Strong, efficient, centralised. China's new Unified economy.
As China seeks to strengthen its economy against internal and external threats, the government seems to be bringing all sectors under its watchful eye. But at what cost?
Outside of the obvious drama surrounding Shanghai (and possibly Beijing by the time this newsletter is out), two news stories recently caught my eye. The first is news that Weibo is planning to sell a 30% stake in the company to state-owned media firm Shanghai Media Group. The second is news that the former head of China Merchants Bank Tian Huiyu has been demoted and is now under investigation as part of Xi Jinping’s sweeping anti-graft policy.
In general, there’s been a lot of news about finance and economics in the Chinese media, though a lot of it has been either a series of small news stories or boring policies and announcements that haven’t made much of a splash. Much of what’s being published in China is focused on the positive: growth in the State Owned sector, developments in the Electric Vehicle industry, government job creation methods, etc. But to me, these two news stories point to a much bigger trend within Chinese macroeconomics and domestic affairs more generally.
We’ve discussed in a previous newsletter how China could possibly turn more inwards in coming years, focusing more on internal development as opposed to international connections and growth. This seems more true in wake of the pandemic and war sanctions. Even positive news about the economy tends to include a line like “This positive start to the year has defied uncertainties stemming from the Russia-Ukraine conflict and a resurgence of domestic COVID-19 infections.”
I think we can all agree that the world is becoming increasingly unstable, and it makes sense for any government to want to strengthen their national economy. But are these moves by the Chinese government just about domestic growth and stability, or is something else afoot? Is it unreasonable to assume that clamping down on corrupt financial tycoons and officials, and breaking up powerful media brands and handing over some of that power to the government, is more than just economic protectionism?
Ensuring a peaceful and smooth running regime is always the ultimate goal of the CCP. This includes taking away the autonomy of groups and individuals in order to consolidate its power. Today we’re asking how recent subtle (and largely unnoticed) changes to domestic fiscal policy reflect this aim.
Words and deeds
A phrase that seems to be coming up more and more often in Chinese media is establishing a “unified domestic market”. This is part of government guidelines released in April for creating a fairer, efficient, and competitive domestic market, much of the language around which is excruciatingly boring and vague. But I believe if we push past the CCP’s deliberately oblique language and look at their broader developmental goals, we might be able to get an idea of what they’re up to.
Creating a unified domestic market seems to be all about creating better internal systems that will boost domestic consumption and therefore stabilise future growth. In the past, China has been proud to call itself the world’s factory, producing many of the consumer goods we use on a daily basis, of both high and low quality. Now it seems that the government is focused on high quality development, creating better goods for its own people to use, and becoming less dependent on outside supply chains and external political factors. It wants to meet international standards in all fields, while producing its own raw materials, goods, and services within a standardised economy.
The government plans to invest more in State-owned Enterprises (SOEs) which have historically been notorious financial drains. But if the government wants to have more direct control over the economy, developing profitable and useful SOEs directly under central control is crucial. SOEs are key for government job creation efforts and thus need to constantly expand. They also need to become more efficient, less wasteful, and reduce their debt burdens. The best way to do this is to expand into new areas using the latest technology. Government efforts to spur this controlled growth are already bearing fruit - SOEs have already spent 51.42 billion yuan (about 23.76 billion U.S. dollars) on research and development in Q1 of this year alone.
When it comes to direct control through SOEs, the government will no doubt focus their efforts on key domestic industries like food and technology. It’s worth remembering that China has a negative list for market access that restricts private investment in certain sectors. While the list has grown shorter overall, in some areas there has been little to no change, and in the case of news media the number of restrictions has actually increased. No doubt when it comes to future-proofing the economy, the government will seek to play more of a role, not less, in controlling the flow of resources and funds.
