Author / Andrew

by Andrew

The education of Li Keqiang

Even in death, China’s former premier Li Keqiang cannot escape the shadow of his overweening boss, Xi Jinping. The commentary around his untimely passing–Li was only 68 and not obviously in poor health–has been filled with implicit and explicit comparisons to the man he served loyally for a decade as China’s second-ranked Communist Party leader.

The general temptation to see Li as representing an alternative school of thought and the potential for a different political trajectory is as strong as it is unsupported by real evidence. Despite much speculation about internal differences between Xi and Li, the system is designed to prevent us from knowing much about the personal views and predilections of Chinese politicians.

The differences in their background made it almost inevitable that Xi and Li would be perceived as representing different ideas, interest groups and, dare I say, classes. Education everywhere is a strong determinant of social position, and due to the accidents of Chinese history, the educational experiences of the two men differed dramatically.

Li was among the first group of students to take the restored college entrance examination in 1977, in which he did well enough to earn a place at the prestigious Peking University. That made him a symbol of meritocracy and the return to traditional intellectual values. Xi is two years older, and started college in 1975, when universities were still more focused on political indoctrination than education; he got his place as a “worker-peasant-soldier” student on the basis of political connections. Fairly or not, those experiences have formed how people interpret the two men: Li as a true child of the reform era, Xi with one foot still in the Mao era.

Writers have mined public records and private recollections to piece together pictures of their early years. Chun Han Wong’s new biography of Xi Party of One: The Rise of Xi Jinping and China’s Superpower Future, has a particularly valuable opening chapter on Xi’s early life, with lots of interesting details that are clearly sourced.

Xi was among nearly 2,700 students who enrolled at Tsinghua University’s Beijing campus in the fall of 1975 … as a worker-peasant-soldier student. He pursued a degree in organic chemistry, but university education at the time was more political than academic, marred by a lack of intellectual rigor and patchy teaching. One friend described Xi’s Tsinghua training as a degree in applied Marxism. Not that it mattered to Xi, who told another friend that he had no plans to work in the chemical industry. Xi, the friend recalled, “wanted to enter politics.”

While many of his peers indulged in romance, alcohol, and movies, Xi focused on politics, overseeing propaganda work as a member of his class’s party committee. Friends recalled a budding politician who showed savviness beyond his years.

More about what university life in China was like at that time, and what it exactly it meant to be a “worker-peasant-soldier” student comes from Jaime FlorCruz’s memoir The Class of ’77: How My Classmates Changed China. FlorCruz, a Filipino who later became an eminent foreign correspondent in Beijing, enrolled as a foreign student at Peking University in 1977, overlapping with both the last cohort of worker-peasant-soldier students and the new cohort of students who had passed the entrance examination. But his first encounter with Chinese university life came in 1971, when he visited as part of a unofficial delegation from the Philippines.

The makeup of the student body was curious as well. None of them had to take an entrance test to gain admission—a surprising development given that China was the historic originator of the concept of qualifying public service examinations. Many of the students we met had spent two to three years working in farms and factories; most of them, they said, got into Beida on the recommendation of the farmers and laborers they had worked with. Other students had previously served in the army and were similarly recommended.

The prerequisites for admission were simple: good health, work experience, and high “political consciousness.” Academic prowess was much less important than a student’s commitment to the ideals of the Chinese revolution and to the belief that working with one’s hands was better than book learning. As part of what Beida officials called the concept of “open-door schooling,” students were expected to extend their education beyond the classroom and to engage in street cleaning, farming, and assisting factory laborers with compiling “revolutionary histories” of their workplaces. These would help develop their moral, physical, ideological and intellectual character, we were told.

The guiding principle for all the subjects was a rigid Maoist perspective, including the doctrines of “combining theory with practice,” of “learning by doing,” and of “being socially relevant.” Students said that high grades were unimportant. Academic performance was rated as excellent, good, or fair but no one failed. Each class automatically moved from one level to another every year. Individual achievement was downplayed. Assignments were completed collectively, including the writing of essays and even sitting for examinations. In another break with tradition, where it once used to take four or six years to complete a degree like physics, the requirement had been reduced to two or three years.

The deficiencies of this system were pretty obvious, and Deng Xiaoping had already tried to overhaul university education in 1974, but was thwarted by conservative opposition. After the death of Mao in 1976, though, things changed quickly:

In 1977, Deng Xiaoping had not yet re-emerged as paramount leader, but he was already a force behind the scenes, and he and the other reformers knew that the existing worker-peasant-soldier student body of China’s universities would not be able to deliver his “Four Modernizations”—in agriculture, industry, science and technology, and defense. So, it was decided to overhaul the education system. One of the first results was the Class of ’77.

