The China model (Part 1: A balanced perspective)
Phuah Eng Chye (11 March 2023)
There is a need to revisit the China model because of the lessons it offers to other countries and also because of the geopolitical ramifications. However, geopolitical information warfare makes an objective assessment difficult. In light of the information warfare, a balanced perspective on the China model is much needed.
Conventional macroeconomic perspective
China’s economic success is attributed to its high-savings, high-investment export-driven model backed by massive investments in property, infrastructure and capital-intensive projects. Michael Pettis notes “there is increasingly a consensus in Beijing that China’s excessive reliance on surging debt in recent years has made the country’s growth model unsustainable…China’s official debt-to-GDP ratio…270 percent…the surge in China’s debt burden in the past decade…is a result of the economy’s overdependence on non-productive investment in property and infrastructure to balance out its structurally high savings rate and to bridge the gap between genuine growth and the GDP growth target”. He argues that “as long as increases in fixed asset investment continue to be Beijing’s main lever for maintaining politically acceptable growth rates much above 2 to 3 percent, there is no way to prevent the country’s debt burden from ballooning…Once the decision has finally been made, however, to regain control of the country’s balance sheet, eliminate or sharply reduce non-productive investment, and accept the consequences in terms of slower growth, the question then becomes how much slower growth can Beijing accept?” He thinks Chinese policymakers will have trouble accepting a growth rate to drop much below 4 percent and this implies “debt will continue to rise for many years”.
In relation to this, Michael Pettis[1] points out “how out of control the property sector became. The direct and indirect share of GDP attributable to the property sector is estimated to be between 25 and 30 percent, which is twice the level in other countries. Real-estate prices are equal to between 300 and 350 percent of GDP, which is two and a half to three times what it is in other countries. When you look at household savings, the real-estate component of household savings is between 60 and 70 percent, which is more than twice what it is in other countries… when you try to bring the property sector under control, you are reversing this entire process. And that means everybody – households, banks, businesses, local governments – suffer enormously from any attempt to bring the property sector under control. And the pain is so great at some point they try to back away. This was not the first time that they went after the property sector, although it has been the most aggressive attempt. They’ve gone after it many times before in the last five to six years. But they always pull back when they see the pain. And the pain is really brutal this time because they really clamped down on it. And it’s particularly brutal for local governments because they’ve depended heavily on land sales for their revenues to pay for everything. And they’re being so heavily squeezed that they’re cutting their expenses, reducing salaries…now Beijing is trying to stabilize the property bubble without reviving it. They want to slow down the contraction…once it goes down, it’s very hard to get it to stabilize. Speculative markets go up or they go down; they don’t do stability. So there’s a real big question as to whether or not Beijing will indeed be able to stabilize them”.
Michael Pettis[2] thinks this relates to “the original problems of the growth model. The private sector, and particularly the service sector, is starved of demand”. China should forsake its high savings, high investment model and reduce the large amount of non-productive investment and shift from supply-side policies (which implicitly requires transfers from the household sector) towards income redistribution and demand-side support. The main hurdle is China’s low household share of income which constrains consumer demand. China “would need to transfer at least 10 to 15 percentage points of GDP from governments to households. So, at the end of this transfer, households retain not 60 but 70 to 75 percent of GDP, and governments no longer retain 20 but rather 5 to 10 percent. That means the ratio of household income to government income goes up by seven, eight, nine, ten times. Well, you cannot have such a massive redistribution in relative income without a massive redistribution in relative political power”.
Michael Pettis explains “Beijing may be seeking to resolve Western forms of income distortion instead of Chinese forms of income distortion in China’s very different economic context. In the West, where household income typically represents 70-80 percent of GDP, the main income distortions are in the unequal distribution of the benefits of growth between those who are rich and those who are not. In China, however, households retain a much smaller share, roughly 55 percent of GDP. While income inequality is certainly a problem in China, the country’s low consumption rate isn’t primarily caused by an unequal distribution of income among households. It is mainly caused by the low household share of GDP, itself a function of the country’s very high government share of GDP, which is recycled into investment rather than used, as in other countries with high government shares of GDP, to support demand-side social programs to benefit households”. “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…such changes would require…an enormous increase in the ratio of household income to government income and an equivalent reduction in the capacity of local governments[3] to intervene in and direct the economy. It is hard to imagine that a relative transfer of this magnitude would not come with an equivalent relative transfer of political power”.
A recent International Monetary Fund (IMF) report note “after decades of high growth, the Chinese economy has started slowing and is facing headwinds that are projected to lower potential growth substantially in the longer term. First, with its rapidly aging population, the Chinese economy is expected to have fewer people entering the labor force, which will diminish growth prospects. Second, productivity growth has slowed significantly, and as China edges closer to advanced economy status and the technology frontier, its aggregate productivity growth is expected to eventually decline further. What is unique in the case of China is the additional pressure from diminishing returns of investment-led growth, as excessive investment – driven by record-high domestic savings – has been channeled towards relatively less productive SOEs, activities such as real estate, which are less growth-enhancing over the longer term, and to further increase China’s already comparatively very large public capital stock. This pattern of investment in China has sped up the decline in aggregate productivity, and hence, potential growth”.
IMF concludes “China’s potential growth has started falling and several headwinds suggest it will continue to slow, showing the need for comprehensive reforms of China’s growth model. With an ageing population, slowing aggregate productivity, as well as record-high investment rates that have pushed investment into less productive sectors, potential growth under a baseline medium-to long-term scenario is expected to fall. Without reform efforts, aging and declining productivity would likely continue to suppress growth over the long term, beyond our forecast horizon. These pressing factors suggest the need to rebalance away from the investment-led, carbon-intensive, growth model towards more sustainable growth drivers, in particular consumption. Such a demand side transformation could be an important step on China’s path to an advanced economy. Additional downside risks, such as a prolonged adherence to zero-COVID policies, geoeconomic fragmentation and reduced technology knowledge exchange amid technological decoupling, could further dampen short- to medium-term prospects…Under a comprehensive reform scenario, steps to lift productivity growth and foster rebalancing towards sustainable, less investment-driven growth can significantly raise China’s growth potential. A return to market-based structural reforms addressing productivity issues could lift aggregate TFP. In addition, reallocating capital between SOEs and POEs and from infrastructure and real estate into more productive manufacturing or services sectors would help lift overall productivity. SOE reforms to enhance productivity in the use of carbon-intensive inputs, while stimulating innovation in renewables, could also support growth. Furthermore, to shift reliance towards more sustainable demand drivers, moving to more consumption-based growth would expand the services sector and rebalance away from excessive, low-productivity investment. These policies would not only raise growth and output levels, but reduce risks, raise welfare, and make growth more sustainable, balanced, and green”.
China’s growth trajectory is significant because it determines when China will be able to replace the US as the world’s largest economy with profound implications for geopolitical rivals and trading partners. Roland Rajah and Alyssa Leng projects “substantial long-term growth deceleration is the likely future for China given the legacy effects of its uniquely draconian past population policies, reliance on investment-driven growth, and slowing productivity growth. Even assuming continued broad policy success, our projections suggest growth will slow sharply to roughly 3% a year by 2030 and 2–3% a year on average over the three decades to 2050”. As compared with consensus projections of 4-5% growth, “with 2–3% growth, China’s future looks very different. China would still likely become the world’s largest economy. But it would never establish a meaningful lead over the United States and would remain far less prosperous and productive per person than America, even by mid-century”.
