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