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The West can learn from China There's a powerful moral force behind Beijing's recent crackdowns

Chinese students, not calling for maths to be decolonised (Photo by Kevin Frayer/Getty Images)

Chinese students, not calling for maths to be decolonised (Photo by Kevin Frayer/Getty Images)


August 10, 2021   6 mins

The Chinese government has made an existential choice: rather than surviving by betting on the financial markets, it is going to produce stuff instead. It wants a nation full of engineers, not financial engineers; computer chips, rather than chocolate chips; innovation over financial experimentation. Beijing also wants an education system that actually educates, rather than creating a cottage industry of “progressive” credentialism that engenders a self-perpetuating upper class, rich both in terms of capital and diplomas but provides little in the way of genuine scholarship.

Needless to say, this is not the conventional reading of China’s recent attacks on fin-tech, internet monopolies and private education companies. Take Stephen Roach, former chief economist at Morgan Stanley, who recently decried Beijing’s actions “as a tipping point for the economy”. He goes on to lament the heavy-handed use of regulation “to strangle the business models and financing capacity of the economy’s most dynamic sector”.

As the proverbial expression goes, you can take the boy out of Morgan Stanley, but you can’t take Morgan Stanley out of the boy. Roach still retains a Wall Street-centric bias in a country — the United States — where the stock market remains the ultimate arbiter of the American experience. Indeed, if one were to assess America’s “entrepreneurial spirit” via stock market metrics, then that would suggest that US has been stunningly successful. As economist David Goldman has noted, “in 2010, the five biggest tech companies accounted for just 11% of the market capitalisation of the S&P 500”. Today, however, “ten companies in the S&P 500 hold two-fifths of all the cash balances of index members, and all but one is a tech giant… The top three cash holders in the S&P — Microsoft, Apple, and Google — hold a fifth of all the cash held by index companies”.

But as Goldman observes, these companies’ profits have increasingly been the product of oligopolistic rents, rather than product innovation: “Apple is so cash-rich that it has bought back $327 billion of its stock since 2012. That explains why its stock price has risen by 82% in the past six years even though its operating income has barely changed.”

Far from deploying cash toward productive R&D investment, Apple’s behaviour provides a case study of precisely the kind of situation that Beijing is seeking to avoid: companies deploying cashflow toward stock buybacks, rather than investing in stateside facilities to enhance the nation’s productive investment and employment capabilities.

How many times do we find ourselves in an elevator, in an airplane terminal or at home, looking at a screen with stock numbers whizzing by, and people fretting over whether America is about to disintegrate because of a 5% swing in Apple’s share price? How did we get to point where our national economic conversation is dominated by chatter on the stock gyrations of GameStop, when this just an economic irrelevance for most of the 330 million people who live in America, and are struggling to sustain a modicum of economic security?

We ban the use of Chinese 5G equipment in US networks, but few ponder the question as to why there are no longer any American telecom equipment companies. After all, in the 1970s the two largest telecom equipment manufacturers were US companies: Western Electric and ITT. With this story of increasing manufacturing irrelevance as our backdrop, is it really fair to suggest that China is on the road to economic perdition because its government decries the “spiritual opium” of computer games?

A harsh charge, especially when one considers China’s own tragic history pertaining to opium addiction. Yet it seems there is some moral force to the Government’s argument which pressured China’s largest gaming company, Tencent, to announce new restrictions to limit gaming time for children under 12 to just one hour a day and two hours a day during holidays.

Here in the United States, we lost our way decades ago, when we decided that the only social responsibility of a corporation was to increase its profits, community considerations and employees be damned. This laid the groundwork for economist Milton Friedman’s “stockholder theory”: the idea that shareholders, being the owners and the main risk-bearing participants, ought therefore to receive the biggest rewards.

But while tying corporate decision-making and stock price to innovation and production may have sounded superficially attractive, the champions of this theory, including Friedman himself, never bothered to show how these outcomes could be achieved in the real world. In fact, the historical experience has been abysmal.