Limits of conventional macroeconomics
Conventional macroeconomics is based on accounting identities and their perspectives on growth are tautological truisms – the numbers need to add up. But accounting identities are not good at explaining intangible growth dynamics, trend sustainability or risk vulnerabilities. In this context, it may not be appropriate to use conventional macroeconomics to formulate policies and project growth trajectories for China. China’s development challenges can be analysed within these paradigms.
- Middle income trap. James Rickards notes “China’s per capita annual income is $12,970 – solidly in the middle income category” and it can be viewed as being caught in the middle-income trap. In this regard, China’s population can be split into two; “about 500 million urban workers has an annual per capita income of about $28,000, while a second population of about 900 million villagers has an annual per capita income of about $5,000”. And within the former group, “most of those would have a middle income of about $12,000 per year, while a select few would be earning millions of dollars per year each”. In my view, the middle income trap applies to small developing countries as they find it difficult to break through the glass ceiling. But it doesn’t apply to China which has already established a formidable base to evolve into a high-income advanced economy. This includes world-class transport and digital infrastructure; leadership in 37 out of 44 technologies[4] and a rapidly growing number of global firms. The fact that China’s economy measured in purchasing power parity (PPP) is more substantial than as indicated by nominal terms implies China can easily break through the middle income trap through leveraging on financial deepening and currency appreciation to drive real income growth over the next two decades. China’s low GDP per capita is due to its large population and implicitly income redistribution is an important aspect of its future economic advancement.
- Aging demographics. China’s population is aging more rapidly than anticipated. James Rickards points out “China’s birth rate is now below what is called the replacement rate. That rate is 2.1 children per couple. China’s current rate is reportedly about 1.6, but some analysts say that the actual rate is 1.0 or even lower. At that rate, China’s population will shrink from 1.4 billion to about 800 million in the next 70 years. That’s a loss of 600 million people in a single lifetime. If you assume productivity will remain constant (a reasonable assumption if China fails the high-tech transition), and the population drops by 40%, then it follows that the economy will shrink by 40% or more. That’s the greatest economic collapse in the history of the world”. An aging population[5] can be a drag on economic growth due to effects such as a shrinking workforce, a rising dependency ratio and depopulation effects – as happened in Japan. Consequently, it is though the consequences will be worse in China because aging is occuring while it is middle income as compared with Japan which was high income when aging started. I find the population argument is flawed. The earlier thinking was that a large population represented a hurdle to achieving economic success. This was due to the earlier success of the small open economies. China’s economic success was a major factor in changing views on large populations. Overall, my view is that changing economic conditions have shifted the advantage from the small open economies and financial centers to the large-population hinterland. Nonetheless, the difficulties of managing a large population should not be under-estimated. We will see if population aids or hampers economic progress in countries like India, Brazil and Indonesia. The impact of large population may be over-estimated. Even if China’s population size stagnates or decline, it doesn’t take away China’s ability to exploit scale, technology and the strengths of their skilled workforce and comprehensive industrial ecosystem. I don’t anticipate aging having an immediate impact on China’s growth. If anything, the initial effects of aging are more likely to be positive due to denominator effect and it will take more than a decade before the negative effects show up.
- Geopolitical headwinds. While China faces considerable domestic challenges (debt levels, over-extended property sector and aging demographics), my view is that geopolitical headwinds will weigh more heavily on China’s slowdown. China’s domestic vulnerabilities are being targeted, its exports and forays abroad are being checked and there seems to be a strategy of expanding harassment to confront and unsettle China. Frank Tang and Ji Siqi notes US technology export restrictions could dash China’s hopes of transforming into the pre-eminent global digital power and surpassing the US to become the No 1 economy in the world. “Goldman Sachs forecast…there could be a 0.26 percentage point hit to the Chinese economy in 2023 as a result of US containment efforts…cause gross domestic product (GDP) to fall by 1.7 percentage points in the medium term, or lead to an annualised drag on growth of about 0.4 percentage points over the next four years. Over a longer horizon, if sustained, the US export controls could have a larger impact. China sees the digital economy, which accounts for 39.8 per cent of its GDP, as the country’s major engine of growth”. In addition, China’s economic growth has also been badly affected by the geopolitical conflict and the pandemic. The higher energy and raw material costs and decoupling – supply chain relocation, tech war, sanctions (related to Xinjiang, Russia, Hong Kong) and reduction in market access – are taking its toll. If the global economy enters into a recession[6], this will also negatively impact China’s growth.
China’s model
Conventional macroeconomic analysis[7] may not provide the best policy advice. China has chosen to craft its economic path based on its own insights. Xi Jinping[8] recently outlined China’s challenges and priorities. “As China enters a new stage of development, its internal and external environment has undergone profound changes”. China faces five major challenges. The first is “the creation and distribution of wealth is a major issue that all countries face. While social wealth keeps growing, extreme wealth gaps and polarization trouble some Western countries…Polarization must be prevented…Common prosperity is an essential requirement of socialism with Chinese characteristics. So how should the path of common prosperity be taken? We are exploring it…the first step is to make a bigger and better cake through the joint efforts of the people, and then divide and distribute the cake properly through rational institutional arrangements…We must ensure the full function and effect of [wealth] distribution. Efficiency and equality must be balanced, and fundamental institutional arrangements must be done in terms of the coordination between primary distribution, redistribution and the third distribution…We will increase the adjustment effect of taxation, social security and transfer payments, and improve their precision…But coercive donation (force others to donate) in the form of moral kidnapping is not allowed. We must improve the system and institutions of public service policies and promote common prosperity, rather than falling into the trap of welfarism…beyond a country’s capability is not sustainable, which would inevitably cause severe economic and political problems! Therefore, we should insist on doing our best while doing things within our power, and put focus on facilitating the level of public services, providing precise and basic public services in areas of greatest concern to people, such as education, medical care, pensions and housing. We will protect those in need’s bottom line of living and not make empty promises”.
The second issue is to “properly understand the nature of capital and its laws of behavior…explore how capital can take an active role in the socialist market economy, while curbing its negative effects. Over the recent years, due to lack of understanding and insufficient regulations, some fields in China have witnessed the unregulated expansion of capital, blatant manipulation, and profiteering. This is why behaviors of capital must be regulated to avoid harm. We shall make capital fulfill its mission as a factor of production while preventing it from going unchecked…We should fight against monopoly, profiteering, exorbitant prices, malicious speculation, and unfair competition by strengthening the effective supervision of capital in accordance with the law…To retain capital’s arbitrary expansion is not to get rid of capital, but to make capital grow orderly. We will improve relevant laws and regulations that are defective, and strictly implement existing laws and regulations to support and guide the healthy and orderly development of capital. We must adhere to and improve the socialist market economy, unswervingly consolidate and develop the public sector, unwaveringly encourage, support and guide the development of the non-public sector, and stimulate its healthy development as well as the growth of participants in the private sector”.