This class, the first step towards normalcy after the Cultural Revolution, was selected from a huge number of applicants of the “lost generation,” capable students whose studies had been cut short or denied after 1966. The average level of knowledge was much higher than those of the Worker-Peasant-Soldier students, who did not have to pass competitive entrance exams to enroll. The selection process for the Class of ’77 was a dramatic throwback to an older China, the revival of competitive qualifying examinations for college admission. It provided an opportunity for those who had been shut out of college for political reasons.

According to the memoirs of former vice-premier Li Lanqing, the demand for the college entrance examination was so high that the government ran out of paper on which to print the exams; the problem was solved by using paper that had been allocated for printing Mao’s Selected Works. FlorCruz’s account makes it clear how the return to exam-based meritocracy was very much a form of “class struggle” in reverse, an explicit decision to valorize the groups that had been targets during the Cultural Revolution and downgrade those (the workers, peasants, soldiers) who had been valorized.

Though separated by only two years in chronological age, Xi and Li ended up being situated on opposite sides of this historic divide in education. That must have had profound effects on their life experience and personality, though inevitably these we must speculate about most of these. In 2011, Chris Buckley interviewed many of Li Keqiang’s classmates from Peking University; the resulting piece gives a good flavor of the time, and why people expected Li to be relatively liberal. Li’s liberalism, if such it was, ended up being expressed more in terms of affect and attitude than in substance. Perhaps that’s because in the end what Xi and Li had in common outweighed those differences: both had political drive and ambition from an early age, and spent their adult lives pursuing ever-higher office in the same political system.

by Andrew

The fiscal consequences of a unitary state

The reason fiscal policy is interesting is that it is the concrete expression of a country’s political priorities: how governments spend money tells you how they work and what their priorities are. By the same token, it is impossible to really interpret fiscal policy without some understanding of the political structure in which the government operates. There are a lot of major differences in political structure–to put it mildly–between the country I grew up in, the US, and the country I have spent my professional life in, China. One of the ones whose importance took me a while to figure out is that China is a unitary state while the US is a federal state.

This issue springs to mind every time I read assertions like this about China: “The ratio of central government debt or sovereign debt to GDP is a mere 21 percent, the lowest among the world’s major economies.” (I’m quoting from the most recent example to have arrived in my inbox, but this argument is so widespread that I don’t need to pick on anyone in particular.) It is indeed true that, if you look at statistics on government debt in China, the majority of it is assigned to local governments rather than central governments (see chart). Many people therefore contend that while local governments have strained balance sheets and limited capacity to borrow further, the central government does not.

Such a distinction would make sense if China were a federal state: if the central and local governments were independent entities with clearly defined constitutional and legal roles and separate finances. But China is not a federal state, and local governments are not separate from the central government. There is only one government throughout China; local governments are merely the authorized agents of this state. There is no constitutional or legal support for the idea that China’s local governments have any independent fiscal power and could ever be considered as having balance sheets that are separate from the central government.

It’s true that China’s government is often deliberately obscure about its true organization and structure. But some things are out in the open. Let’s turn to the Constitution of the People’s Republic of China:

Article 105. Local people’s governments at various levels are the executive bodies of local organs of State power at various levels and are the local organs of State administration at the various levels.

Article 110. Local people’s governments at various levels throughout the country are all organs of State administration under the unified leadership of the State Council and are all subordinate to the State Council.

That’s pretty clear. There is only one government in China, and the State Council, meaning essentially the executive, controls that government. As a matter of constitutional theory, local governments have power and authority only because the State Council gives it to them. The fiscal implications of the unitary state are also clearly spelled out in the Law on the Administration of Tax Collection:

Article 5. The competent department for taxation under the State Council shall be in charge of the administration of tax collection throughout the country. The national tax bureaus and the local tax bureaus in various places shall administer tax collection respectively within the limits set by the State Council. 

The local people’s governments at various levels shall strengthen their leadership over or coordination of the administration of tax collection within their respective administrative regions, and support the tax authorities in performing out their duties in accordance with law, calculating the amounts of taxes to be paid according to the statutory tax rates and collecting taxes in accordance with law. 

This is also quite clear. The authority to raise tax revenue lies solely with the central government. Again as a matter of constitutional theory, local governments’ job is to help implement the tax policies decided by the central government. They do not have any authority to raise taxes on their own, and have no independent sources of revenue.

If you look at local government budgets in China, there are two sources of funds: revenue “at the local government level,” historically 55-60% of total revenue, and transfers from the central government, historically 40-45% of the total. In reality, though, these are the same thing: money from the central government. The central government allows local governments to retain a share of the taxes that are collected at the local level. The remainder that is handed over to the central government, and the taxes collected at the central level, are then redistributed back to local governments as transfers. Ultimately all tax revenue is controlled by the central government, which decides how much money local governments get.