Boeing and GE, to cite two prominent examples, were once poster boys for the success of American capitalism. Today they are but a shell of their former glory. With its Max 8 737 plane, and the 787 Dreamliner, Boeing has become synonymous with airplane crashes and shoddy engineering, whilst GE, once a byword for thriving manufacturing and innovation, suffered the indignity of being yet another target of Harry Markopolos, the accounting expert who first raised red flags about Bernie Madoff’s Ponzi scheme.

Both managements are now focused on financial engineering rather than manufacturing, much of which has been sold off, or outsourced to China. In doing so, they reflect an ethos that prioritises finance above all else in an economy increasingly characterised the layering of debt on top of debt. It means a greater share of GDP going to the financial system, going to interest rather than profit, and away from a goods-producing economy.

Beijing has been paying attention as it increasingly bets on real innovation, and targets various companies as strate­gic components within a broader industrial ecosystem to promote national development. True, the Government has fought to protect and promote its own companies within this sector. But what has been caricatured in the West as governments incompetently picking winners and losers has in fact created world-class companies such as Huawei.

At the same time, American “free market” solutions have resulted in a hollowing out of companies that were once world-class innovators, and a corresponding degradation of economic know-how and social capital as highly skilled jobs have been outsourced.

This is the context in which we should understand Beijing’s recent crackdowns. What Stephen Roach and others characterise as Beijing’s politically motivated attacks on big tech behemoths such as Jack Ma’s Alibaba, could more accurately been seen reining in Ma’s attempt to convert his company into bank, all the while seeking to circumvent increased banking regulation. In other words, regulatory arbitrage.

Likewise, China’s State Administration for Market Regulation has been criticised for its fines on Alibaba Group, Tencent, and SF Holdings. But a closer look at the situations shows that these firms were singled out for what China’s chief regulator called “monopolistic corporate behaviour”, and the fines were levied “to protect consumer interests”. That sounds like the sort of thing that we are used to in the US, before our tech behemoths — Apple, Google, Facebook, Microsoft — gobbled up smaller competitors and began stifling competition and actively suppressing competitive innovation. These days, Beijing appears to believe in market competition more than we do.

Similarly, the crackdown on private education companies should be seen as an attempt to curb a credential arms race as we have in the US. Attacks on cramming factories such as TAL Education Group and Gaotu Group are not an attack on education, but a deterrent to the need to furnish students with worthless diplomas while businesses lament a skills deficit.

It’s not as though Beijing’s authorities are saying mathematics is Western and needs to be replaced with Han math or Confucian physics — which would be the real equivalent of what we are currently doing in many of our universities, where the extremes of progressive ideology mean that medical school professors are forced apologise for referring to a patient’s biological sex on the grounds that “acknowledging biological sex can be considered transphobic”.

In America, among the biggest beneficiaries of the current economic system are not entrepreneurs or innovators, but parasites who owe their wealth to rigged markets or government subsidies. But they are merely a symptom of the bigger problem: a newfound scepticism in the ability of American capitalism to deliver on its economic promise of prosperity.

That is precisely the kind of thing that China is seeking to avoid. Stock market investors may be unhappy, but far from destroying consumer confidence, the measures now being undertaken by Beijing might have precisely the opposite effect.

As Chinese fund manager Yuan Yuwei has argued, “housing, medical and education costs were the ‘three big mountains’ suffocating Chinese families and crowding out their consumption”. Yuan went on to describe these measures as “the most forceful reform I’ve seen over many years, and the most populist one. It benefits the masses at the cost of the richest and the elite groups.”

Unlike America’s Federal Reserve, whose increasing tolerance and support of financial bubbles continues to engender profound systemic fragility in the American economy, Beijing is prioritising social cohesion above the narrow interests of financial rentiers. If only American policymakers had demonstrated such foresight in decades past.


Marshall Auerback is a market commentator and a research associate for the Levy Institute at Bard College.