Third, “we must properly understand the supply security of primary goods…In the field of consumption, we will enhance national awareness of conservation, advocate a simple and moderate, green and low-carbon lifestyle, oppose extravagant waste and excessive consumption…We must optimize the security of overseas resources. We should make full use of international and domestic markets and resources, in a way that brings us mutual benefits and win-win outcomes. Under the premise of effectively preventing outbound investment risks, we should strengthen cooperation in energy resources with relevant countries, and buttress rights and interests in high-quality overseas resources”.
Fourth, Xi Jinping emphasise the need to “properly understand the importance of guarding against and defusing major risks. Since the 1990s, China has effectively handled the Asian financial crisis, the international financial crisis, the COVID-19 epidemic and other major tests. Now, China’s economy and financial sector possess many risks, but the overall situation is under control. We must think about worst-case scenarios just as the old saying goes Nip the disaster in the bud. We have to leverage the strengths of CPC’s leadership and the advantages of our socialist system, spot the problem early on, and try our best to avoid major risks or crises. In the previous stage, we effectively disposed of the shadow banking risks and Internet financial risks…The three phases superposition impact (a period that China’s economic growth rate shifts, a period that the pain of structural adjustment is felt, plus a period that the economy needs to digest the previous stimulus) has not yet ended, and there are still risks from earlier stages to be digested. The second is the deficiencies of regulatory capacity and system. There is a lack of supervision for financial institutes’ corporate governance and a mismatch between financial regulatory capacity and the regulatory level. Some local governments borrowed in a covert and illegal manner, causing the liability burdens to continuously grow. The third reason is the savage behaviors of debtors. Some big enterprises…pulled off diversified expansion irrationally, so they relied heavily on financial leverage, resulting in too much industrial capital ending up in the financial sector…Problems like insider control, manipulation by major shareholders, financial fraud and massive embezzlement kept showing up. Fourth, there existed collusion between government and business and corrupt practices…Fifth…When the economy went into a downturn, those originally hidden risks surfaced, so the probability of local risk triggering systemic risk would increase, featuring the risk of companies going bankrupt. Next, we must continue the work to handle the risk…All parties should cooperate extensively, and the financial industry should establish an integrated risk disposal mechanism with full authorization and coordination to improve the abilities of cross-market and cross-industry coordination and response…Local governments should take responsibility, enhance regulation, and maintain a vigilant guard against systemic risks. So that the real-estate market could develop in a stable and healthy way”.
Fifth, Xi Jinping notes “we must properly understand the idea of achieving carbon peak and carbon neutrality. we found phenomena such as carbon rush, one-size-fits-all, campaign-style carbon reduction, even pulling the plug to limit electricity, which are not in line with the requirements of the CPC at all. Green development is a comprehensive and complex transformation of the economy and society. Restructuring energy and industry cannot be achieved overnight, and they must be done based on reality. If the gradual withdrawal of traditional energy is not under the premise that there is a safe and reliable alternative, it will have an adverse impact on economic development and social stability. Pollution reduction and carbon reduction are an integral part of economic restructuring. So we need to build the new before weeding out the old, and always have the big picture in mind…a comprehensive arrangement for double carbon (to peak carbon dioxide emissions by 2030 and achieve carbon neutrality by 2060), emphasizing the principles such as national coordination, a priority of conservation, relying on forces of both government and market, linking up domestic work and that of other countries and risk prevention”.
As a late-comer, China modelled its economic policies on the East Asian export-led growth model, Germany’s Industry 4.0 and Singapore’s strict meritocracy-based governance regime. China has also incorporated lessons from its own experiences and those of other countries. First, it prioritises political, economic and financial stability based on its experience during the post-Manchu civil war, and the turmoil following the Soviet Union break-up[9]. Second, the possibility the West may band together[10] to supress China – e.g. events such as China’s century of humiliation[11] and Plaza Accord[12] – weigh heavily on its mind. To the extent that China’s builds self-sufficiency and becomes more assertive, it ends up on a self-fulfilling path that leads to growing confrontation with the West.
Third, China is alert to the dangers from speculative attacks and capital outflows (i.e. Asian financial crisis 1998 and Iceland), and sanctions (i.e. such as those on Russia). Thus, the pace of financial liberalisation has been gradual, capital controls remain largely in place while de-dollarisation[13] is being accelerated. Prudently, China constantly attempts to defuse risks from its overleveraged property sector, domestic debt, internet shadow finance and cryptocurrencies; and to guard against spillovers from loose US and Japanese monetary policies. The socialism big bang[14] – a simultaneous crackdown on property, errant entrepreneurs and states, shadow finance, internet platforms and cryptocurrencies – triggered broad price corrections to let some air out its asset price bubbles. Foreign investors were forced to sell out at unfavourable price levels. But imagine the consequences if prices remained elevated and if the foreign funds pulled the rug out when cryptocurrencies were falling, US interest rates were rising and the yuan was depreciating (as was the case at end-2022). In other words, the outcome would have been much worse for China if not for the pre-emptive action taken during the socialism big bang.
Fourth, China relies on a problem-solving approach to get in front of macroeconomic challenges that has affected developed economies such as Japan’s lost decades, the Dutch disease[15], the US and European financial crisis of 2008, Baumol’s cost disease[16], growing inequalities and platform monopolies.
Kevin Klyman notes international consensus that “China is shooting itself in the foot by cracking down on its largest tech companies…But a closer look at the policies enacted and the companies targeted…reveals that these measures may advance China’s interests…Recent Chinese regulations on data protection, cybersecurity, and anti-competitive practices benefit consumers and advantage domestic firms by reducing competition from foreign firms that cannot comply. Curtailing investment in cryptocurrency and EdTech redirects capital into producing microprocessors. Anti-monopoly rules make the Chinese market more difficult for tech giants to dominate, forcing them to expand their footprints abroad…Significantly, the Personal Information Protection Law resembles GDPR in that it applies extraterritorially, meaning that companies with no presence in China may also have to overhaul their business practices in order to work with Chinese companies…When negotiating future agreements, Beijing’s new privacy and data security laws could give it political cover to coerce foreign firms…Anti-monopoly rules will likely create a more competitive and innovative Chinese tech ecosystem. Technology giants dominate China’s economy, making up 40 percent of all large companies in China…The first notable feature of the Chinese firms that have been reprimanded is that they are almost exclusively software companies…illustrates Beijing’s calculus when imposing burdensome regulations that alarm foreign firms. If firms exit the Chinese market because of the risk of being singled out, that void can be filled by a domestic supplier backed by state-owned lenders…In February 2022, the U.S. Chamber of Commerce argued that China’s regulatory crackdown gives it an economic advantage over the United States by “reorienting capital and talent away from consumer-oriented, social media and digital-economy technology companies to strategic technology industries such as semiconductors, electronics, technology, batteries, biotechnology, and telecommunications infrastructure”.
Dan Wang doesn’t “think that Beijing’s primary goal is to reshuffle technological priorities. Instead, it is mostly a mix of a technocratic belief that reducing the power of platforms would help smaller companies as well as a desire to impose political control on big firms. But there is also an ideological element that rejects consumer internet as the peak of technology. Beijing recognizes that internet platforms make not only a great deal of money, but also many social problems…considers the peer-to-peer lending industry as well as Ant Financial to be sources of financial risks; and video games to be a source of social harm. These companies may be profitable, but entrepreneurial dynamism here is not a good thing…Beijing is also falling out of love with finance. It looks unwilling to let the vagaries of the financial markets dictate the pace of technological investment, which in the US has favored the internet over chips. Beijing has regularly denounced the disorderly expansion of capital, and sometimes its barbaric growth…The Chinese leadership looks more longingly at Germany, with its high level of manufacturing backed by industry-leading Mittelstand firms. Thus Beijing prefers that the best talent in the country work in manufacturing sectors rather than consumer internet and finance”.
