such as Huawei and Alibaba have decided that they need to use the best components on the market, many of which are American made”. The “leading entrepreneurial firms can no longer ignore the state’s commands to source products domestically, however. Enhanced U.S. export-control measures have made that decision for them and united China’s government and its leading firms in a shared goal: to pursue technological and industrial self-sufficiency so that no Chinese firm is at the mercy of U.S. trade policies. By imposing restrictions on American products, the U.S. government has inadvertently done more than any party directive to incentivize private investment in China’s domestic technology ecosystem”. “U.S. sanctions against Chinese technology companies have deeply offended many in China, especially given their perceived arbitrary criteria and severe effects. Many engineers at top companies such as ByteDance, DJI, and Huawei have studied and worked in the United States and were bewildered by claims that their work constituted a threat to U.S. national security”. “Now that Huawei’s phones are difficult to find in stock, every consumer in China knows that U.S. restrictions have started to bite. It is not unusual, these days, to see people on the Beijing subway watching video explanations of the semiconductor supply chain. China’s true Sputnik moment has been its realization that it cannot count on the United States to supply its technology – and that it must cultivate domestic alternatives”.
Dan Wang points out the long-term consequences. “Today, the U.S. government is putting Huawei in NASA’s position: a cash-rich organization willing to pay for critical components on the basis of performance rather than cost. Smaller Chinese companies that previously never stood a chance of selling to Huawei are now sought after as vendors, and they receive infusions of cash and technical expertise that will accelerate their growth. Private and state-owned chip manufacturers are ramping up their operations. Once siloed industries now collaborate in the service of tech innovation: the Chinese Academy of Sciences, for example, has begun coordinating regular sessions that bring together math professors and private companies. China is now undertaking a whole-of-society effort to improve domestic technology, specifically around what Chinese leaders think will drive not only economic growth but also geopolitical power…It is likely that in a decade, China will have made greater technological advancements under the U.S. export-control regime than it would have had the United States not forced China’s leading companies to buy from weak domestic firms”. In addition, “a Beijing less dependent on U.S. products will feel less apprehensive about retaliating against American firms, giving it license to respond to perceived affronts… Greater self-reliance would deflate the threat of those sanctions and remove a deterrent against military action”.
China’s reforms are bold but, by most accounts, they are intrusive and excessive. Lu Xi warns of the dangers of China’s bureaucracies taking “policies to the extreme to please higher-ups”. “The reality is that excessive execution or even misinterpreting public policies have become a common sight at the grassroots level in China’s battle against the pandemic. Not recognising Covid-19 test outcomes from other jurisdictions, repeated quarantines and polymerase chain reaction tests, expanding the scope and extending the duration of quarantine at will are all examples that stem from each layer of the Chinese government introducing additional Covid-19 measures. Such behaviour reflects the underlying intrinsic shortcomings of implementing a legalistic Chinese bureaucracy”.
As with most things associated with China, the West will undoubtedly perceive an authoritarian intent underpinning its socialism big bang. But at the same time, it prompts questions as to why Western governments are not adopting similar hard-hitting reforms to address similar maladies afflicting their societies such as inequality and labour and consumer rights. It is perhaps an irony and a reflection of their decline that the most advanced nations remain major producers of agricultural products, are unable to control spiralling education, housing and health costs, and do not spend enough on R&D and infrastructure.
Nonetheless reform agendas, of any garden variety, are dicey because they inevitably threaten vested interests and most reforms and governments do not survive the pressure from powerful groups. China’s government is demonstrating it is not beholden to foreign governments and investors, and local tech entrepreneurs, property tycoons and other elites. But it remains an open question as to whether China can manage the risks of doing so much, so quickly; without the situation running out of control. China’s socialism big bang means its government is sailing into uncharted waters. The personal credibility of its helmsman, President Xi Jinping, is on the line as to whether he can steer the boat steadily through the turbulent waters.
Conclusion
Overall, China’s new policy direction is born out of the decoupling tensions. China has chosen an off-the-beaten track developmental path with technology having a central role. China believes its historical weakness was due its disdain for science and technology. This is now been reversed as China now believes the future will likely belong to those most willing to disrupt the past. China’s government prioritises the extensive use of technology and data in society, and supports information disruption and competition regardless of corporate and individual concerns. The outcomes are unpredictable except that it means there is no status quo in the future.
