The New China Playbook E-Book

Keyu Jin

• Herausgeber: Swift Press
• Kategorie: Geisteswissenschaft
• Sprache: Englisch

Seitenzahl: 537

Veröffentlichungsjahr: 2023

Beschreibung

Financial Times Best Summer Books of 2023 'Essential reading' Tony Blair A revelatory, myth-dispelling exploration of China's juggernaut economy Although China's economy is one of the largest in the world, Western understanding of it is often based on dated assumptions and incomplete information. In The New China Playbook, Keyu Jin burrows deep into the mechanisms of a unique system, taking a nuanced, clear-eyed, and data-based look inside. From the far-reaching and unexpected consequences of China's one-child policy to the government's complex relationship with entrepreneurs, from its boisterous financial system to its latest push for technological innovation, Jin reveals the frequently misunderstood dynamics at play. China is entering a new era, soon to be shaped by a radically different younger generation. As it strives to move beyond the confines of conventional socialism stained by shortages and capitalism hindered by inequality, the world is about to witness the emergence of a completely new dynamic between two diametrically opposite systems. The thorough understanding of China's playbook that Jin provides will be essential for anyone hoping to interpret the nation's future economic and political strategy. While China's rise on the world stage has stirred a wide range of emotions, one thing is certain: a deep understanding is essential for successfully navigating the global economy in the twenty-first century.

Leseprobe

THE NEW CHINA PLAYBOOK

SWIFT

First published in Great Britain by Swift Press 2023

First published in the United States of America by Penguin Random House 2023

Copyright © Keyu Jin 2023

The right of Keyu Jin to be identified as the Author of this Work has been

asserted in accordance with the Copyright, Designs and Patents Act 1988.

Graphs on page 164 from ‘Demystifying the Chinese Housing Boom’ used with permission of Professor Wei Xiong.

A CIP catalogue record for this book is available from the British Library

ISBN: 978-1-80075-384-6

eISBN: 978-1-80075-385-3

To my parents

CONTENTS

1.   The China Puzzle

2.   China’s Economic Miracle

3.   China’s Consumers and the New Generation

4.   Paradise and Jungle, the Story of Chinese Firms

5.   The State and the Mayor Economy

6.   The Financial System

7.   The Technology Race

8.   China’s Role in Global Trade

9.   On the World’s Financial Stage

10.   Toward a New Paradigm

Acknowledgments

Notes

Bibliography

ONE

THE CHINA PUZZLE

This book is about reading China in the original, coming to understand its people, economy, and government in such a way that the truth is not lost in translation, as is far too often the case. I first realized this fresh perspective was sorely needed way back in 1997, when, as a teenager, I came to the US as a Chinese exchange student. Dr. Lawrence Weiss, visionary headmaster of the Horace Mann School’s upper division, in New York City, anticipated China’s future significance in the world, despite its much smaller economic and political heft at that time. He believed it was important to introduce an authentically Chinese perspective to the school’s intellectual and social life. I was selected to help fill those gaps, eager in return to learn from the America that so impressed all of us back home.

Having parachuted in from a geographically and ideologically far-flung land, I seemed exotic to my classmates. Outside of school, anytime I mentioned that I was from mainland China, a blizzard of questions followed. When will China become a democracy? Do you feel oppressed? How do you wake up in the morning knowing that you can’t elect your own president? When will the Chinese economy stop growing? I was fortunate enough to live with a hospitable American host family who brought me directly into American political life. Fresh from Communist China, I plunged straight into democratic campaigns for high office in New York State, handing out leaflets and attending fundraisers. I met lots of well-informed, politically savvy people, but they surprised me by posing the same questions as my fellow students. It was becoming clear to me that even sophisticated Americans possessed only a simplistic understanding of life in China. Between the lines I sensed sympathy for my having grown up in what seemed to them a backward country, with limited freedom of expression or political choice.

But the China they imagined was far from the one that I knew from my everyday life there—not to mention that by 1997 seismic shifts were already under way in my home country. People’s excitement and hopes were bubbling over as we debated the value of new economic reforms, our bid to host the Olympics, joining the World Trade Organization, privatizing state-owned companies, and adopting the technology of the West—including its cars, infrastructure, and business models. In school, our Chinese political science textbooks were in a constant state of revision, as Marxist thought gradually morphed into “socialism with Chinese characteristics.” People in China were living more comfortably than they had in many generations. And every summer when I went back to Beijing during my years as an undergraduate, and later as a graduate student at Harvard, the city’s skyline astonished me with its latest transformation.

Fast-forward nearly three decades to the present. Today the backward homeland of my childhood has become the world’s second-largest economy, its massive new cities animated by astonishing technological wonders. Yet so much of the world is still asking the same questions, and still comparing China to former Communist countries with their autocratic and repressive regimes. Even when it comes to China’s juggernaut economy, the world remains skeptical: China’s economic model is running out of steam; the state is suppressing private entrepreneurs and stifling innovation; financial implosion looms on the horizon. However, in 2008 it was the US financial system that drove off a cliff, dragging with it a formidable array of European financial institutions and corporate giants. When so many other significant players in the global economy fell into the recession that followed, it was no longer clear that a one-size-fits-all economic system like conventional Western capitalism was necessarily destined to prevail.

Many people today still hold the deep-seated conviction that China’s present course will end in disaster unless it converges with Western values, economic systems, and political persuasions; some of those who hold a more positive view of China’s economic accomplishments also tend to see China as a threat. As an economist who grew up there but also works in the West—with one foot in each world, as it were—I believe neither of these perspectives accurately reflects what is truly going on in China. This book proposes an alternative view: more nuanced, more complex, and, hopefully, more helpful.

Understanding the Chinese system and its economy is essential to comprehending China more broadly. Those who wish to see China succeed will need to understand how its economy functions so they can better take advantage of the opportunities it presents. Those who don’t trust China will be able to critique it with more relevance, to better distinguish the acts of the state from those of the people, and to separate macro appearances from micro realities. Between China and the West there are many areas of contention and differences in values, perspectives, and political approaches, so all too often immediate events and political dramas eclipse consideration of economics. In this book I will try not to succumb to these distractions, but will limit myself instead to orbiting the economic issues—and the political and cultural superstructure on which they depend.