It makes sense. Supporting the new energy vehicle (NEV) industry, for example, means when the technology comes into play on a mass scale, people will buy domestically. But the government’s attitude to problems faced by the industry, like price hikes in raw materials and auto chip shortages, is reflective of their attitude towards the broader economy. According to one official, “authorities [are cooperating] in cracking down on hoarding and price gouging to bring raw material prices "back to a reasonable level." In other words, the government plans to get directly involved in controlling prices and the flow of resources.
Another major aim of the government is to create an economy that’s as strong as it is broad. The Chinese economy is known for being large and growing at a rapid rate, but is equally known for its instability, with officials adopting the phrase “big but not strong” to describe problems around standardisation, segmentation, and uneven implementation of regulations. Now that China has lifted itself out of poverty, their sights are set on avoiding possible economy-collapsing disasters like the Evergrande default scandal.
An example of this is the introduction of “Futures and Derivatives Law”, again under the radar, and again written in relatively opaque language. Some keywords do jump out however. The law seeks to build on “historical experience” to create a “standardised, transparent, open, dynamic and resilient capital market.” The market should serve the “real economy” and make “[the] prevention and resolution of market risks a top priority.” They also aim to open up the futures market internationally, and compete against other markets on the global stage. Though a small law, the language used points to the bigger picture - China’s future depends on a stable and standardised system that can withstand big shocks.
These big shocks are often caused by the breakdown of large monopolies or underregulated industry giants that have long benefitted from internal corruption within the CCP and government. A big part of the government's plans is “effectively eliminating local protectionism, industry monopoly, and market segmentation.” The government also looks to support smaller businesses, making tax cuts for micro, small and medium business in manufacturing, and exempting small business in the services industry from rent for up to six months. This is no doubt to prevent those most affected by the pandemic from collapsing under undue burden, but also sends a strong message to larger firms and would-be monopolies. It would seem the government is now on the side of the little guy.
This is backed up by the strengthening of intellectual property rights laws, which the government argues will help create a fairer and more competitive market. Beyond that, it also ensures that China as a whole will remain competitive in the international market, and tech patents will become increasingly important over the coming years. In our last newsletter, we also spoke about how China wants to patent some grains to ensure their own food supply, and in recent years we’ve seen how medical patents can influence global health policies as well as regional diplomacy.
A stronger domestic economy will mean that China will be free from supply chain issues caused by external factors (pandemic), will not have to fear sanctions (Russia-Ukraine war), and will be effectively protected against potential ups and downs caused by monopolies (Evergrande). But what do these policies mean for people on the ground? Is it all good news?
Pros and cons
As we see a clampdown on runaway financiers, the silencing of business tycoons, and increasing state control over media, it’s clear that China’s era of free development and growth at all costs is over. While we’re not quite back to a planned economy, we are moving closer to a China where the party-state directs the flow of resources, funding, and favourable policies to enable industries that benefit the national economy to flourish.
There are some clear benefits to this approach. Financial corruption or favouritism by some local governments to certain businessmen and companies can be tackled head on. Apart from Tian Huiyu, at least 17 other officials have been punished for corruption in April alone, including a regulator in charge of approving IPOs who was accused of taking bribes. The fact that top officials are now being targeted sends a strong message to other would-be perpetrators.
Clamping down on monopolies means greater stability for the country’s economy, ensuring that the day-to-day lives of the people aren’t overturned by a 2008 Financial Crash-like event. This stability will be a great boost to young people, who now more than ever are struggling to get graduate jobs due to degree inflation and layoffs in popular sectors like tech. The government also has plans to “channel more unemployment insurance funds to underpin employment and training, and provide job seekers with no fewer than 1 million internship openings this year.”
The centralisation of control over major resources like power and data also has its benefits. The construction of the East-West Data Centre, for example, will spread the data processing burden equally, speeding up connections in high-demand regions and reducing costs.
However, with greater centralisation comes greater government oversight.
Those who are worried about free speech in China should note new rules surrounding media “no longer allows for private investors, without special approval, to conduct news gathering, editing, and broadcasting operations; invest, establish, or operate any form of news agency; or publish news reported by foreign entities.”