What’s surprising is that, in a unitary state, there could even be such a thing as local government debt. And indeed before 2010 there was not. The local government bonds that have been sold since then are a curious thing: the central government approves their issuance, so the local governments do not have any independent borrowing authority. And the central government controls how much revenue local governments have, so whether local governments can repay the debt still ultimately depends on the central government. This is a weird arrangement. The central government could just issue the same amount of money in treasury bonds and redistribute it to local governments. But for internal political reasons that I honestly struggle to understand, it is considered desirable that some of this debt be “in the name” of local governments. Even though local governments do not have any authority to raise revenues to repay the debt!

Because of this unitary structure, it makes no sense to split either the income statement or the balance sheet of China’s government between central and local entities. There is only one state in China and its finances are unified. I should point out that an excellent recent quantitative overview of China’s government balance sheet by the IMF, “Fiscal Policy and the Government Balance Sheet in China,” does not fall victim to the fallacy I criticize; the authors follow best practices by presenting their assessment on a “general government” basis, i.e. the combination of central and local governments. That’s the right way!

What all this means is that you cannot wave away the debts of local governments by saying they are local, and it’s only central government debt that matters. The central and local governments are part of a single unitary state, and the central government is in charge of figuring out how to repay all of its debt. This is precisely why it has been such a disaster for the central government to allow local governments to engage in all that uncontrolled off-balance-sheet borrowing. If China was a federal state, local fiscal incontinence wouldn’t matter too much ultimately. When local authorities borrowed beyond their means, they eventually wouldn’t pay it back, and it would just be an issue between them and their creditors without national implications. But because China is a unitary state, every time local authorities abused their power by creating unauthorized liabilities, they worsened the fiscal situation for the entire state.

Moral of the story: a unitary state needs to act like one, not pretend to be a federal state. A combination of centralized revenue-raising authority and decentralized liability-creating authority is the worst of both worlds, and the sooner China gets away from it the better.

P.S. My thanks to the excellent NPC Observer website for making it easy to track down the relevant laws.

by Andrew

Max Weber on journalists

About halfway through Max Weber’s famous lecture on politics, originally delivered in 1919, there is an extended digression on journalism. As more than a few people have noted recently, the lecture on politics overall still feels quite relevant today, and the bit on journalism is also surprisingly (or not) undated. It rang true to me, anyway; here are the best parts:

The journalist, along with the demagogue in general, the lawyer — and the artist as well — has no fixed social position. He belongs to a kind of pariah caste that “society” always judges socially by its least ethical members. As a result, the most outlandish ideas about journalists and their work are common currency.

Few people realize that a truly good piece of journalism requires at least as much “intelligence” as any scholarly writing, especially since it has to be produced on demand, on the spot, under completely nonacademic conditions, and moreover it must generate an immediate response. It is almost never acknowledged that the journalist’s responsibility is far greater than the scholar’s, and that as a rule the reputable journalist’s sense of responsibility is by no means less than the scholar’s–in fact it is greater, as we saw during the war.

This is almost never acknowledged because we quite naturally tend to remember precisely the irresponsible pieces of journalism, with their often-terrible effects. No one believes that competent journalists are more discreet than other people, as a rule. But they are.

…

Up until now journalism has not been a path to true leadership roles or responsible political conduct. Only time will tell how things will develop in the future. Whatever happens, though, journalism will remain one of the most important career paths for professional political activity. It is not for everyone — least of all for people of weak character, especially those who need a secure social position for their inner equilibrium. A young scholar’s life may be a matter of luck, but at least it is framed by stable conventions of social status that keep him on track. Meanwhile, the journalist’s life is left to sheer chance in every way and involves working under conditions that test a person’s inner fortitude like almost nothing else.

The journalist’s often-bitter professional setbacks may not even be the worst of it — even the most successful journalist faces especially difficult psychological and ethical challenges. It is no small thing to consort with the most powerful people on earth in their drawing rooms, on a seemingly equal basis, and to be flattered because you are feared, while all the time knowing that as soon as the door closes behind you your host may have to explain to his guests why he had anything to do with “the scoundrels from the press.”

And it is truly no small task to crank out quick and convincing responses to any and every problem or issue in the world, whatever “the market” demands, falling into neither total superficiality nor undignified self-exposure with all its inexorable consequences. What’s surprising is not that numerous journalists have lost their way or become worse human beings, but that, despite everything, this class of people contains so many worthy and genuine human beings, more than outsiders would dream of.