In the decades that followed my high school studies in the Bronx, China has forged a unique economic model well suited to its purposes, aligned with its national conditions, and authentic to its culture. Despite regular predictions of its imminent collapse, China continues to defy conventional wisdom: far from acting with an invisible hand to manipulate the economy behind the scenes, the state has intervened often, heavily, and sometimes clumsily. The rule of law, sound corporate governance, and intellectual property protection—all long held up as essential to long-term growth—have been weak during much of China’s economic upsurge. Yet somehow China’s approach seems to have succeeded. A large segment of China’s population has been lifted into the middle class. Twenty million private firms have sprung up like mushrooms, when only thirty years ago they couldn’t even legally conduct normal business. In 2019, China had the world’s largest number of unicorn companies (private firms valued at $1 billion or more). In a landscape where empty plains once reached to the horizon, now gleaming new smart cities feature separate driving lanes for autonomous vehicles, and robots serving Kentucky Fried Chicken. And for those who think that China’s all-powerful political party and numerous state-owned enterprises (SOEs) point to a state-dominated economy, consider these facts: Today it is the private sector that accounts for more than 60 percent of national output, 70 percent of the nation’s wealth, and 80 percent of urban employment. Thirty years ago, it was the other way around.1

To my European colleagues, exactly what role the Communist Party plays in a seemingly thriving capitalist economy has always been a mystery. To my American friends, China’s dynamic entrepreneurialism seems wholly incompatible with its people’s deference to authority. Resolving these paradoxes requires going beyond mere stereotypes. Only by fully grasping the new China model with its intricate and often contradictory dynamics can we truly appreciate how different it is from pure capitalism or socialism. Only then can we critique the China model intelligently—both recognizing its merits and identifying its challenges. As China’s economy matures, this deeper understanding will help us anticipate which aspects of the model will endure and which are likely to change. As excited as I have been about China’s mesmerizing economic surge, I am equally concerned about the long-term ramifications of its approach and the suitability of the system in the new era.

Demystifying China’s meteoric ascent requires examining the fluid interplay between many elements, including households, business enterprises, and the state, along with the tidal pulls of history and culture. In subsequent chapters, we will explore the behaviors and incentives that drive each of these three basic economic agents, and how their interactions make up the colorful and often paradoxical Chinese economy. With a deeper understanding of their roles, we can then grapple with China’s ambitions with regard to technology, trade, and finance, as well as China’s impact on the global economy. Finally we take the key themes that have emerged—the role of the state, the importance of a new generation, and China’s coming of age—and use them to consider how the nation’s present will extend its reach into its future as it embarks on a new era.

Deng Xiaoping, China’s supreme leader, who rose to power in 1978, once remarked that it does not matter whether a cat is black or white, so long as it catches mice. He shrewdly put an end to the febrile debate about the superiority of socialism and capitalism in an ideologically charged era. The idea that a market economy could be compatible not only with capitalism but also with socialism was a breakthrough that set the nation on a course of economic liberalization. Since then, China’s economic system has begun to morph gradually into a unique form. Whether it is called “managed capitalism,” the “mayor economy,” or, more officially, “socialism with Chinese characteristics,” its model does not neatly fit into any category. Instead, it embodies a unique blend of the state and the market economy, striking a balance between state and industry, coordination and market incentives, communalism and individualism.

The contrast between China’s political economy model and the West’s free market model is illustrated by Figure 1.1. The market economy of the West is made up of consumers and enterprises connected through a financial system, in which the state plays a minor role. In China, the confluence of consumers, enterprises, and the state (which exerts significant power over the financial system) results in a hybrid that contains elements of both market and “mayor” economies (about which we will learn more in chapter 5). The size and power of the Chinese state is greater than that of Western countries, as the figure shows, reflected in the fact that it has many more tools and instruments at its disposal as well as a wider range of mandates and objectives. The state in China is unique in its ability to mobilize collective action in service of the nation’s goals. Not only can it allocate resources and create incentives, but it can also impose mandates and mete out punishment.

A second feature that makes the system different is that China’s political centralization is paired with economic decentralization. The central government sets the strategic direction, but local officials deliver on the ground. The “mayors” are effective equity stakeholders of their jurisdiction. By supporting good private companies, they build an industrial cluster, and a thriving economy with multiplier effects: more GDP, jobs, and surging real estate prices. They collect more tax revenue and ascend the political ladder. This is why, contrary to our deep-seated assumptions about the state, local officials are more likely to lend a helping hand than to extend a grabbing hand. As we will see throughout this book, this unique marriage of local officials and intrepid entrepreneurs is how China reformed, industrialized, urbanized, and now innovates.

The third feature of China’s growth model is that aspects of its economy are still nascent: its institutions, such as legal systems, regulatory bodies, and contractual rules, though improving, have been hitherto weak. In an economy with many institutional flaws and loopholes, the state holds the keys for any business looking to overcome a wide range of entry and operational barriers. As a result, in China, an intimacy between the state and the private sector has emerged unlike anything we see anywhere else in the world. There is a lot of good that the state can do in immature markets. The problem is that most developing countries have neither state capacity nor good institutions. China has strong state capacity and weak institutions, whereas advanced countries like the United States have strong formal institutions but state capacity is gradually eroding.

Figure 1.1: The left panel illustrates the free market economy of the West; the right panel illustrates the hybrid Chinese economy. Government in the West mainly influences the market through its fiscal, financial, and monetary policies, whereas the Chinese government also applies industrial policies and management of its state-owned enterprises. The size of government is much larger in China, and government is an active participant in a hybrid economy.

The biggest difference between socialism and capitalism is dynamic innovation—capitalism’s most fundamental virtue, delivered by mechanisms such as property rights protection and competition, which are notably weak in socialist systems (Table 1.1). But in China, innovation and entrepreneurship have been defining features of the economy despite socialist characteristics of in-state coordination and resource allocation. It has found a way to combine private and state forces to suit its own circumstances.