Dan Wang notes China is progressing on several fronts. “First and foremost is the continued build-up of wealth, not just in big cities but also rural areas. Air quality has also substantially improved in Beijing and Shanghai over the last decade. The government of daily life has also gotten better. One can now obtain business licenses fairly straightforwardly; the intellectual property system has become robust, such that Chinese firms are bringing huge numbers of cases against each other; regulations tend to be relatively transparent and professional; and many types of risks are being squeezed out of the financial system. I submit that Chinese local government functions today would look fairly ordinary in any other advanced country. Outside of the security and propaganda apparatuses, government departments work as they would in the US or Europe, only with greater digitization. In more tangible matters, residents in Shanghai like to talk about improvements to city life that accelerated in only the last few years. The government keeps building new parks, bike trails, and commercial areas to improve the city’s already substantial livability. Chinese firms have not created many global brands, but I have confidence that will change. Entrepreneurs are still full of big dreams, having failed to receive the memo that globalization is dead. Those who sense foreign hostility towards China would keep their identity quiet, with the hope that the product quality will speak for itself. In segment after segment, I find that the quality of Chinese products has become strong. And I expect that good branding will follow good quality”.
While “China’s economy is in structural slowdown. But there’s still lots of catch-up growth available to a country with one-seventh the level of GDP per capita of the US. And there’s strong growth momentum in individual sectors, especially the science and technology fields…China’s semiconductor industry remains weak, but broader science efforts haven’t done too poorly. China’s space program, for example, might be years or decades behind NASA, but it has shown the capability to learn from past missions and take on increasingly difficult tasks. A steady capacity to execute on bigger and bigger projects also describes China’s energy infrastructure buildout. These produce the sort of national confidence to do hard things that the US had in the ‘50s and ‘60s. For someone in the middle class, there has never been a better year to live in China. That comes down to the entrepreneurs, who are creating businesses to please people. They are not at all different, I submit, from their counterparts in the west. The control tendency of the government would every once in a while assert itself, which annoys entrepreneurs to no end. Their ability to push back has shrunk during Xi’s administration, but it has not completely disappeared. Every so often, they are able to tell Beijing to stuff it, through accepted administrative channels, for example in the case of excessive pandemic controls. And the central government is itself keen for improvement as well. It has displayed a stronger record of reform than any other developing country, as the leadership keeps pulling off politically-difficult tasks: shrinking the state sector, re-orienting the economy towards export-led growth after WTO accession, and so on.”
Dan Wang concludes “an important factor in China’s reform program includes not only a willingness to reshape the strategic landscape – like promoting manufacturing over the internet – but also a discernment of which foreign trends to resist. These include excessive globalization and financialization. Beijing diagnosed the problems with financialization earlier than the US, where the problem is now endemic. The leadership is targeting a high level of manufacturing output, rejecting the notion of comparative advantage. That static model constructed by economists with the aim of seducing undergrads has leaked out of the lecture hall and morphed into a political justification for only watching as American communities of engineering practice dissolved. And Beijing today looks prescient for having kept out the US social media companies that continuously infuriate their home government…The good and/or bad thing about China is that everything changes every 18 months. So it’s all the more important to observe reality on the ground. Graham Webster has a good line that the reality of China includes a mix of brutality and vitality and mundanity.”
China proactively manages inequality through common prosperity policies and addresses rising costs on living standards. Bloomberg reports “China is doubling down on its efforts to radically overhaul its health care system by driving down prices of off-patent drugs to free up state funds for novel, cutting edge therapies”. “China’s biggest-ever round of drug price cuts saw global pharmaceutical firms losing most of the nationwide contracts to local rivals, as Beijing aggressively pushes to contain health care costs by an average of 53 per cent decline in latest bulk purchase”. This follows the earlier 2018 pilot for government medical procurement which resulted in prices plunging “by more than half as cheaper generic drug makers undercut their global peers”.
Hence, conventional macroeconomics has limits in estimating China’s future growth trajectory. I anticipate China is entering a phase where economic growth will be driven by a shift to digitalisation as an engine of growth, financial deepening (despite an injured property sector), replacing foreign output with local output (semiconductors, luxury goods, cars), changing external relationships (diversion of flows from West to Global South) and network benefits (gains from building alternative networks to bypass the dominant Western-centric global architecture).
China model governance and culture
Western politicians and media frequently label the China model as communist and authoritarian. Chinese leader Xi Jinping is accused of being a dictator particularly after term limits were removed to allow him to continue as President for a third term. He is also perceived to be centralizing institutional power by holding multiple positions; building a cult around his ideas (Xi Jinping Thought which is being incorporated into party and national constitutions), stacking the leadership team with loyalists and for his emphasis on national security and CCP leadership.
China is also frequently accused by the West of human rights abuses and even practicing genocide. These narratives have largely fallen flat within the Global South that is largely sympathetic to China’s view that the West is conducting a smear campaign. The simplistic labels can hardly reflect the complexity of Chinese governance. For example, Uwe Parpart asks “what should be made of Xi’s alleged neo-Maoist, leftist and anti-capitalist emphasis on common prosperity? Throughout his career, Xi has shown himself to be a master of the most characteristic maneuver in Chinese imperial governance: Feint in one direction in order to disarm prospective opponents, while preparing to move in another…During the past two years, Xi adopted the rhetoric of income redistribution under the watchword common prosperity, and cracked down on China’s consumer Internet sector. In classic Chinese style, he adopted the rhetoric of the Communist Party elements he most opposed, only to move decisively in the opposite direction. Ideologically blinded Western analysts and officials consistently miss the point. China’s state is the least ideological, most ruthlessly pragmatic entity in the world. To the extent its leaders succeed, they do so by achieving prosperity and security by whatever means necessary to meet their objectives. Xi knows that China’s state-owned industry is too sclerotic and corrupt to lead the transition to a digital economy and that the Chinese state needs private entrepreneurs to take the lead. But he also knows that entrenched political interests linked to the state sector will not just grumble at the sudden ascendance of entrepreneurs but also make determined political moves…To stay in power, Xi or any other Chinese leader must placate the old guard and defuse popular envy of the newly rich while allowing entrepreneurs to lead economic transformation”. In addition, Western media portrayals of China governance often skips the challenges posed by the dynamics of provincial politics[17] and the generation gap[18].
The quality of China’s leadership is another point of contention. While China’s leadership ranks are stacked with Xi’s loyalists, nonetheless they are experienced and qualified. Uwe Parpart argue “the appointment of Shanghai party head Li Qiang as the country’s premier, the number two position to Xi Jinping”, affirms leadership support for the private-led high-tech industry. Li was chosen for his track record of economic and financial innovation in the Shanghai Free Trade Zone, for bringing in major foreign investment (up by 32% in 2021 despite Covid) and for the policy papers on economic development he wrote for Xi as his assistant in Zhejiang…Li has demonstrated that he has the energy and executive capability to get things done…in 2018-19 he mobilized Shanghai’s capabilities and workforce in tandem with Elon Musk to build a Tesla factory capable of making 500,000 electric cars annually. Amazingly, it took only ten months for this joint venture to advance from construction to full operation”.