While reducing corruption is obviously a net positive, it’s often difficult to tell whether or not the state’s intentions are pure. When Alibaba’s founder Jack Ma disappeared for 3 months last year, for example, most speculated that it was not only because he was accruing too much power in the tech and financial sectors, but also because he spoke out about government policies. When the government prevented the IPO of his company, was it because Ant Group had failed to comply with regulations, or because Ma had angered China’s state banking elite?
Even if you avoid directly angering the party-state, companies operating in older industries risk indirectly losing out due to the nature of their business. If you’re too reliant on foreign funds, or your company is suddenly seen as ‘obsolete’ in an ever-changing landscape and therefore not eligible for government support, survival could become much harder in the coming years. As the government shifts to doing what’s right on a macro level - ensuring stable growth, jobs for all, and reduction of risk - the dreams of individuals and potential of non-essential businesses may slip through the cracks.
Stability at all costs
The Chinese government wants everyone inside and out of the country to remain optimistic about the Chinese economy. Consequently, they are restructuring furiously behind the scenes to make real changes with long-term effects. They’re focused on battle perceived inequities in society by pushing for what it sees as a more even playing field within the economy.
Even though some measures, like clamping down on corruption, threatens stock prices and short-term growth, these issues don’t seem to faze them. After all, things like young people’s lying flat, and depression and despondency due to pandemic measures, and competition over education and jobs, are a much bigger problem as they threaten to weaken trust in the regime.
The government is doing everything it can to inject positivity into society and create hope. For example, “authorities have vowed to channel more unemployment insurance funds to underpin employment and training, and provide job seekers with no fewer than 1 million internship openings this year.” They’re definitely focused on the bigger picture: making an economy that actually works for the people, and not for profiteers. After all, it won’t matter how high share prices are if regular people have nowhere to live and can’t afford basic amenities, a problem even developed countries are beginning to grapple with…
As one Shanghai citizen puts it “In China, the free market has always been carried out in a macro-controlled way by the government. So I think we shouldn’t dichotomize and say that a free economy is better suited to solve the current situation or a planned economy.” Even those living in a difficult situation can see the benefits of government intervention.
Arguably, the Chinese government is doing what most people would want their own government to do - taking matters into its own hands to secure the future of the people. Future-proofing the country against internal and external shockwaves are the cornerstones of China's new unified market. Even if pursuing that ideal model means trampling on the freedom for private companies to operate as they see fit.
Sources
China Briefing, China’s “National Unified Market” – Standardizing the Domestic Market to Spur Internal Circulation
China Daily, 稳增长政策适时加力 [The policy of stabilizing growth will be strengthened in due course]
China Daily, One picture to understand the economic operation of central enterprises in the first quarter of 2022
China Daily, [Intellectual property protection is an important driving force for sustained global economic recovery - Boao Forum for Asia Annual Conference 2022 Focuses on IP Trends and Opportunities in Asia]
China Daily, 政策力挺央企控股上市公司做强做优 [Policies support central SOE-holding listed companies to become stronger and better]
China Daily, 央行:4月25日起下调金融机构存款准备金率0.25个百分点 [Central Bank: From April 25, the deposit reserve ratio of financial institutions will be lowered by 0.25 percentage points]
China Daily, 加快建设全国统一大市场, 在国际竞争和合作中取得新优势 [Accelerate the construction of a unified national market, gain new advantages in international competition and cooperation]
China Economic Net, "Futures and Derivatives Law" passed, China Securities Regulatory Commission: Reserve space for reform and innovation
People’s Daily, China's central SOEs record growth in R&D spending
People's Daily, Reasons to stay optimistic on Chinese economy
People’s Daily, Chinese authority to unveil supportive measures for NEV industry
What’s on Weibo, Will Weibo Become 30% State-Media Owned?
Sixth Tone, Shanghai Lockdown Brings Back Memories of China's Past
WSJ, What Is China Evergrande, and Why Is Its Crisis Worrying Markets?