TABLE 1.1

CAPITALISM

SOCIALISM

Private Property Rights

Strong

Insecure

Research Initiatives and Decisions

Entrepreneurs/Firms

Government

Financial Reward for Entrepreneurs

Large

Insignificant

Competition (creative destruction)

Strong

Weak

Financing of Projects

Flexible and Market Based

Rigid and Allocated

Source: Modified version of Chenggang Xu, “Capitalism and Socialism: A Review of Kornai’s Dynamism, Rivalry, and the Surplus Economy,” Journal of Economic Literature 55, no. 1 (March 2017): 191–208.

Thus, it is easy to make the mistake, as many pundits do, of ascribing China’s success either to the emergence of free market economics or to the power of a highly centralized Communist regime. But the truth lies somewhere in between. Yes, markets do work in China: goods and factor markets (capital and labor) operate on the basis of supply and demand, consumers shop freely, and firms innovate. Discovery, education, and sound financial investments lead to lucrative returns. But state planning and mobilization also have a starring role: How else is it possible, for example, that a developing country like China can become both the largest consumer and producer of electric vehicles in a matter of a few years? Mass adoption of a new-generation transport technology requires rapidly rolling out charging stations, organizing supply chains from battery makers to manufacturers, and even breaking old consumer habits. Western economies talk about “nudging” consumers to do the socially optimal thing—and have difficulty succeeding. In China, system-wide changes can be enacted quickly, with little political opposition. To some, this may sound both impressive and scary at the same time.

The combination of state guidance at the macro level and market mechanisms at the micro level, as we will see throughout this book, is what explains China’s rapid growth spurts and its technological uptake in such a short span of time. It is also the approach taken toward achieving its new objective of shared prosperity. It explains many economic conundrums, such as the persistent undervaluation of China’s exchange rate, sustained periods of low interest rates and suppressed wages, and large trade surpluses—all notable mysteries at various times in recent history. Contradictory mandates and the tension that arises when the state and markets pull in opposite directions are a recurrent feature of the hybrid economy. Although replicating China’s successful economic formula may not be possible for third world countries looking for a model to follow, there are still many lessons to absorb from it as an alternative to full-fledged capitalism. And although our focus is on the Chinese economy today and tomorrow, I draw liberally from the nation’s recent past in order to better comprehend both the present moment and those yet to come.

Making Sense of the Puzzle That Is China

Economists tend to focus on universal principles—a given set of fundamental rules established within a given framework that gives rise to predictable outcomes. But when we look at China, anomalies, paradoxes, and puzzles abound. Western economic thought is based on the premise that individuals seek to maximize their own welfare, and that companies are similarly motivated to maximize profit; markets establish their own equilibrium, while the state plays a largely passive role. But in the Chinese landscape, the state features far more prominently, a towering peak overlooking other imposing promontories like culture and history. In China’s economy, those mechanisms identified by pioneers of economics like Adam Smith are not the only ones at work, nor always the most significant.

Consumers, entrepreneurs, and the state: in China none of them behaves like a conventional economic agent. Therefore, in our quest to learn more about China’s present and prognosticate about its future, we will need to challenge Western assumptions, adjusting our lens so we can bring this global outlier into sharper focus. Chinese households tend to make decisions on a collective rather than individual basis, choices that take into account a rich network of intergenerational relationships and duties that often are placed above individual self-interest. Entrepreneurs decide not only what is optimal for their firm’s profits, but also how to balance delicate relationships with local officials, align their goals with national policy directives, and manage symbolic and political responses to regulations that affect their business. The Chinese state is endowed with singular power, including an array of instruments that can be deployed to steer, manage, and push the economy in any direction. These tools of mass intervention are unparalleled. Policy directives, rules, and regulations can be set with little political obstruction. The state can scrap old rules and make new ones overnight, influencing when, how, and in what firms can invest overseas, granting or denying specific approvals and licenses, or leveraging the financial system to serve a national goal. But this power is not limitless. Internal controls and competition curb corruption. An increasingly demanding civic society holds the government more accountable on a wider range of issues. Social media—despite strict censorship—embodies a two-way monitoring platform between people and government.

If the first reason why the world so often misreads China is lack of a suitable perspective, the second is a shortage in the use of data; anecdotes are no substitute for hard evidence if we want to see the whole picture. While many are rightfully dubious about official Chinese figures, there is a plethora of good data available on the micro level, collected from households, firms, and industries. I will be drawing from this more granular information, including a wide range of internationally and privately commissioned data sets and surveys. These have the benefit of being far less prone to manipulation than national GDP figures or inflation rates, which are subject to political influence.

At the same time, data can be misleading without an appropriate framework for interpreting it. China’s double-digit growth numbers for many decades may look staggering, but they’re less impressive when benchmarked against the low base from which they started. Similarly, people have criticized China’s investment in infrastructure as being far too high, based on its outsize 40 percent share of GDP, but for a country that is only a little more than halfway through its ambitious plan for urbanization, that number may not be high at all—if the money is efficiently used. With the right framework in mind and data for empirical validation, we can begin to see the Chinese economy for what it actually is.

A more accurate understanding of the Chinese economy also requires us to appreciate the impact of culture, values, and history. Only then can we come to explain its many paradoxes. Why does a Chinese household save 30 percent of its income on average, while its American counterpart saves on average 3 percent? How can a Chinese person with an income below the US poverty line afford Boston-tier housing prices? Why does China have the world’s best-performing economy and the world’s worst-performing stock market? How are government officials motivated to create massive wealth for private entrepreneurs without creating commensurate riches for themselves? How do we make sense of the fact that the fault lines in China’s financial sector—its roller-coaster stock markets, exploding debt, shadow banking, and astronomical housing prices—have so far not led to a major financial implosion?

There are also many things that are difficult to reconcile with a Western orientation: highly centralized power with a government that is also attentive and responsive to its citizens; a new generation of strong-willed, hyper-educated (often in the West), and cosmopolitan Chinese that is still very oriented to what their parents want; a vast majority of China’s citizens that willingly cooperates with the state, despite complaints and grievances over some of its stringent rules and impositions. What is acceptable behavior in some countries can induce quivers or distaste in others. According to the World Values Survey, which explores people’s beliefs and values in more than one hundred countries, 93 percent of Chinese participants value security over freedom, as compared to only 28 percent of Americans.2 Such differences can be fully understood only by taking culture and history into account.