Cheng Li highlights “the recent emergence of engineers/scientists-turned-political leaders in China’s Party-state with strong background in modern technologies…attributed to the meteoric rise and the ever-increasing power of China’s large state-owned enterprises on the world stage. Under the Xi administration, technically well-trained, politically trusted, business-savvy, and globally minded technocrats have increasingly been viewed as suitable candidates for the CCP leadership, thus these new recruits differ profoundly from their old-fashioned technocratic predecessors…many prominent technocrats 2.0 in the Xi administration studied aeronautics and astronautics…cosmos club…Many leaders from the technocrats 2.0 cohort have engaged in Xi’s drive to promote military-civil fusion…Almost all of the technocrats 2.0 cohort received graduate degrees, and many hold a doctoral degree. Many also had foreign study or work experience…Another major difference between technocrats in the Jiang-Hu eras and the Xi era lies in their main career paths. Previous generations of technocratic leaders such as Jiang Zemin, Zhu Rongji, Hu Jintao, Wu Bangguo, Jia Qinglin, and Yu Zhengsheng all advanced their careers primarily from local administration, and their tenures as municipal and provincial leaders usually lasted for 15-25 years. Some might have served as managers of SOEs, but they had usually worked for small and local enterprises for a few years. In contrast, many technocrats 2.0 have advanced in their professional and political careers by serving as business executives in China’s flagship SOEs, many of which are Fortune 500 companies or other global enterprises. Ma Xingrui, Zhang Qingwei, Yuan Jiajun, Zhang Guoqing, Jin Zhuanglong, and Hao Peng have all had substantial leadership experience as top business executives. Most of them also served as municipal and provincial chiefs, but their tenure in local leadership ranged between two to nine years, much shorter than their peers in the previous generation of technocrats. These features of the technocrats 2.0 cohort are important as they move to center stage of the national leadership at the upcoming Party congress…these rocket scientists- or AI experts-turned technocratic leaders may reinforce their belief in the crucial role of applied science and technology in determining regime strength and economic competitiveness.”
Francis Fukuyama[19] explains that “in China, I believe everyone knows the fact that you have had moral accountability, meaning that the government is not totally accountable through election, but feels a sense of responsibility to the public based on the education and training of the emperors/rulers…No matter how powerful a government is, it should be constrained by the rule of law and be held accountable to its people”. He explains that prolonged military conflict, such as during the Spring-Autumn Period and Warring States, “forced the formation of modern political institutions” and the promotion of officials on merit within the bureaucracy and military. “What China didn’t develop is the other two political institutions: rule of law and formal institutions of political accountability. The reason that China did not have the rule of law is that China did not have a dominant religion…because religion usually serves as the source of moral rules…Today China is ruled by the Communist Party whose doctrine is Marxism, not Confucian ideology. But in many other respects, the governance structure in China is very similar to the pattern established in the Qin Dynasty. High quality centralized bureaucratic government is built on impersonal recruitment and formal rules…Chinese accountability has been moral rather than procedural. Moral accountability means rulers feel morally accountable to their people. If you look around the world at the successful modernized authoritarian regimes, they are all clustered in East Asian countries…Compared with the last generation, the Chinese today are relatively free from ideology. The government has tried many innovations. If they work, it goes with them. If not, it drops them…I want to give credit to the Chinese system. Many Americans fail to recognize the fact that, although China is an authoritarian country, it is also highly institutionalized and has checks and balances in its system. However I think we need to think about the long run”.
Zhang Weiwei[20] thinks “the accountability that the Chinese are exploring covers far wider areas than in the US. China’s experiment in this regard covers a whole range of economic, political and legal accountabilities. For example, our governments at all levels have the mission of promoting economic growth and job creation. An official cannot be promoted unless this mission is fulfilled”. In addition, “China has its own long cultural traditions, which may impact China’s middle class in a different way. Most Westerners view government as a necessary evil, but most Chinese view government as a necessary virtue. With this cultural legacy, the Chinese middle class is more likely to become the staunchest supporter of China’s stability in the world. In addition, instead of being confrontational, the relationship between the middle class and the Chinese state is most likely to be positively interactive, rather than confrontational. This will generate a social cohesion in the Chinese society unmatched in any Western society”.
Wang Huning, recently appointed 4th-ranked member of the Politburo Standing Committee, is believed “to be behind the political thought published under the names of three leaders: Three Represents of Jiang Zemin, the Scientific Outlook on Development of Hu Jintao, and Xi Jinping Thought. He is also believed to play a key role in drafting concepts including Chinese Dream, Chinese-style modernization, and the Belt and Road Initiative”[21]. “In his 1988 essay The Structure of China’s Changing Political Culture, Wang said that the CCP must reconsider how a nation’s software, meaning culture, values, and attitudes, shaped its hardware, meaning economics, systems, and institutions…this type of thought to be a daring break from the materialism of Orthodox Marxism. Wang said that China was under a great transformation, but the new model under the socialism with Chinese characteristics was leaving China with no core values, which could serve only to dissolve societal and political cohesion. Wang also said that the introduction of Marxism to China was not completely positive, and that while the CCP criticized China’s historical values since 1949, it has not paid enough attention to creating and shaping its own core values. He recommended that China combine its historical and modern values (including Western and Marxist values)”.
Kerry Brown notes in 1988, Wang Huning saw the need for a transition “from politics to economics, from revolution to construction, from collective to individual, from focus on the goal to focus on the process, and from ideals to reality. The endpoint of this if it were simply left to happen would be a society where everything was about making money, caring just for yourself, and never having any ideals or goals”. “What they needed, according to Wang, was the form of politics that they could believe were their own, ones that spoke to their sense of being Chinese, modern, confident and outward facing…For Wang, and now for Xi, the core idea is cultural confidence. Chinese being able to say that they have a form of modernity and a set of values on which it is based grants indigenous power and authenticity…One of the great deficits in the modern era for China was a feeling of cultural backwardness…and that to have a future, Chinese needed to desire to be something else. For Wang and Xi, this era of Chinese confidence is also the one where it can finally start to say that to be Chinese, to believe in Chinese values, to admire Chinese culture, is a source of strength. It is no longer the Chinese who are afflicted with self-doubt, poor confidence, and societal divisions, but the once confident Westerners”.