Mauerback

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J Bryant
J Bryant
2 years ago

Great article. Thank you, Unherd, for finally commissioning authors to write about economic issues.
For so long, many in the US, and elsewhere in the West, have been decrying economic inequality, the loss of decent paying jobs, the erosion of our industries, the subversion of universities to diploma mills that now serve mainly as a pipeline into the progressive grievance industry. But they were voices in the wilderness. The financial engineers won the day. So much of our skill base is gone, and the young are so disenchanted with the capitalist system, and the lack of commitment to their future by their own society, that fringe ideologies have taken root.
Yes, we can learn something from China about building a meaningful future for our own population. I wonder if it’s too late for such lessons.

Galeti Tavas
Galeti Tavas
2 years ago
Reply to  J Bryant

Bit confusing in the writing though – but I suppose I got the gist, which is obvious to anyone who reads on the world and the economy in a serious way.

The thing I would say though, is that since the 2008 QE the USA economy has been so distorted it has left all industry to be more about finance than about production. Borrowing is almost free, but there is little they wish to spend on to develop new production as there is no need. Rather they buy other rising companies, and their own stock.

USA = $ 30 Trillion debt, 113% GDP. $3.5 Trillion revenue, $6.5 Trillion spending.

The thing is some of this is going to pay social programs and so on, but really most of it is spent to keep interest at ZERO and to keep the stock market from falling. Insanity. And only possible as USA is the Global Reserve.

I read about the tutoring thing last week

“In mid-July, China’s government issued new regulations that drastically limit for-profit tutoring services and prohibit foreign investment in Chinese private education companies” (A 150 Billion$ industry!)

China says it is because it overtaxes the parents income so they do not spend consuming and having more children, and overtaxes the children – but I did wonder if it also wants a thumb on all education less Liberalism creeps in. China knows the trade deficit with USA cannot continue, and needs to get the Chinese to consume enough to replace the American market, and that its Demographic clock is ticking FAST – so for parents to have more children they cannot afford to spend $40,000 per child in private tutoring so the one child can pass the national college exams highly –

China and USA at this point are like 2 co-dependent enablers locked in a destructive relationship they cannot leave as they will be even worse off alone.

Giles Chance
Giles Chance
2 years ago

The criticisms of the US system are generally correct, but it’s sad that the writer has to laud the CCP-led Chinese system as a means of beating up America. The best solution is an America that worked correctly, not a Chinese alternative.

Dustshoe Richinrut
Dustshoe Richinrut
2 years ago

At any one time in China, thirty million people are said to be learning to play the piano. (How many in the US?). The very young in the world who decry video game restrictions on their time will cry out that their contemporaries who are marked out as future concert pianists probably spend “hours and hours daily on the piano”. Not that they know any pianists much less any friends who are learning to play any musical instrument. Unless that video gamer kid is from China perhaps. At the rate the enthusiasm for playing video games all day, every day, continues to grow in the western world, there won’t be any, say, future guitar maestros emerging again let alone flutists or trumpeters. The very young are just not interested. A real talent for something will never be discovered, all because of the obsession for ramping up record scores. Is video-gaming a training ground for playing the stock market? Is video-gaming one reason why girls do better than boys at school exams? In Germany there seem to be plenty of brass bands dotted around the country, with lots of young people involved. It might be interesting to know what the market for video games is there compared with Britain or the US. Even in the olden days, when the very young were “into comics”, nobody spent hours and hours reading them. They did various other things. But people have their worlds and their virtual worlds now, I suppose. The problem is that one is a teenager for only seven short years. Perhaps kids socialised in the pandemic year playing their video games. Perhaps that was even a godsend. If it were, then the pandemic was also a godsend for the gaming industry. God help us in the future trying to get a plumber or electrician! That’s all I can say!

Galeti Tavas
Galeti Tavas
2 years ago

I fish a great deal, most days I am on the water in public places – and the fishermen are mostly older now, 35 and older, some young kids with parents, but I doubt they will be there much once on their own. When I was young I was outdoors all the time, I half lived outside, even though I lived in London then there was always some water to ride my bike to to fish, or woods to run in. We had no cell phones and I was always just gone – somewhere off in London, on bike, foot, public transport, and my parents thought nothing of it – what a different world it was.