In China, an interventionist state is rooted in paternalism, a hallmark of government in China since Confucian times, more than 2,500 years ago; it is based on the conviction that intervention by a senior person is justified if it benefits a junior person. This helps explain the urge of the Chinese government to steer the economy rather than just let the markets do all the work. This also offers up a reason for the state’s aversion to economic and financial fluctuations, even when they reflect the natural cadences of a healthy market. And it provides a rationale for why the state prefers to liberalize slowly, treading carefully while avoiding certain risks, in contrast to the overnight overhaul of centralized economies we’ve seen in former Soviet bloc economies.

So far as the Chinese are concerned, there is little difference between state paternalism and authoritarian parenting. While those who grew up in Western cultures may balk at its intrusiveness, the Tiger Mom phenomenon of disciplining children and making decisions on their behalf is taken for granted by the Chinese people. Yet they do not see themselves as helpless pawns in the context of either family or society. Working around a social norm of strong tolerance, the Chinese constantly try to balance obligation and deference with free will. A longitudinal survey conducted by researchers at the Harvard Kennedy School—consistent with a range of surveys conducted internationally—reported strong satisfaction with the government, despite paternalism: 86 percent in 2003, 96 percent in 2009, and 93 percent in both 2015 and 2016.3 The latest World Values Survey (2017–2020) indicates that 95 percent of Chinese participants had significant confidence in their government, compared to 33 percent in the US and 45 percent, on average, in the rest of the world.4 As of 2022, that level of trust was at 91 percent, compared to 39 percent in the US.5 Sentiments may fluctuate, and satisfaction levels tend to be lower for local government officials. But Chinese citizens expect the government to take on large roles in social and economic issues and do not see interventions as infringements on liberty.

The Good, the Bad, and the Future

China’s economic story is by no means a narrative of unqualified triumph. It also serves as a cautionary tale. The Chinese economy in 1978, the year that it began to implement major reforms, was in shambles, and China’s people were mired in poverty. In the ensuing decades, hundreds of millions of people were lifted out of poverty, and the nation turned itself from an economic backwater into the most connected central component in the global economy. But China’s economic ambitions have extracted a high price. In order to propel rapid industrialization and subsidize investment in production, households were weighted down with below-market wages and low rates of return on their savings. Imbalances deepened between trade exports and domestic consumption. Ancient towns with unique relics were flooded to build dams to power modernization. Grim, cheaply built housing projects sprang up, accompanied by widespread environmental degradation and wasted resources. China’s economic development was based on a high-cost, high-growth model.

A poor nation with ambitions to catch up fast often ends up taking shortcuts. China was an archetypal country sprinting a marathon. Rules and regulations were bent as needed to foster GDP growth. Unfair competition widened the gap between a few insiders with good connections and the vast number of people without them. Unscrupulous businesspeople became billionaires overnight. And all of this was countenanced so long as capital flew in, investment grew, businesses boomed, and GDP surged.

The same approach applied to the drive to acquire technology. Chinese companies offered to swap big chunks of their domestic business to foreign firms in exchange for core technologies. Some were illegally appropriated. In its rush to modernize, China accepted substandard products, copying and counterfeiting, and investments made with little consideration for efficiency and consequence. I remember seeing new restaurants that looked like palaces, fancifully decorated with marble, mahogany, and Greek columns painted in gold, with elaborately dressed servers lined up at the entrance. But rarely did I see customers inside. This shortcut approach left international controversy, excess, and waste in its wake.

So, were the cost and sacrifice worth it? Could a saner path to growth have achieved the same dramatic results? There is no way to evaluate the counterfactual; we just don’t know. But we can become more aware of the forces that made those results possible and continue to exert their pull on the Chinese people today, for better and for worse. Sacrifice for the good of the family or community is a practice that conforms with social norms. It is neither good nor bad—just widely accepted. Recent debates on how to approach COVID-19 have given a new twist to the notion of sacrifice, but in early 2020 China chose to save lives and forsake economic output, and the West ended up with the pendulum swinging in the other direction.

For all its dramatic leaps forward, China’s economy faces major challenges today, including some of its own making. Key aspects of the strategy that proved so effective during the economy’s early development may not be well suited for its later stages. Catch-up growth is very different from innovation-based growth. When low-hanging fruit is abundant, the quality of the institutions supporting economic growth is less crucial. When markets are inchoate and disorderly, heavy-handed state interventions may be more effective than when markets are deeper and more mature. The apparatus that was so effective in mobilizing China to lead in new areas of technology like electric vehicles and clean energy has also produced excess production in steel and solar panels, causing them to flood domestic markets and international shores. A wise state needs to know when to recede into the background, and where it should loosen its control and let the economy ride its natural ebbs and flows. It needs to guide with a lighter hand on the reins and greater skill, especially in this new era of knowledge and information.

The New Playbook

The short-and-fast approach, with its febrile rush to boost GDP, is becoming a thing of the past as the Chinese economy comes of age. It is now running from a new playbook, powered by a new generation. Observers still fixated on Chinese imports displacing American workers, a Chinese economy based on cheap imitations, a growth model based on smokestack industries, an inflexible state crowding out the private sector, and sweeping corruption as the inevitable costs of doing business are not keeping pace with a rapidly evolving China. Its new playbook is based on innovation and technology, meant to be attained through self-reliance and mastery in an age marked by an unparalleled sense of national urgency and pride. Its rising middle-income group and new generation of consumers place high demands on civil society and standards of living. China’s relentless pursuit of economic growth has been replaced with a burgeoning emphasis on improving the softer metrics of development—a cleaner environment, greater food security, and a higher quality of life. In China’s old model, development was propelled by an ecosystem of loose regulations and subquality standards. Its new model is based on a slower but saner pursuit of growth—more orderly, regulated, and monitored. There is a growing consciousness that what is economically efficient may not be socially desirable, and that economic success does not necessarily guarantee a nation’s overall well-being. In the new era, China will strive to move beyond socialism stained by shortages and capitalism stigmatized by inequality.