Vijay Prashad points out although “China experienced a century of humiliation since 1840. Despite that, China never suffered the level of colonization in Africa, South Asia, Southeast Asia & Latin America”. He explains that Chinese language has remained largely intact in contrast to the dominance of Western languages (English, Spanish and Portuguese in Latin America, Africa and many parts of Asia. “So many places in the world have been shattered by colonialism and cut off from their cultural traditions in the intellectual realm…From this perspective, China has the unique advantage of not being cut off from the traditions of the past. Chinese intellectuals and others must understand the lengths to which many parts of the world have had to go to reconstruct the concept of civilization. For on a cultural level, they have been colonized far more than China”. The language-cultural heritage is reinforced by the ubiquity of Chinese apps while others are dependent on the largely English-based US apps. “For many places in the world, China is uniquely positioned regarding the construction of civilization, the continuity of culture”. In contrast, “civilizations in other underdeveloped parts of the world, Southeast Asia, South Asia, Africa, Latin America, have all been destroyed. The Mayan, Aztec, and Mongol empires have long ceased to exist. We, in these places, must struggle against unimaginable odds…As a civilizational state, China has demonstrated through its unique history and development that developing countries can forge a development path different from that of the West, and at the same time construct a discourse that is different from that of the Western nation-state”. In this regard, “what the Communist Party of China (CPC) has done is to democratize and popularize these traditions for the masses. So, when we discuss the civilizational state, the great continuation of Chinese civilization, we must acknowledge the fact that China’s socialist path has played an important role in democratizing traditional Chinese culture, for example by integrating the idea of multi-ethnicity into the practice of the modern state”.
Overall, Zhang Weiwei argues “the rise of China…a civilizational state, an amalgam of the world’s oldest continuous civilization and a huge modern state. Its rise is a new model of development and a new political discourse that questions many of the Western assumptions about democracy, good governance and human rights… its model of development enriches, if not redefines, what constitutes modernization and modernity in the 21st century”.
The clash of models
Many Chinese regard the Beijing 2008 Olympics as the break-out moment for China on the world stage. At that point, the West expected or hoped China would integrate into its liberal-democratic global regime. However, these hopes were dashed as China carved out its own path.
Kinling Lo notes Xi Jinping recently stated the “Chinese style of modernisation has debunked the myth that modernisation means westernisation…The Chinese model showcased a different paradigm for developing countries to achieve modernisation…different from the West…a brand new form of human civilisation”. “He urged them to promote Chinese modernisation, which expands the path choices for developing countries…and provides China’s solution for human beings to explore a better social system…China needed to create a path to modernisation that was more efficient than capitalism”. “Analysts said it signalled Beijing’s confidence and determination to consolidate its status as a global leader…They said the speech, more explicit than previous similar remarks, was set to spark further scepticism among Washington and its allies about China’s intentions to reshape the world order”.
As geopolitical tensions escalate, China is explicitly challenging the current orthodoxy. Stella Chen notes “Community of common destiny for mankind, or renlei mingyun gongtongti, is now central to the notion of Xi Jinping Thought on Diplomacy, the phrase encompassing Chinese foreign policy in the so-called New Era…in 2018 the concept was added to the Constitution of the People’s Republic of China, as a core value driving the CCP’s international relations, coming ahead of language affirming China’s opposition to imperialism, hegemonism and colonialism, and its commitment to unity among the peoples of the world. While the term seems to appeal to a set of shared values and goals as the core of international relations – and resembles, for example, ideas at the heart of the formation of the European Union – it is important to note that the phrase incorporates traditional elements of Chinese foreign policy that prioritize a state-centered approach to human rights, while subordinating individual rights to the basic question of national interest. Promoting a nation-centered view of international governance, human rights and development serves China’s longer term interests by legitimizing its domestic approach to governance and its domestic rights situation even as it expands its economic and political reach across the globe. In this respect, Xi Jinping’s community of common destiny for mankind can be viewed as a reconfiguring of Chinese foreign policy - based on foundational ideas of national sovereignty, territorial integrity and non-interference – within the liberal common destiny vocabulary of common development and transnational peace. In the Chinese political discourse, Xi’s community of common destiny for mankind has been characterized as offering a Chinese Solution and Chinese wisdom to the reform and innovation of global human rights governance. The innovation lies in relegating all questions of individual rights to matters of peace and security, development, national sovereignty and state-to-state equality…In some cases, China has also sought to contrast the supposed cooperative spirit of the concept of a community of common destiny for mankind with what it deems the selfish and narrowly political conduct of other countries, notably the United States”.
In this context, Zhang Weiwei[22] points out “China is now perhaps the world’s largest laboratory of political, economic, social and legal reforms in the world…we’re still learning from the West, and will continue to do so in the future, but it’s also true that we have indeed looked beyond the Western model or the US model. To a certain extent, we are exploring the political, economic, social and legal systems of the next generation…from my point of view, the American political system is rooted in the pre-industrialization era, and the need for political reform in the US is as strong as in China, if not more. The separation of powers within the political domain alone can no longer effectively address the major problems in American society today; it certainly failed to prevent the recent financial crisis. To my mind, a modern society may need new types of checks and balances. It needs a balance between political, social and capital powers beyond the political domain. The separation of powers in the US has its weakness….many vested interest groups, such as the so-called military-industrial complex, will never have their interests encroached upon, thus blocking many reform initiatives that are necessary for the US”.
Interestingly, China chose not to adopt the Anglo-Saxon mercantilist, industrial capitalism and liberal democratic models; instead preferring to evolve its socialism model with Chinese characteristics. In doing so, China rejected the much-lauded Hong Kong (HK) model. The Chinese government is thought to be critical of HK’s inability to resolve its social problems (affordable housing and income inequality) despite its wealth. In addition, HK as a foreign enclave has been losing ground as its contribution to China’s GDP has shrunk. It is now evident that HK needs to reinvent itself as part of China. It still has attractions as a financial center given its currency peg to USD, underpinned by a currency board[23], which effectively makes the HK dollar a USD-based stablecoin. Overall, the Anglo-Saxon model used to enjoy a huge advantage in solving coordination problems due to the prominence of English language in laws, finance and services and its cosmopolitan culture. But, in my view, knowledge dispersion and information disruption has reduced the centrality of the Anglo-Saxon model. Overall, there is a major shift in competitive advantage away from financial entrepots and market-based economies as evident by the economic dilemmas faced by UK and HK. Even the US and EU are reviewing their economic models particularly with a view to revitalising their industrial sectors.
The success of the China model pits it as a direct competitor to the Anglo-Saxon mercantilist or industrial capitalism and liberal democratic models. China seems to have evolved its model by uncoupling or synthesising, depending on the perspective, ideological preferences from market economics. In doing so, they have exposed the vulnerabilities of the Western model and provided an alternative development path for other countries. The strength and spread of the China model have important geopolitical ramifications as it affects the rules for the global economy and this, in turn, has a bearing on the world order.
The West has responded in two different ways. First, it has criticised China’s model as authoritarian and, by implication, is doomed to fail particularly in the face of growing Western opposition. Second, it recognises that if more countries adopt the China model or strengthen their connectivity with China, that this would be at the expense of the West. Therefore, the China threat must be firmly opposed and defeated.
The West has accusing China of breaking global norms and Xi Jinping for aggression. In other words, China is to blame for alarming the world and responsible for the hostility it is facing from the international environment. The usual commentary is that China should not have strayed from Deng Xiaoping’s counsel of hiding one’s strength and biding one’s time. But this advice misunderstands the Chinese psychology. As C. Northcote Parkinson explains in his satire, while a Chinese coolie may have become successful “he continues to live in a palm-hatched hovel on a bowl of rice for two reasons. The first is that his home has brought him luck and the other is that to move to better premises would attract the notice of the tax collector”. But at some point, he may need to publicise rather than conceal his wealth “to evade the exactions of the secret society, blackmailers and gangs”. He terms the migration from the hovel to a well-fenced house guarded by an Alsatian hound as breaking the Chinese Hound barrier. At this stage, there is little to gain from modesty and China’s needs to be explicit about its ambitions so as to rally and align its own people as well as to shape global expectations – so that the world knows what it is dealing with.
