What is the Chinese government up to? For several months the headlines have been dominated by what the papers call the “regulatory storm” or “regulatory crackdown,” whose targets have ranged from internet companies to real-estate developers to after-school tutors to steel companies. Interpretations of this wave of government activism have ranged from the benign (China’s government is just doing what Western governments wish they could) to the dire (Xi Jinping is bringing back socialism).
At a recent talk at Stanford, the always-insightful Barry Naughton made an attempt to synthesize and explain what’s been going on, arguing that we’re seeing “the consolidation of a new model, in which the Chinese government decisively steers a predominantly market economy.” I found the talk very useful, and took notes on some of the key points; here they are:
The vocabulary where people refer to these actions as regulatory actions I think is a little bit misleading. It creates the impression that there is some underlying static well-regulated market equilibrium. Some people explicitly say that although the initial application of these regulations may have been clumsy, may have caused some losses, that’s just the necessary cost of changing course and once the course is established markets will settle down to this new better-regulated mode. I think that’s a very wrong set of expectations. What we’re going to see from these changes is an increasingly aggressive effort by the Chinese government to shape the way the economy is developing.
What I want to do is pull back and look at the macro picture. That also means thinking of it not as a static adjustment from one set of regulations to another, but rather as an inherently dynamic process in which the government has taken lessons that it thinks it has learned from trying to foster high-tech development in China, and applies them to a broader canvas where it tries to paint the destiny of the Chinese people in increasingly vivid and assertive coloration.
This is something that admittedly draws on my own earlier work. Maybe my view is overly shaped by the fact that I was looking at Chinese industrial policy anyway, so it’s natural for me to see these recent policies as a deepening and expansion of industrial policy. Let me confess to that potential bias. But having confessed to that bias, I think it’s a good starting point for looking at what we see today.
China has been running a very interventionist and increasingly powerful industrial policy. It really gets going around 2009-10, when China articulates a vision of the strategic emerging industries. … While governments in the US and Europe kind of look at these technological changes and think maybe we should do something about it, China is already all in, it’s driving forward a set of changes based on this high technology orientation. …
My central assertions are that from an economic standpoint what really changed in the summer of 2021 was two things. First, that the policy objectives that the Chinese government was pushing for proliferated enormously. This portfolio of things that the government is pushing for really extended so quickly into so many new areas that I think most people were in shock. Probably the most dramatic of these is that the government seems to be displaying something near panic on falling birthrates even though we have known for 25 years what the trend of the Chinese birthrate was going to be. Instead of pursuing one or two simply defined objectives, namely new growth drivers and high-tech development, now all of a sudden China has a portfolio of six or eight or ten:
1. Data security and control
2. De-risk and enhance control of the financial risk
3. Raise the birth rate by reducing the burden on families
4. Rebuild new decentralized cities, while keeping housing prices low
5. Reduce carbon emissions, pollution and global warming
The even more surprising thing is the second one: which is that as these objectives have proliferated, the instruments deployed to achieve them have not been able to catch up. We see the widespread recourse to a bunch of actions and instruments that are no longer conforming to the requirements of smooth market development. This has created substantial immediate costs for Chinese citizens, and I argue that it creates substantial medium-run costs for the Chinese growth process. There are may built-in conflicts between the different objectives and the different instruments, and the way those instruments are deployed, suddenly, sometimes excessively, and in many cases without consideration for what their implications will be in other areas.
There’s a couple points implied by this “industrial policy for everything” concept that I think are worth drawing out more. First, this increased government intervention is oriented to the future, not the past. It is aimed at achieving aspirational goals for the development of Chinese society, not returning to an imagined past utopia. Second, it is driven by sweeping political objectives that cut across economic sectors, rather than a “target list” of industries that need to have tighter regulation. These are my preliminary conclusions anyway — no doubt the Chinese government will give us plenty more to figure out in coming months.
UPDATE: A full video of Naughton’s lecture has been posted here; it’s worth your time.