These changes are taking place against an important backdrop—the rise of a new generation. The generation of Chinese born in the 1980s, the 1990s, and the first decade of the 2000s marks a distinct break from the past. These cohorts, of which I am a member, seem different in virtually every respect from earlier generations, who were shaped by decades of shortages in a society that purged anything that smacked of capitalism, and by the Cultural Revolution and its impact on the public mindset. Most important, China’s young people have been deeply affected—in both predictable and completely unanticipated ways—by the greatest social experiment in human history: China’s one-child policy, enacted in the early 1980s. The generation molded by this policy is transforming the nation’s spending and saving habits, innovation dynamics, competitiveness, and soft power.

As data reveals, these young people are big spenders, prodigious borrowers, and have a knack for lifestyle consumption. They have the potential to unleash trillions of dollars more into the global economy as they travel abroad, set global trends in fashion, and spend disproportionately more than their parents on culture and arts. Surveys indicate that they are substantially more open-minded and socially conscious than previous generations. However, despite much greater exposure to the West, younger people in China feel less suited to Western-style democracy than do older generations.6 Although young Chinese may be wearing Adidas and watching the NBA, globalization will not displace what is already deeply layered in the national psyche, any more than replacing the Mao jacket with Western-style suits and ties signified a pivot toward a Western way of life. Deep down, China’s people are steeped in their own culture, bound by their own traditions, and rooted in their own communities. They may be traveling the world in record numbers, but their reference points are overwhelmingly local. This younger cohort is ushering in an era of economic liberalization without political liberalization, although the situation is dynamic, and we still have much to learn about the new generation in China that is taking up the reins of power.7

But if miscommunication and misgivings have contributed to the deteriorating relationship between the US and China, there is the hope that the next generation of leaders in China, more educated and fluent with diverse cultures, are well equipped to bridge the gap between different worldviews. Even if an elite US education has failed to convert young Chinese students into avid promulgators of Western-style democracy and capitalism, it certainly has opened their eyes to the virtues of an open society, if not a wholly free society. Their desire to question, to challenge, to pursue the truth, and to push back against injustice will have important implications for the China they will shape.

There are major risks to the Chinese economy, but it will not likely be direct economic factors that will pose the greatest impediments to China’s hugely successful economic upsurge since 1979. Some fear that ideology and politics will trump economic considerations in a way that will harm growth; others believe that it will be China’s voluntary or involuntary withdrawal from global engagement. There is also the risk of politically charged technocratic errors. If not prudently calibrated, a hasty, hyper-charged implementation of well-intentioned policies to shift China’s growth model may do more harm than good, as we will further discuss in the concluding chapter.

Extended skirmishes, export bans of semiconductors, and tariffs are reinforcing China’s assertiveness and setting it on a course of national mobilization to attain self-reliance. There are those in the US who want to see China’s rise contained; there are those in China who believe in the ancient saying “One thrives in adversity and perishes in prosperity.” The mindset of self-sufficiency without continued global engagement is a dangerous one in a world where prosperity and technological proficiency are increasingly network based and interdependent. When economic interlinkages snap, everyone loses, especially the vulnerable.

It is a particularly gloomy time for the world economy, now more than a decade since the end of the Great Recession. The world’s most important economies are all slowing down, the majority ravaged by heavy debt burdens and raging inflation. Disruptions to global supply chains, US-China standoffs in technology, and looming post-pandemic crises in developing countries do not augur well for the globalized economy. When major economies stood together in the spirit of collaboration to combat economic damage brought about by the 2008 global financial crisis, few would have predicted that the world was going down the route of bifurcation rather than of convergence. Few companies would have imagined that their fates could be sealed by geopolitical factors rather than their own strategic decisions or competitiveness. And few investors and multinationals could have envisaged China losing much of its appeal as the main destination of investment after years of travel restrictions.

The war in Ukraine only proves ever more forcefully the devastating consequences of war and its reverberations around the world. But it also highlights the power of the fusion of nations through economic and financial collaboration. If they behave rationally, the US and China will do their best to avoid confrontation, and while they might not work toward convergence, they will at least move peacefully in parallel. But that would lead to the creation of separate spheres for technological standards, models of globalization, management of domestic politics, and the economy. It would also mean a slower pace of innovation and a higher cost of doing business, product shortages, and inflation—all ultimately paid for by consumers. The theoretical case for maximizing economic efficiency through globalization turned out to be too idyllic for a world of great-power competition and shifting political landscapes increasingly shaped by post-liberal thinking, economic insecurity, and the rise of social media.

Two things need to happen before the China model can be vindicated. First, China must make the shift from being a $10,000 per capita income nation to a $30,000 per capita income nation. Getting there will not be as easy as reaching the first goalpost of $10,000 was. Second, it needs to demonstrate that it can do a better job than free market economies of addressing the most intractable problems of capitalism and globalization, such as rising inequality, displacement of jobs by technology, and the diminishing expectations of the younger generation, which in an age of unprecedented abundance is more disillusioned than generations that had much less. Hence, China’s system is met with a challenge: a system that is powerful in mobilization and executing big industrial pushes may not be as effective in fostering breakthrough technologies and sustainable growth vital to becoming a rich nation; one that is expedient when a nation and its people are singularly focused on economic growth does not necessarily have the resilience and flexibility to manage a much more complex and pluralistic society. As material needs are fulfilled, the measurement of welfare extends beyond consumption and wealth accumulation; individuals will demand that their increasingly multifaceted preferences be respected and reflected in collective outcomes. There will need to be new mechanisms adopted to reflect choices from the bottom up rather than the top down; better processes to integrate debate, expertise, a diverse set of skills; and broad-based participation to cater to and balance society’s various needs. Can China meet these challenges? The jury is still out, but we can come to keener conclusions and more insightful judgments about China. Analysis based on data and evidence can allay misgivings and dispel myths, help us forecast the future more accurately, and steer us away from decisions that are motivated by emotion, ideology, or politics.

Even natives cannot claim full knowledge of their countries. I have come to appreciate China’s immense impact on the world economy as a professor based in London and a board member of some global firms. I have learned firsthand how business is often conducted in China in my role as an adviser to technology companies, whose young founders have constantly impressed me with their entrepreneurial spirit and skill at deftly navigating a highly complex business and political environment. Participating in government working groups and policy debates has led me to appreciate the wide range of considerations the government needs to take into account whenever it makes an important decision. The civil servants and leaders I have met are highly motivated and deeply committed to their mission. They want to do things the right way, which usually isn’t the easy way. My background and experiences straddling East and West have allowed me to look at the Chinese economy from up close and also from afar, where things look a little clearer and differences are a bit easier to reconcile.