The consequential effect of the China model is how it is changing Global South views on the Western model. Generally, the superiority of market economics is undisputed and widely accepted. It is the ideological aspects of the Western model that has lost considerable ground. In this regard, liberal democracy and the Western order are ideological constructs that matters only to the West and the Global South generally don’t buy into it. In fact, Global South countries want to reduce their dependence on the West and they have noted how US allies in Europe and North Asia are suffering collateral damage from relinquishing strategic autonomy in favour of security alignment. To the Global South, Russia and China represents a growth opportunity (due to the vacuum created by Western ostracization and to buy resources at lower prices) and a deterrence to secondary sanction threats to reduce their access to Western markets, technology and finance.
Zhang Weiwei explains “non-Western powers like China, Russia and India may differ somewhat on the definition of civilizational state, yet they seem to converge on the theme that they are respectively unique civilizations, fed up with the Western imposition of its values on them in the name of universality, and they resist the Western interference in their internal affairs. These rising civilizational states are indeed challenging the so-called liberal international order, with the result that the global order is shifting from a vertical one, with the West on top, to a horizontal one, in which the West and the rest, notably China, are on a par with each other in terms of wealth, power and ideas”. “Indeed, the rising civilizational states of Eurasia have defined themselves mostly against the liberal West, while the West is now struggling to find its own identity, which seems harder than it is for China or Russia. The West may well have more to deconstruct and construct, with its identity politics evolving into prevalent crises. For one thing, the liberal West has long preached universal values beyond national or civilizational boundaries, as if its values were not Western nor European nor Judeo-Christian. Yet, as the Portuguese political scientist Bruno Maçães has argued, the liberal West is now dead, having caused a global rootlessness…Western societies have sacrificed their specific cultures for the sake of a universal project. Indeed, the culturally, socially and politically divided West today has an uphill battle for shaping a common civilizational identity, if any”.
Zhang Weiwei thinks “in a long-term perspective, as the global order becomes increasingly more horizontal than vertical, and as the West and the rest, notably China, are more on a par with each other in terms of wealth, power and ideas, we are likely to witness the rise of more civilizational communities or states, self-claimed or genuine, including most likely a Western one. The West’s so-called universal values may well be reshaped or even replaced by certain common values, still to be identified democratically, discussed thoroughly and endorsed fully by the entire international community, such as peace, humanity, international solidarity and one human community. All civilizational communities or states or others should make their contributions to this noble endeavor in the interest of all mankind”. In this context, “the idea of civilizational state seems appealing also to many in the West. Faced with the daunting challenges of Europe’s renationalization, French President Macron almost openly admired the ideal of civilizational state when he referred to China, Russia and India as such examples and declared that France’s historic destiny was to guide Europe into a civilizational renewal. For those on the right, the model of a civilizational state is one method to defend traditional values and resist the excess of ultraliberalism and widely perceived cultural degeneration. For those on the left, it shows due respect for Indigenous cultures and traditions as a way to reject Western imperialism and the excess of neoliberalism”.
A significant difference to consider is that the Western model is built on “voice in the public town square” while China/Asian models ride on the hopes of good government. But conditions in advanced democratic countries have changed. For one, they have allowed the quality of their civil service (and cultures) to deteriorate; thereby leaving them unable to act as am effective check and balance to popular but irresponsible or ineffective political leaders. Developing countries (like Russia) have found that if they can’t get democracy right, then chaos ensues and instability follows. On the other hand, the China model works if there is benevolent leadership that is able to instil a public service culture of meritocracy and public duty, and that values and recruit talent. Otherwise, the consequences could be dire.
In my view, China’s governance model is neither well understood nor accepted around the world. While the levels of repression have diminished from earlier decades, nonetheless China has yet to address doubts on its governance processes. Hyper-sensitivity combined with heavy-handed censorship and the disappearance of individuals without explanation are symptoms of an insecure regime. Overall, China needs to address “democratic shortcomings” by increasing the transparency of its governance processes and establishing independent judicial and due process to empower citizens. To be fair, China is still midway in its quest to establish a legal and judicial framework protecting individual rights that is compatible with a modern society. Their progress can be re-assessed maybe at the end of the decade.
While China has made rapid progress in living conditions, it is clear that if individuals were allowed to vote with their feet, most would still prefer to migrate to a Western country. In this sense, Western societies are still more attractive to individuals. Nonetheless, internationally China’s governance model wins in the Global South because it is agnostic, non-imposing and therefore expedient in being able to accommodate different political and ideological settings. In contrast, the West seeks to impose their values and systems on other countries and adoption of democracy can sometimes lead to chaos and instability which is very costly to a developing country.
The stakes are rising in the clash between economic models. Intensifying attacks on the China model reflects growing concerns on how it is eroding the dominance of the Western model. China’s attitude seems to be hardening and it is signalling that it is prepared to “take on the West” and forging relationships with the Global South to build an alternative international network. If China’s economy overtakes the US to become the largest in the world, it will be taken as a vindication of the China model. If other countries adopt China’s model or join its network, Western influence would fall. The battle is also playing out at the corporate level where Chinese and Global South corporates are attempting to wrestle global market share from OECD MNCs.
The China model is too big to be ignored and the geopolitical reactions have a huge impact on global economic patterns that is forcing all countries into adjusting their own economic models. Wolfgang Münchau points out “there was a time, not too long ago, when every country had their place in the world economy. China and Germany would run large external manufacturing surpluses. The US used its exorbitant privilege to absorb those surpluses. Russia was the reliable purveyor of oil and gas, or so we thought. I would not call this arrangement stable, but it experienced a period of pseudo-stability, from the 1990s until the pandemic. What has changed with Brexit, the pandemic and the war in Ukraine is that this model has broken down…Russia will need a new model because it will never again sell the same volumes of energy to western Europe. China is finding that its large volumes of dollar and euro reserves have made it politically dependent on the US and the EU…The US, too, needs a new economic model. The exorbitant privilege will disappear over time precisely because the US is treating foreign reserve holdings as a sanctionable commodity. There is a price to be paid in the future. The US economy will have to become less reliant on the rest of the world for imports, produce more at home, and maybe extend NAFTA geographically and develop it into a deeply integrated market the way the Europeans did. But the time when the US acts as the global economy’s shock absorber is coming to an end”.
