China, innovation, and competition with the US

Sep 15, 2023
Double exposure of Mao Tse Tung from Yuan banknote and coins with stock market chart for China economy growth.

The real American terror is not that the Chinese economy will grow bigger than the American economy – if it is not already – but that the Chinese mixed economy model will prove superior to the rampant free-market, greed model US billionaires and their peddlers promote.

Western journalists and commentators have long struggled to explain how the Chinese economy actually works.

Typically we read of the failures under Mao’s communism and the explosion of growth with the supposed introduction of capitalism after the death of Mao and the rise of Deng Xiaoping. Before Deng we are reminded of the failures of the great leap forward and the disastrous cultural revolution. Little or no credit is  given to, for example, the communists’ achievement in land reform, or educating the population, two essential ingredients in modernising an economy.

And Western commentators repeatedly tell us that the Chinese economy is about to collapse. (See for example: Gordon Chang’s 2001 book, The Coming Collapse of China;  hedge fund manager, Jim Chanos’ 2010 description of China as being “on a treadmill to hell”; George Soros’ 2014 observation that China’s growth model had “run out of steam”; Morgan Stanley’s and Ruchir Sharma’s 2016 pronouncement that China now faces “the curse of debt”; and finance journalist Dinny McMahon’s 2018 observation that the economy was becoming “increasingly dysfunctional.”)

Now a new book, The New China Playbook: Beyond Socialism and Capitalism by insider Keyu Jin provides real insights into how the Chinese economy actually works. Jin, an associate professor at the London School of Economics, was born in China and is the daughter of Jin Liqun, an economist who previously served as vice-minister of finance.

The growth of China challenges Western capitalism’s claim of economic superiority. Since the collapse of the Soviet Union it’s been an article of faith that the “free market” is superior to planned economic systems.  American capitalism won the economic race that began in 1917 with the Russian revolution and the formation of the USSR in 1922. The race “proved” that capitalism generated innovation and faster economic growth, albeit with inequitable share of the spoils.

But did it? Was it ever a fair race? Was it more a case of one competitor starting poor and crippled from the impact of war; having both legs broken along the way by a second war; and having post-war growth slowed by the burden of competing arms manufacture in its run to the finishing line?

In the next lane, the US started the race in the prime of its life; waited until the end of World War I before joining; suffered no World War II mainland invasion; and capitalised on the war’s destruction of Europe and Asia.

The end result was capitalists’ claim that “free markets” were superior to planned, or guided economies. Planned economies, it was said, simply could not compete.

The rise of China seriously challenges that claim. The bubble must surely be about to burst.

As the growth continues, Western commentators tell us that the Chinese system is oppressive and opaque: Xi Jinping and a small cabal of yes men dictate everything that happens in China.

Now Keyu Jin provide us with some insight into how the country actually works. She says the Politburo’s Standing Committee, which consists of the most important officials in the country, functions like a senior management team of a giant corporation. At the next level down, power splits into two branches, with the party on one side and the legislature and government on the other. Jin likens this structure to a double helix that converges at the top.

Municipal government has both a party secretary and a mayor, working closely together with the party secretary invariably ranking highest.

But unlike the centralised Soviet Union, local officials in China’s provinces and towns push their own agenda for local development and growth. The “Mayor Economy” has transformed fishing villages and backwaters into modern export hubs, manufacturing centres and high-tech economic zones. Local governments can give out licences, contracts, cheap land, and direct loans from local banks to firms they prefer. They can make new laws or sidestep the old and they can lobby the central government.

It is no accident that all three general secretaries of the Chinese Communist Party since Deng Xiaoping were once provincial leaders.

Since Deng’s reforms of the 1980s the structure of the economy has changed dramatically. Today the private sector employs around 80 per cent of the urban labour force.

Reforms initiated in the mid-nineties resulted in the shut-down, or privatisation of many state-owned firms and a consequent dramatic improvement in performance of those that survived. Large State-Owned Enterprises (SOEs) became profitable and productive.

Today the SOEs play an important role in the economy, not only acting on their own behalf but also in collaboration with the private sector. In 2019, 63 of  China’s 100 largest corporations were state players and most interestingly every single one of them had a joint venture with a private company.

In times of crisis, SOEs have also proved most useful. In the wake of the 2008-9 financial crisis they were called upon to salvage the economy.

Jin tells us that regions compete with each other and that at times local officials have bent, or even broken rules and traditions. In the 1980s, for example, when private sector companies might bear the stigma of being seen as “capitalist” they could be dressed up as collective enterprises.

But as the population and the central government came to see, ‘rule bending’ can go too far. In 2013 Xi launched a sweeping anti-graft campaign, resulting in 2.3 million officials being punished for violating party rules, or state laws. Among them was Zhao Zhengyong, the former party secretary of Shaanxi Province, who built expensive villas on protected land.

Unlike the USSR, China is not seeking to push an international ideological agenda. The government is seeking to maintain stability and lift the population’s standard of living.

But increasingly politicians in the United States – always in need of a barbarian to generate fear – have demonised China.

The US/China rivalry reached a peak with the election of Donald Trump in 2016. Covid-19 was sneeringly called the China virus; US unemployment was due to unfair Chinese trading practices, requiring tariffs to protect American jobs; and US technology transfer must be stopped.

President Biden has followed Trump, imposing export controls to cut off China’s access to top AI chips made by US firms such as Nvidia, Advanced Micro Devices and Intel.

The real American terror is not that the Chinese economy will grow bigger than the American economy – if it is not already – but that the Chinese mixed economy model will prove superior to the rampant free-market, greed model US billionaires and peddlers promote.

Educated in China and the US, Jin appears to accept the argument that innovation requires a private sector generating huge financial rewards for innovators. She seems to be unaware that many of the “zero-to-one” early-stage discoveries in the West were made in government run, or funded, institutions.

The most obvious examples in the US are the Manhattan project and the NASA moon landing. Computers were not invented by Steve Jobs, or Bill Gates. The internet is not a Google or Meta creation. It emerged from action to enable government researchers to share information. Major breakthroughs in medicine, such the discovery of Penicillin, have come from salaried researchers, whose reward is the discovery itself and perhaps recognition of their achievement.

China now aims to achieve break-throughs in key technologies: the central government has outlined the plan and local governments have been called upon to deliver.

Jin says China is building a fully integrated incubation chain, linking key national labs, universities and high-tech parks. Researchers from abroad are returning to China.

It is not until the end of her book that Jin addresses the question of rising inequality. Around the world, labour’s share of national production is declining, while capital’s share is rising.  With the world’s second-largest number of billionaires, China’s inequality is now approaching that of the United States.

Jin writes approvingly of China’s efforts to eliminate illicit income, but says that not all income inequality is unjust. The problem she avoids addressing is that of increasing wealth inequality. She disapproves of ideological solutions by which she really means Communist ideology, implicitly accepting American ideology.

At some point Socialism With Chinese Characteristics is going to have to tackle the inequity/billionaire problem. In time ‘legitimate’ billionaires and their heirs become as damaging as illegitimate billionaires, wielding undue influence, consuming excessive amounts of resources and, contrary to their own propaganda, proving no better at planning and distributing resources than salaried managers.

Around the world, over the years the extremely rich have shown no loyalty to their nations, shifting their wealth at the hint of any fair redistribution.  Perhaps Chinese billionaires can be persuaded to voluntarily relinquish their billions; maybe effective gift and death duties can be introduced. But one way or another, this issue will have to be tackled.

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