I believe that a better understanding of China’s playbook can help reduce tensions and make the world a safer place. It was none other than John F. Kennedy who called for a world “safe for diversity.” Politician, businessperson, student, or scholar: we can each do our best to rise above the morass of sensationalism, stereotypes, and biases. Only then can we engage with China in a measured and effective way, critique it with relevance, and ask good questions. Until we do so, we will continue to get China wrong more often than we get it right, at a time when a sense of common purpose has become crucial to addressing the existential threats that face humankind.

TWO

CHINA’S ECONOMIC MIRACLE

The power of economic growth lies in its ability to change people’s lives. In few places is this more evident than China, where during the period between 1978 and 2016 life expectancy increased by nearly ten years and infant mortality dropped by more than 80 percent. Over the past four decades, more than eight hundred million people in China have been lifted out of dire poverty—the largest global reduction in inequality in modern times. Statistically, we see the power of the rule of seventy-two at work here: given a 6 percent annual growth rate, an economy doubles in twelve years. Between 1978 and 2011, the average growth rate of China’s GDP was an astounding 10 percent, and its tangible effects were visible everywhere: in new buildings springing up overnight, and in the flood of new tramways, cars, trucks, railway lines, bridges, highways, roads, and canals.

I was born into this era of China’s modern economic transformation and experienced its life-changing effects firsthand. In the early 1980s, my family—and all the families I knew—were living on rationed food coupons. Eggs, cooking oil, sugar, meat, cloth, soap, and many other daily necessities were subject to strict monthly rations. Life in a twenty-square-meter apartment with a shared communal kitchen and lavatory was considered luxurious. We cooked our meals on coal-burning stoves. Electric power was so unreliable that blackouts were considered the rule rather than the exception, even in Beijing, the nation’s wealthiest city. In those days, when you walked down Chang-an Avenue, Beijing’s version of the Champs-Élysées, you saw only three posh hotels, and the handful of cars on the avenue were navigating an endless tide of bicycles that parted and rejoined as fluidly as a school of fish.

At that time, we were only a few years into the new era of Deng Xiaoping’s economic reforms, and the Chinese people were poor but hopeful. As China’s sputtering economic engine began roaring to life, what I noticed most as a child was the shift from scarcity to abundance. By 1985, coupon rationing was effectively a thing of the past, and decades later those coupons would be avidly sought after by collectors. By the time I reached middle school in the early 1990s, food was not just available in endless supply, but also in dazzling variety. Imported snacks like Coca-Cola, Korean cream cakes, and potato chips became wildly popular. When the first McDonald’s opened at the corner of Wangfujing Street and Chang-an Avenue, the queue of eager customers extended for blocks, and as the golden arches expanded into other Chinese cities, Kentucky Fried Chicken and Burger King lost no time in following suit. Happy Meals were still enough of a luxury, however, that my parents used them to reward me for good academic performance at the end of the school term.

As China bade farewell to food rationing, its people also cast off the drab, gray clothes that for so long had served as the mainstay of Chinese couture. In the 1990s, the urge to find more colorful jobs inspired the first wave of adventurers to xiahai, “the plunge into the sea” of private business. Some got rich overnight, proudly showing off their brick-shaped mobile phones and sporting about in new, domestically produced cars. As the nation’s economy grew, the burdens of life eased further. Soon the privileged life of a ten-thousand-yuan-income family in Beijing was no longer a rarity. Having only known one day of rest from work each week, people now took two-day weekends—and not just to squeeze in more household chores, but also to enjoy new leisure activities like a walk in the city’s many parks, or an evening of Peking opera. Fast-forward another ten years, and classmates of mine for whom a Popsicle had once been a rare treat now possessed white-collar jobs, one or more cars, and spacious apartments they didn’t have to share with other families.

This extraordinary metamorphosis within China was matched by an equally momentous shift in the way China was viewed in the eyes of the world. In 1997, the same year that the British handed Hong Kong back to China, I left my family in Beijing to attend Horace Mann High School in the Bronx, the northernmost borough of New York City. It so happened that an American lobbyist in the education sector, to whom I will remain forever indebted, was looking for a mainland Chinese exchange student to recommend to Dr. Weiss, the headmaster of Horace Mann. That a proud Youth League member of the Communist Party could find herself immersed in an American family actively involved in democratic campaigns, conventions, and fundraising seemed utterly surreal.

These tectonic shifts in my own life opened my eyes to vast differences with regard to values that I had previously deemed universal. Whenever people learned where I was from, the same three topics came up: Tibet, Tiananmen Square, and human rights. To my great surprise, even cosmopolitan New Yorkers seemed to believe that all Chinese people lived in constant fear of an oppressive regime—when most of the Chinese were having the time of their lives embracing new opportunities. Fortunately, this narrow view of China was opening up thanks to a growing number of cultural exchange programs like mine. By the time I reached university in 2000, my friends were mesmerized by China and starting to learn Mandarin; by the time I graduated four years later, some of them had decided to move to China to embark on their careers. In the span of just fifteen years, China’s image had radically shifted, not only because it had become a major new player on the global stage, but also because opportunities abounded for foreigners inside its borders. Soon China would be taking on a leadership role alongside the most advanced and prosperous countries in the world. All this has taken place during my own time as a student.

This transformation that I lived through—from food rationing to a vibrant global economy—is often described as an economic miracle. Because economists tend to prefer scientific rather than faith-based explanations, this chapter sets out to identify the various factors that contributed to China’s economic metamorphosis. At first glance, two aspects of that change are particularly striking. The first is speed. Over the two-hundred-thousand-year arc of human history, the Industrial Revolution is considered pivotal because it improved the standard of living by 75 percent within a single lifetime. By comparison, growth rates in China mean that many Chinese will see living standards rise seventy-fivefold, or 7,500 percent.