Wolfgang Münchau argues “the German model consisted of wage repression at home, cheap energy from Russia, technical specialisation, and integration into global supply chains…the age of wage repression and cheap energy input costs is coming to an end. The model no longer makes economic sense. Scholz is wasting precious time pushing the old model, when they should be thinking of a new one. Germany has innate strengths it could exploit in the new world. The country has some of the world best engineers. It is also a leading force in pharmaceutical research. The share of manufacturing in GDP is very likely to fall since many mid-sized companies are only barely profitable. The energy price shocks will push them over the edge. Demand for petrol and diesel engines will almost surely fall, and with it so will demand for components of these engines. Germany will produce less. But there is a lot of high-margin, high-precision machinery that will still be produced in Germany”. “The German model is clearly not working anymore. Olaf Scholz is currently engaged in the futile attempt to replace the broken friendship with Russia with a new strategic alliance with China. I am ultimately relaxed about this because this has no chance of working, although Scholz’s Neo-Mercantilism could cause a lot of collateral damage. I would think that the US administration, which has just imposed a high-tech semiconductor ban on China, will put up massive resistance. Germany is dependent on the US for its security, and on the EU as its main export destination. Germany cannot act against the security interests of both the EU and the US simultaneously in pursuit of national Neo-Mercantilist goals”. Wolfgang Münchau concludes “changing economic models will be extraordinarily difficult for everyone. It requires technical work and preparation, and a degree of clarity in national political debates that is mostly absent. To shift an entire economic model, you have got to know what you are doing”.
One sign that the China model is winning, at least momentarily, it is that the West are grafting parts of the China model; unfortunately they are the “bad” parts – supply chain resilience, industrial policies, economic coercion, hyper-sensitivity and censorship. But will this work for the West? For example, can Western countries use industrial policies to rebuild their manufacturing base to achieve supply chain resiliency? There are several problems. The first problem is that reindustrialisation in a mature economy is an untested proposition. The odds are against success due to the bottlenecks in reversing “hollowing out” such as higher costs (including land, compliance), the task of shifting the workforce from services to manufacturing and the lack of a supportive ecosystem. The second problem is that the Western ecosystem has been largely built on “market forces” and may not react well to government intervention. In this regard, industrial policies tend to build dependencies between the “chosen” companies and the government with the “winners” exploiting patronage to maximise profits. If these companies falter, they will place the blame on the government and seek further assistance. In addition, “choosing the winners” may dampen competition as non-selected players exit because their odds of success have shrunk and the difficulty of getting financing or investments.
China’s advantage is that its government does not feel beholden to foreign and domestic interests. Competition in China is fierce, even among SOEs, and the central government can be ruthless in weeding out government-sponsored failures. In addition, China can move quickly and coordinate resources to improve the odds of success. if things go wrong, China can reverse its direction on a dime. Developed countries can’t follow the China model because they tend to get bogged down. Can developing countries easily replicate the China model? Only a handful of countries have a sufficiently large population to enjoy the benefits of scale and human resource in their domestic markets. Most developing and developed countries lack the efficiency, discipline, infrastructure, and worker-skill availability. In particular, developing countries lack the private sector capabilities and are hampered by leakages (corruption).
Nonetheless, the China model is relevant to the Global South for several reasons. First, it is providing the pathways to bypass legacy obstacles and leapfrog economic development. Second, developing countries need to be alert to changing global patterns. In particular, there will be a diversion of flows from traditional centers, mostly in OECD, towards new networks, centers, intermediaries and markets. Developing countries need to reposition themselves to plug into an increasingly multipolar landscape.
Will Western countries succeed in blocking China’s rise? As more obstacles (access to Western technology and markets) are thrown in China’s path, it remains to be seen if China can achieve technological self-reliance and whether it can sustain its growth pace. On the other hand, the China model is too big to fail. If it blows up, there will be global repercussions. This is similarly true for a collapse of the Western model. Yet, the prospects for the two models to co-exist and for limited fragmentation appears dim given conflict escalation.
Conclusions
The eminence of the China model is an affirmation of the transition to a multipolar landscape. It is too early to pass judgment on the China model though. China is still undergoing rapid transformation. The governance structure is still rapidly evolving as China experiments with legal frameworks to strengthen accountabilities, oversight, and enforcement and tinkers with societal culture. On the geopolitical front, China retreated during the zero-Covid years into a shell to launch sweeping reforms to address domestic structural weaknesses. This phase has ended. President Xi Jinping’s attendance at G20 in Indonesia signalled China is coming out and is prepared to confront what it sees as efforts to contain its rise. This augurs a new phase of elevated confrontation between China and the US that will play out across the West and Global South.
From an economic perspective, the China model has been posited as an ideological battle between socialism and capitalism. I think this framing is superficial. Western models based on mercantilist and industrial capitalism have been highly successful in the past but faces problems and requires renewal. In a sense, the China model is about the future; how it should go about meeting its societal aspirations while managing challenges faced in Western societies. China has chosen a digital path that focuses on technological advancement and deployment and information use. The China model is thus a drastic experiment to adapt “industrial” socialism to an information society.
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Phuah Eng Chye (26 August 2017) “The services economy: Revisiting Baumol’s cost disease”. http://economicsofinformationsociety.com/the-services-economy-revisiting-baumols-cost-disease/
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[1] See Eric Levitz.
[2] See Eric Levitz.
[3] See Tyler Durden on risks emanating from excessive local government debt.
[4] According to the Australian Strategic Policy Institute (ASPI) tracker, China is the global leader in 37 out of 44 technologies spanning defence, space, robotics, energy, the environment, biotechnology, artificial intelligence (AI), advanced materials and key quantum technology areas. See Jamie Gaida, Jennifer Wong Leung , Stephan Robin and Danielle Cave.
[5] See “Organisation of households: Aging, secular stagnation and population policies”.
[6] See Mike Shedlock.
[7] See IMF country report.
[8] See Jiang Jiang and Jinglin Gao.
[9] See Gábor Scheiring’s review of Isabella Weber’s book How China escaped shock therapy exploring how China became the world’s industrial powerhouse with analysis of policy debates around price reforms.
[10] Germany, Japan, Russia, Britain, France, the United States, Italy, and Austria-Hungary formed a Eight-Nation Alliance to invade northern China in 1900 with the stated aim of relieving the foreign legations in Beijing, then besieged by the popular Boxer militia.
[11] https://en.wikipedia.org/wiki/Century_of_humiliation
[12] See “Global reset – Monetary decoupling (Part 4: Lessons from Plaza Accord)”.
[13] See “Global reset – Monetary decoupling (Part 3: Consequences of diverging policies)” and “The Great Economic War (GEW) (Part 4: Battles reshaping the global monetary order)”.
[14] See “Global reset – Economic decoupling (Part 1: China’s socialism big bang)”.
[15]Dutch disease was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands due to capital inflows, currency appreciation and hollowing-out after it discovered large natural gas reserves in 1959. https://en.wikipedia.org/wiki/Dutch_disease.
[16] See “The services economy: Revisiting Baumol’s cost disease”.
[17] See Xiao Ma.
[18] See Jacob Dreyer.
[19] See Observer “The China model: A dialogue between Francis Fukuyama and Zhang Weiwei”.
[20] See Observer “The China model: A dialogue between Francis Fukuyama and Zhang Weiwei”.
[21] https://en.wikipedia.org/wiki/Wang_Huning
[22] See Observer “The China model: A dialogue between Francis Fukuyama and Zhang Weiwei”.
[23] Hong Kong has a currency board that maintains a fixed exchange rate between the U.S. dollar and the Hong Kong dollar. Hong Kong’s currency board has a 100% reserve requirement, so all Hong Kong dollars are fully backed with U.S. dollars. https://www.investopedia.com/terms/c/currency_board.asp