Do the recent actions of the Chinese government against the largest Chinese companies have a broader purpose and does its cleansing of the financial sector fit into its economic strategy? China has sought for at least 15 years to rebalance its growth in exports and capital investment towards greater domestic consumption, efforts that have taken on new urgency due to conflicts with the United States and other countries. As long as its domestic market grows, China will be able to reduce the strategic vulnerabilities that its dependence on exports entails, and foreign companies will become more dependent on the Chinese market, giving China new sources of strategic leverage. . But there are serious obstacles to this strategy.
For Chinese domestic consumption to increase, wages and household income from invested savings must grow. And for that to happen, China needs to move away from a growth model that has so far relied on heavy repression to keep workers’ wages and income paid to savers low. This means moving towards more skilled industries that pay workers more, with investments mediated by a sophisticated financial sector that can generate reasonable returns even without access to cheap capital. This transition would be difficult under any circumstances, but it is particularly difficult today, given China’s past actions. After emphasizing investments in fixed assets, China now faces a massive excess of unusable borrowing from developers and quasi-government vehicles. When restructuring over-leveraged entities, Chinese authorities usually force investors to bear losses, spreading them as they see fit. But when we fear a general loss of confidence, especially among foreign investors, these entities have instead been bailed out. That’s why all eyes are now on the heavily indebted real estate developer Evergrande.
Likewise, as China’s past cavalier treatment of intellectual property (IP) rights has made advanced economies increasingly reluctant to share research and know-how, China must now create more of its own IP. . And while it has sophisticated universities and private companies that can do so, the key question is whether these entities will be incentivized to innovate freely despite the recent crackdown.
The answer remains unclear, as President Xi Jinping has pledged to maintain the position of the Chinese Communist Party (CCP) at the top of Chinese society and affairs. After launching campaigns to crack down on corruption, he has since decided to strengthen the role of public enterprises (SOEs), even though they tend to be the least productive players in the economy. Despite the central government’s preference for state-owned enterprises, the private sector has grown considerably (usually with support from the local government), and wealthy entrepreneurs like Jack Ma, co-founder of Alibaba, have captured the public imagination. sometimes even daring to criticize the policy of the State.
The authorities insist that the crackdown on tycoons like Ma and their companies is carried out in the interest of “common prosperity.” have used the power of their platform to restrict user choice) and the exploitation of workers by platforms that until recently boasted of their “996” culture (working 9am to 9pm six days per week). And it will strike a blow in favor of data privacy (by offering protection of individual data against companies, but not the government), and against cross-border data flows and foreign influence, including foreign registrations.
As with China’s anti-corruption campaign, many elements of its new agenda look attractive. Who could disagree with “Housing is for living, not for speculating”? The problem is not with the stated goals, but rather with their pursuit in a system devoid of checks and balances. While authorities have been careful to point out that the is focused on the wealthiest and most prominent entrepreneurs, especially those who don’t seem to add much social value, it is also open enough to target just about anyone. who. By cracking down on the extremely rich, the government risks discouraging the simply rich from trying to create value.
And who decides what has social value? Bureaucrats and party officials do it. They are the ones who determined that video games and tutoring are more dispensable than chipmaking. And there is little or no opportunity to seek redress if they become overzealous in achieving what they think Xi wants. While the parallels to Mao’s Cultural Revolution are probably overstated, fears that Beijing’s new crackdown will prove counterproductive are not. Most likely, this will discourage private sector innovation and risk-taking, while imposing overly conservative partisan preferences on the activities that are encouraged. Such results hardly correspond to China’s need to shift to highly skilled, high value-added production.
Moreover, actions taken today cannot simply be reversed tomorrow. Once confidence in the markets or government is lost, it is not easily restored. This is especially true of confidence in the financial sector, where millions of Chinese have their savings stuck in semi-finished houses and wealth management products sold by loosely regulated investment firms. While Chinese officials are used to attributing financial losses without triggering panic, they should not assume that they can continue to do so.
The government’s attempt to control the private sector will make it much more difficult for Chinese companies to access international markets, an important factor in the country’s growth. Consider the government’s willingness to control the data, including requiring it to be stored in China. Chinese service companies like Ant and ByteDance can have a much harder time selling products globally if potential customers (and their governments) are concerned that the CPC has access to their personal data. The government is also trying to reduce the influence of foreign regulators by discouraging foreign listings. But the perception that Chinese companies are subject to Western governance standards is what has allowed them to expand their access to venture capital. With cheap capital in China, it might not matter much right now, but conditions will change.
Although the crackdown on Chinese companies is broadly in line with the mood of the public around the world, it risks going too far, as there are so few controls over the power of the CCP and within the party over its leadership. The slowness of spending bill negotiations in Washington may dismay many observers, but it is also a testament to the virtues of the democratic process. Because no view dominates, there is less chance that a wrong approach will get out of hand. Â© 2021 / Project union.
Raghuram G. Rajan is Professor of Finance at the Booth School of Business at the University of Chicago
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