History also tells us that periodic growth spurts do happen every so often. Brazil was a top economic performer in the 1960s and 1970s, as was Botswana. Latin American countries like Mexico and Peru, and such Asian economies as Malaysia, Indonesia, and Thailand, all experienced rapid growth during the same period. But sixty years later, not one of those countries has made it into the ranks of high-income nations. China’s growth, however, has proven durable as well as swift. Its GDP has expanded at an astonishing average 9.5 percent per year for the past four decades. For context, GDP growth in the Western world from AD 1 to AD 1829 was 6 percent per century.1 During the period of America’s fastest economic growth, which took place between 1920 and 1970, its GDP grew an average of 4 percent per year.

Only a small handful of economies have come close to matching the pace and stamina of China’s growth. These include Korea, Hong Kong, Singapore, and Japan,2 but their economies are far smaller—comparable to that of a single Chinese city or province. Today China possesses the second-largest economic engine in the world, commanding about 16 percent of global GDP, and the gap with the global leader, the US, is narrowing fast. Based on current projections, by the early 2030s China will have recaptured its early nineteenth-century status as the world’s largest economy.

So how did China become “the land that failed to fail”? When developing countries look at China today, they are less interested in debating the fine points of privatization versus nationalization and more eager to import China’s model in its entirety. But what is that model, exactly? And to what extent can it be imitated? Nobel laureate Robert Lucas said, “Simply advising a society to follow the Korean model is a little like advising an aspiring basketball player to follow the Michael Jordan model.”3 He made this observation in 1993, before China had worked its own miracle, but it’s even more appropriate for the Chinese model.

Many theories have been put forward to explain China’s remarkable growth. Some scholars believe it was primarily a matter of “markets over Mao,”4 a triumph of unfettered economics over ideology; some attribute it to the nation’s outsize investment strategy; still others hold the view that China’s enterprising people with their unusual predilection for saving was the key. Each of these factors certainly played a role, as we will explore, but they don’t provide a first-order explanation for China’s growth over the last forty years. The reason behind this surge can be summarized in one sentence: China was catching up to its own potential. In this sense, it was not a miracle, per se.

Just as a gifted athlete with poor training will fall behind the competition, China had been handicapped by its own flawed strategy during the years leading up to 1978, when plans based on the Soviet model shackled the economy. But when provided with top training, that athlete improves faster than any of his competitors, achieving what looks like “miracle growth.” China’s turbulent past obscured the fact that its underlying fundamentals were still sound. The nation’s two-thousand-year history as a great power, the cultural values of Confucianism, and high levels of public education and bureaucratic competency lay waiting to contribute once China succeeded in moving beyond the devastating events of the first half of the twentieth century.

Intangible Fundamentals: Culture, Institutions, and History

The World Values Survey quantifies the way different countries express a wide array of cultural beliefs and values, including attitudes toward thrift, work and effort, individualism, innovation, trade, the role of women, openness toward other countries and other cultures, and political and legal institutions.5 China ranks particularly high when it comes to frugality, hard work, and educating its children.6 Many believe that these traits have been pivotal to China’s economic success, but there is a fundamental confusion here between what drives income levels as opposed to growth. Culture and values change slowly, if at all, and thus cannot be considered first-order factors for growth; and as we have seen, an economy’s growth can swing wildly up and down (unsound policies, political instability, or misguided ideology can easily knock an economy off its path or drive it to disaster). But over the long term, culture can play a major role in shaping an economy’s income levels. (A country with a propensity for saving is more likely to become wealthier, for instance, although this outcome isn’t guaranteed.) Culture can also serve as an “interaction variable” when it comes to determining growth. That is to say, cultural values do not necessarily contribute independently to growth but can jointly affect growth together with other factors.

Prominent among China’s cultural advantages were the contributions of Confucius (551–479 BC), the famous Chinese philosopher whose teachings emerged from his search for pragmatic solutions to the problems of his day. In response to the rigors of life in an agrarian society, Confucius extolled the virtue of hard work, the value of a large family, and the honor of a long family lineage. Because having a big family meant stretching limited resources, the Confucian virtue of frugality became deeply embedded in China’s psyche. According to The Zuo Tradition, a commentary written in the fifth century BC by one of Confucius’s disciples, “Frugality is a feature shared by virtue of every description; extravagance is the worst of the evils.”

For Confucius, alongside knowledge and learning, character and moral integrity were highly prized. The emperor held supreme power, yet the state’s day-to-day affairs had to be managed by administrators who were competent, well educated, imbued with righteousness and self-restraint, and committed to discharging their duty. Political scientist Francis Fukuyama argued compellingly that good institutions required a merit-based bureaucracy. China, which has the world’s oldest tradition of centralized bureaucracy, introduced a meritocratic system of selection for government officials in the third century BC.

To the surprise of many Westerners, upward mobility based on ability and character is still a hallmark of the Chinese system today. Where once the means of entry was the imperial examination system, today it takes the form of a grueling university entrance exam that has become a national fixation. For three days each year, millions of students around the country simultaneously sit down to a test for which they have been preparing for years. Outside the test centers, millions of parents line up, sweating under oppressive summer heat with lunch boxes and water bottles to get them through the day, anxious to find out what fortune awaits their children.

China’s respect for order and governance also traces its origins to Confucianism. Confucius lived in a time when sovereign rulers had lost control over a dynasty, plunging the land into chaos as vassal states engaged in endless wars. He was therefore keenly aware of the vital importance of social stability and harmony, supported by citizens who knew their place in society, accepted it, and behaved accordingly. For a long time, modern economists held the view that Confucian aversion to individualism was antithetical to the enterprising spirit, and therefore limited innovation. But more recently, Confucian doctrine advocating social order, frugality, hard work, communalism, and merit-based bureaucracy has been credited with playing an important role in the astounding success of East Asian economies like Japan, Korea, Taiwan, and mainland China.7

These economies enjoy not only high rates of saving along with high rates of investment, rapid rates of industrialization, and a wealth of human capital, but also effective public institutions and well-trained technocratic bureaucracies. Singaporean economist Tan Kong Yam puts it this way: “Unlike the Euro-American model that traces its origin to the tradition of Adam Smith, which treats government as a necessary evil that should be confined to only law and order, Confucian values and tradition lead to a model of maximal government, with myriad responsibilities, duties, and obligations. The state is not just supervisory and regulatory in function, but plays a leadership role in development, education, and mobilization behind specific priorities. Government is not just made up of administrative functionaries: its members are often perceived as leaders, intellectuals, and teachers.”8 The emperor, apart from being the supreme sovereign, was morally obliged to compassionate ruling.