We always had some pets, fish, turtles, snakes, rabbits – I think kids today have left nature entirely for electronic I find this very depressing indeed. The young are all about saving nature, but have nothing to do with it, it is a mere abstraction to them.

Andrew Fisher
AF
Andrew Fisher
2 years ago

I imagine there is rather a lot of social and parental pressure for the children to ‘improve’ themselves.! Still, worth living in a totalitarian system for…

Russell Hamilton
Russell Hamilton
2 years ago

I’m a bit surprised that the Chinese Communist Party wasn’t mentioned in this article. A lot of these campaigns in China are basically about reminding everyone to stay on the straight and narrow path where the way forward is laid out by the CCP. “Beijing is prioritising social cohesion” means everyone will live according to the rules determined by the CCP – hardly a model for us.

Friedrich Tellberg
Friedrich Tellberg
2 years ago

I think you are right. The author tapped into Chinese propaganda. Just like in the Soviet Union the Communist Party removes people that might get to powerful, and it is always for the same old reason: the Party protects the people.

Alan Thorpe
Alan Thorpe
2 years ago

This reminds me of intellectuals visiting Russia after the revolution and being impressed with their economic policies.

Jonathan Ellman
IS
Jonathan Ellman
2 years ago

We can agree or disagree with the CCP’s moral principles, they have them. All our leaders seem to have had for decades is the stock market.

GA Woolley
GA Woolley
2 years ago

There is another issue where we may, in time, come to re-evaluate China, that of the Uighurs. China, perhaps with good reason, suspects that this Muslim community was increasingly falling for indoctrination by foreign Islamic ideologues, and is pre-empting that by indoctrinating them in its own Chinese ideology. Meanwhile, our own Muslim communities are similarly being indoctrinated, but we afford the source of those ideological beliefs ‘protected status’. Which approach will work out better in the long run?

Andrew Fisher
AF
Andrew Fisher
2 years ago
Reply to  GA Woolley

Some good exculpatory words there – ‘suspects’ and ‘perhaps’. I hope you don’t ever fall foul of the law on that basis!
Mass human rights abuses and internment of millions in concentration camps is hardly a reasonable response to one or two terror attacks many years ago. I have no problem with harsh treatment of those actually responsible, but these are a tiny minority.

Last edited 2 years ago by Andrew Fisher
Alka Hughes-Hallett
Alka Hughes-Hallett
2 years ago

At least we in the west can openly talk and criticise our system. Freedom of thought and expression are the cornerstones of our system (although in the recent times the tech giants are trying to squeeze that right, at least it is still spoken about without fear).

However erratic, the western model does allow for change and reinvention. I accept all the criticism you have levied on the west & the markets etc, it IS however changing. But in China there is no room for change from within, only from the top. So what happens when the top is corrupted? What’s the guarantee that CCP will always do right by the people? And if it is doing so, why is it following the west and behaving like a clandestine colonial power?

May be we have have a lot to learn from China, maybe it has a lot to learn from the west yet too.

chris sullivan
chris sullivan
2 years ago

Excellent article thanks – one with some actual new info vs the shallow regurgitated crap we usually glaze over to whilst attempting to understand the Chinese.

Dustshoe Richinrut
Dustshoe Richinrut
2 years ago

So what’s best? The guiding Han of the market?

Chauncey Gardiner
CG
Chauncey Gardiner
2 years ago

Touche’!
The very Visible Han of the Market.

GA Woolley
GA Woolley
2 years ago

This is a really important article, which describes a situation which I think many of us sensed, but couldn’t quite pin down. While I understand, and agree with, commenters’ objections to using the CCP model as the better option, it’s what the competition, and primary alternative, happens to be. Yes, I think that its rigid conformity will stifle innovation, but the CCP has put measures in place to tap into what’s left of the West’s technological progress.

Michael Kellett
MK
Michael Kellett
2 years ago
Reply to  GA Woolley

‘.. but the CCP has put measures in place to tap into what’s left of the West’s technological progress’.
Yes, by continuing its industrial espionage, otherwise known as theft.