The upheaval from China’s socialism big bang will leave the world guessing on the nature of the future China it will have to deal with – post-pandemic and post-decoupling – and how China is likely to manage its relationship with them. The divergent paths means that China and the West will likely be further apart. The economic model rivalry with Western capitalism is part of a geopolitical challenge that can longer be avoided.
China’s new policy direction presents a direct challenge to the US-led international order on many fronts. Its new economic policies to shift from low value to high value goods and services, its tight monetary policies (including bursting its asset price bubbles, strong yuan policy[22]), and dual circulation (re-centering flows and consumption away from US sphere) will raise inflationary pressures and slow economic growth in the West. Increasingly, the US and China will compete as the largest consumers while the technology, information and monetary system may fragment into different spheres.
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[1] Peng Shengyu argues huge exports lead to a great loss of domestically created material wealth flowing overseas. By unreservedly supplying China-made goods to the US who has the power to print money and leaving wealth accumulation in the hands of individuals, the Chinese government has not done enough to improve the lives of its people, especially the poor.
[2] See “Information and development: Escaping the industrial maturity trap and moving forward to an information society”.
[3] Jeremy Goldkorn, Anthony Tao, Lucas Niewenhuis, Jiayun Feng and Chang Che provide a guide to the various crackdowns.
[4] “Global reset – Two whales in a pond”.
[5] https://en.wikipedia.org/wiki/Long_March.
[6] “Global reset – Monetary decoupling (Part 4: Lessons from Plaza Accord)”; “Global reset – Monetary decoupling (Part 6: The forthcoming currency war)”.
[7] N. S. Lyons attributes the ideas underpinning China’s social reforms to influential ideological theorist Wang Huning who is a member of the CCP’s seven-man Politburo Standing Committee. He is thought to have “convinced Xi that they have no choice but to take drastic action to head off existential threats to social order being generated by Western-style economic and cultural liberal-capitalism – threats nearly identical to those that scourge the U.S”.
[8] “Labour share of income (Part 6 – The missing big picture)”.
[9] “The services economy: Revisiting Baumol’s cost disease”.
[10] Clare Jim and Farah Master note “some Chinese officials and state media have blamed tycoons for failing to prevent anti-government protests in 2019 that they say were rooted in sky-high property prices” and signalled expectations for Hong Kong’s powerful property tycoons to “pour resources and influence into backing Beijing’s interests, and help solve a potentially destabilising housing shortage”. See also Tai Hing Shing on property issues in Hong Kong.
[11] Phrase is attributed to Mark Zuckerberg.
[12] https://en.wikipedia.org/wiki/Chinese_Dream
[13] See Xinhua News Agency: Proposal of the Central Committee of the Chinese Communist Party.
[14] See Adam Ni for Xi Jinping’s recent speech explaining “common prosperity”.
[15] Ellen Brown notes “a March 2016 article in Forbes…90% of families in the country own their home, giving China one of the highest home ownership rates in the world. What’s more is that 80% of these homes are owned outright, without mortgages or any other liens. On top of this, north of 20% of urban households own more than one home”.
[16] Yang Danxu relates on the state-level attempts to cool the red-hot Shenzhen property market.
[17] Deng Qingbo highlights some debates in China on the role of enterpreneurs and common prosperity.
[18] Qin Hui provides valuable insights into the Chinese debate on socialism.
[19] See Chang Che’s guide to China’s cultural crackdowns.
[20] Global Times report the authorities have asked online game companies to strictly comply with the game time limits for minors, to supervise their spending and prohibit high-value reward games. The companies were also asked to review online game content and prohibit illegal content such as incorrect value orientation, obscenity, and bloody violence; and refrain from promoting unhealthy cultural features such as money worship, sissy men, and Dan Mei. They were also asked to review playing rules and designs (such as “money-oriented” and “traffic-oriented” games) that could lure players to indulge in the game. Game companies were also asked to refrain from unfair competition, prevent excessive concentration and monopoly practices, and focus on promoting technological innovation and better satisfying the new expectations of the people’s spiritual and cultural life.
[21] A cultural trend that espouses young people to “lie flat” to pursue a simple life rather than chase after careers and wealth.
[22] See “Global reset – Monetary decoupling (Part 3: Consequences of diverging policies)”.