After the death of Confucius in 479 BC, China went on to create the earliest modern state, some eighteen centuries ahead of Europe. Four Chinese inventions—paper, printing, gunpowder, and the compass—changed the world forever. By the time of the Song dynasty (960–1279), China had become the world’s undisputed leader in science and technology, and its vast economy represented a quarter of the world’s total GDP.9 Political power had been consolidated under one emperor; an efficient bureaucracy managed the administration of the empire’s vast territories, provisioned armies, and provided public goods; a sophisticated system of taxation based on household registration and land ownership was firmly in place; and competitive exams for official appointments supported a merit-based civil service.

China’s isolationism made it miss out on the Industrial Revolution entirely. By the late nineteenth century, the Qing dynasty found itself at the mercy of Western powers. Its policy of isolationism had given way to foreign military incursions and war, political chaos, and poor policies. During the three decades after World War II, China’s primary concerns became ideological purity and national security, its main goals to transform the economy into a socialist system and to build military muscle to safeguard China’s sovereignty.

A historical fact that is often overlooked is that even in the difficult years running up to the turbulent Cultural Revolution in the nation’s recent history, there were signs of forward movement. A governance structure based on economic decentralization was put in place, along with the practice of using local experimentation as a laboratory for major policy initiatives. Large strides took place in modernizing China: local and national power grids paved the way for new industries and technologies. The literacy rate rose along with life expectancy at birth, which increased from thirty-six to sixty-seven years. The majority of Chinese children became immunized. Despite misguided economic policies, the three decades prior to 1978 were not completely lost decades.10

These historical antecedents make China very different from other developing countries sitting on the tarmac waiting for economic takeoff. Most never before reached an advanced level of institutional and economic development, or they were once prosperous economies that at some point succumbed to colonial rule. In those countries, which include India, Bangladesh, and many Central African states, indigenous institutions were either completely uprooted and supplanted or permanently altered. China only narrowly escaped the fate of colonial servitude, clinging to political autonomy at the nadir of its fortunes, and even under Soviet influence in the 1950s and 1960s, its political and economic destiny lay in its own hands. Thus, culture and history laid the foundations for China’s potential level of income, but the path to get there would require a radical overhaul of the economic system.

1978: A Watershed Year

The decades prior to 1978 were notable for two major political movements in China. The first was the Great Leap Forward, Mao Zedong’s campaign from 1958 to 1960 to shift China’s economy from agrarian to industrial and fulfill Mao’s ambition of surpassing the US and the USSR in steel production. Government financing came from squeezing modest surpluses from other parts of the economy, while households did their part by melting kitchen pots and scrap metal in their backyards. Tragically, the result was the Great Famine rather than the Great Leap Forward. A series of misplaced policies to accelerate agricultural output actually led to a 15 percent decline in grain output in 1959, and another 16 percent in the following two years, during which time the entire nation suffered from a severe famine.11

By the mid-1970s, China’s economy was in shambles, devastated by inefficient Soviet-style central planning and economic stagnation during the Cultural Revolution, as well as by a disastrous earthquake in Tangshan that killed more than 240,000 people and severely injured 160,000 more. Although China had become a nuclear power in 1964, and just the fifth nation to successfully launch an orbital satellite in 1970, it was still mired in poverty. Then Mao Zedong, founding father of the Communist People’s Republic of China, died.

Against this backdrop, Deng Xiaoping stepped onto center stage as China’s new supreme leader, applauded by those who remembered him as a pragmatist keen on economic progress, before being stripped of power shortly before Mao’s death (after which he came back to power). Despite their high hopes for Deng in his new role, few Chinese could have imagined the historical reforms he would initiate as he paved the way for China’s future. The challenges he faced were daunting—and not just economic, but also ideological. Until this point, the nation’s leaders had been guided by a political mindset based on class struggle. Hard-liners among the old guard would resist change that deviated from orthodox Marxism-Leninism. But if one pocket of the nation could demonstrate visible success from a particular reform, then even those voices most strenuously opposed to reform could be drowned out by a chorus of supporters.

Deng Xiaoping rose to the occasion by focusing on two issues. The first was creating party consensus by assessing Mao’s historical performance in order to avoid a long, drawn-out controversy over the Cultural Revolution; this would help unify the party rather than divide it. Deng made the case for this political reorientation by arguing that Mao Zedong Thought should be interpreted “holistically, correctly, and comprehensively,” easing the bonds of ideological orthodoxy enough to open a path to economic reform. The second issue was how to implement new economic policies, and here Deng Xiaoping was both flexible and patient. Recognizing the dangers of uprooting China’s Soviet-style economy overnight through massive privatization programs, Deng took the approach of “crossing the river by groping for the stepping-stones.” This gradualism was an ingenious way of deferring some thorny issues, such as how private ownership could be reconciled with the ideals of a socialist state, or free exchange with Marxist theories of value.

So 1978, the year that Deng Xiaoping was resurrected for a third time from political banishment to become undisputed leader of the People’s Republic, marked a crucial turning point in contemporary Chinese history. This was the year China began to move away from a playbook based on strict Communist doctrine and embarked on a series of transformational reforms. The bottle containing the genie of rapid growth had been uncorked, although there were still some major hurdles to overcome before its powers could be unleashed.

China’s twentieth-century transition from poverty to economic prosperity was both swift and sustained, but as the graph below indicates, a closer look at the nation’s year-by-year growth reveals that the upward climb was not a smooth sail. In some years the annual growth rate soared to 14 percent, while in others it sank below 3 percent.

Figure 2.1: GDP Per Capita Growth of China, 1978–2020

Source: World Bank Dataset

No one momentous change propelled the economy forward in a continuous climb. Instead, growth came in surges that turned out to be linked to specific waves of reform, each directed at a particular structural weakness in the economic system. When the positive effect of one particular reform eventually began to ebb, it was replaced by a new wave of reforms leading to another surge, until that, too, had run its course. “Reform is China’s second revolution,’’ Deng Xiaoping famously stated, and between 1978 and 2008 four major tides of reform triggered major surges of growth.