Stephen Rose
Stephen Rose
2 years ago

I applaud this article, but I have reservations about following the Chinese model.
There was an account by a football/soccer coach recalling the Chinese attempt to build a national team. They spent billions on fostering a national game, but could never consolidate the individual within a team, who could, function as an individual when required. I don’t recall the Soviets having this problem with the game.
Training excellent musicians isn’t a problem, allowing a composer to flourish is. Some years back, a Chinese orchestra played at the London Prom season, rattling through Western classical music, until hitting the buffers with a home grown piece.The Soviets didn’t have that problem either.
Creativity is harder to nurture, China may be moving forward on this, creativity certainly needs discipline,which currently we seem to lack in the West. It also needs financing. I never forget what a German tech startup financier (he helped develope NASDEC ) told me 20 years ago. “I don’t invest in brilliant ideas, but brilliant plans”
I don’t understand gaming, I understand its a billion pound industry, which we are rather good at and that it has generated some very useful spin offs.A misspent youth, wasting time in pool halls and bars has resulted in many a later genius. What is worrying is what is happening in our universities, that might be our death blow.

Ferrusian Gambit
Ferrusian Gambit
2 years ago
Reply to  Stephen Rose

The kind of intense focus and ability to manipulate mechanical chains of logical outcomes that many gamers have does make them good engineers and programmers. I speak from personal experience and knowing a lot of them. As long as they themselves or their parents push them into growing out of an all consuming obsession with cames and end up learning maths and programming at some point.

Last edited 2 years ago by Ferrusian Gambit
Chauncey Gardiner
Chauncey Gardiner
2 years ago

Many thanks for this essay and saying things that need to be said.
Let me ask for elaboration of “hollowing out” in successive essays.
The first time I’d encountered the phrase “hollowing out” was in reference to Japanese industry. (“Deindustrialization”, 産業空洞化) But hollowing out, of course, is not a phenomenon unique to Japan. Downstream from the Three Gorges Dam is production volume serving Japanese, European, and American interests. France is hollowed out. Italy is hollowed out but for small, small manufacturing. The United States is hollowed out. Britain’s industrial north is hollowed out. The shipyards of Northern Ireland and Scotland are hollowed out. And this kind of thing is the subject of film: The Full Monty, Once Upon a Time in the Midlands, Trainspotting — anything with reliable Northerner Robert Carlisle in it.
So, the hollowing out of the West was matched with the “financialization” of everything. Or aren’t “hollowing out” and “financialization” the same thing? Everyone shipped off their manufacturing to lower-costs plants in China. And that’s it; the West became occupied with organizing logistical networks — with getting stuff to and from manufacturing sites and then to consumers. That stuff needed to be financed. Voila! “Financialization!”

Last edited 2 years ago by Chauncey Gardiner
david.siu2011
david.siu2011
2 years ago

Excellent article. The author has made many valid points. It is not about which system is more superior but rather about learning. The title of the article says it all and the keyword is “Learn”. Many people have very strong views of the CCP and China’s political system is far from perfect but we must give credit where credit is due. Lifting millions of people out of poverty in one generation is no mean feat. It is the West’s loss if we dismiss everything China does, especially out of arrogance. Alas, I am very pessimistic. Even if the western politicians recognise that our system requires some root and branch reforms, I am not confident that they have the political will to make them happen.

Satyam Nagwekar
Satyam Nagwekar
2 years ago

A superb contrarian view on the CCP’s ‘antics’.

Peta Seel
Peta Seel
2 years ago

Brilliant essay and absolutely spot on. There is nothing in the human experience from which lessons cannot be learned. The totalitarian means aside, we ignore what China is doing at our own peril.

Noah Ebtihej Sdiri
Noah Ebtihej Sdiri
2 years ago

This is China’s “L’État c’est moi” moment with the Chinese State reasserting its authority over the national bourgeoisie. The Chinese authorities wanted to send a clear message to its nascent capitalistic nobility: the nation is greater than you.

Galeti Tavas
VS
Galeti Tavas
2 years ago

the CCP is greater than you

Cheryl Jones
Cheryl Jones
2 years ago

So basically Making China Great Again?