The quotation is from the new translation by Damion Searls, published (along with the earlier lecture on scholarship) in 2020 as Charisma and Disenchantment: The Vocation Lectures. It is quite conversational and accessible, two adjectives not normally associated with the great German sociologist. I read a lot of Weber at university, and while he is truly amazing, his usual mode is definitely more dry and forbidding. For a short introduction to Weber’s thought, these two lectures are a good place to start.

by Andrew

What I’ve been listening to lately

  • François Houle – In Memoriam. On this new release, the Canadian clarinetist leads a multinational sextet through beautifully arranged pieces. The New Orleans-style front line of clarinet, trumpet, trombone is unusual these days, but perfectly suits the alternately elegiac and rousing tone. Consistently excellent.
  • Duke Ellington – Happy Reunion. An undeservedly obscure piece of Ellingtonia: two sessions recorded in Chicago over 1957-58 when Duke was passing through, with different subgroups of the full orchestra. The small-group playing here is relaxed and beautiful, and the sound more open and spacious; it’s too bad there’s only just over half an hour of material. The CD is out of print but not hard to find (I got mine for $1 from the clearance bin at Amoeba Records.)
  • Joe Lovano – Trio Fascination. The prolific saxophonist Lovano has tacked between more traditional and more avant-garde styles throughout his career. For me this 1998 album, with jazz elders Dave Holland on bass and Elvin Jones on drums, sits at a very pleasing point on that spectrum: it’s intimate and melodic but also forceful and varied.
  • Augustus Pablo – El Rockers. Pablo was given top billing on what is generally considered the best single dub reggae album, King Tubbys Meets Rockers Uptown, though like most dub it was really a group effort. If you want more of those wondrous spaced-out dub instrumentals, the reissue label Pressure Sounds has put together two compilations of Pablo material from the same period, this one and the earlier In Fine Style. Both are absolutely top-notch.
  • Natural Information Society – Since Time Is Gravity. A new record from Joshua Abrams’ minimalism-jazz-trance-world ensemble is always an event; the group has created one of the most distinctive sound worlds in contemporary music. Their latest brings in Chicago saxophone legend Ari Brown and some other ringers to fill out the large and ever-shifting ensemble. The choir of horns creates an even richer mass of shifting sounds, always solidly anchored by Abrams’ guimbri (a North African bass lute). Enchanting.
by Andrew

China wants those low-end industries after all

The usual goal of industrial policy is to, by supporting or protecting a particular industry, allow it to more quickly achieve the economies of scale necessary to be competitive. China has plenty of experience with this type of industrial policy: witness how it has scaled up in the manufacturing of solar power, lithium batteries, and electric vehicles to a size that dominates global markets. But the official rhetoric on industrial policy is now turning to a different and less well-trodden path: pursuing economies of scope as well as scale. Or, to put it in less technical terms: China’s government wants to preserve and improve competitiveness in a wide range of different industries, not just specialize in the most profitable ones. It sounds like a simple change, but it’s a significant one for China’s trading partners.

As is usual in China today, the signal of this change in priorities has been delivered by the man at the top, Xi Jinping. At the May meeting of the Central Commission on Financial and Economic Affairs, one of many steering groups he chairs, Xi laid out his vision of a “modernized industrial system.” He explained that such a modernized system has three key characteristics: it is “complete” ( 完整, also translated as “comprehensive”), “advanced” (先进) and “secure” (安全). The most novel of these objectives is “completeness,” and Xi briefly explained what that objective means in practice: “We must keep promoting the transformation and upgrading of traditional industries, and not take them as ‘low-end industries’ to be simply eliminated.”

On its surface, this could sound like one of the invocations of the importance of blue-collar manufacturing jobs now common in other countries on both the populist right and left. In fact, this statement is an intervention in a specific Chinese policy debate that clearly indicates a reversal of the previous direction. China’s turn toward high-technology-focused industrial policy well predates Xi, and actually began in the prior administration of General Secretary Hu Jintao and Premier Wen Jiabao (see Barry Naughton’s excellent short history of industrial policy for more).

In the mid- to late 2000s, “upgrading the industrial structure” was a regular buzzword, and official support for “emerging” and “strategic” industries ramped up. At the same time, though, the government tried to restrict resources going to less-desirable industries, usually defined as those that are highly polluting, energy-intensive, or in excess capacity. These efforts reached a peak in 2008; here is some representative language in Wen’s government work report from that year:

It is essential to appropriately control the scale of fixed asset investment and improve the investment structure. We will maintain strict control over the availability of land, credit and market access, and pay particular attention to strengthening and standardizing supervision of new projects to ensure they meet all the conditions for launching. Haphazard investment and unneeded development projects in energy intensive and highly polluting industries and industries with excess production capacity will be resolutely stopped, and market access will be tightened and capital requirements will be increased for industries whose development is discouraged. Work on illegal projects will be resolutely stopped.

In this vision of industrial upgrading, there is both positive and negative discrimination: the government pursues policies that favor high-end industries and disfavor low-end industries. Such a vision is based on ideas of national specialization and integrated global trade. It’s influenced by the “flying geese” model originally articulated by a Japanese scholar and popular among development economists in the 1980s and 1990s. The idea is that, as nations advance up the technological ladder, they leave behind production of low-value or commoditized products, which then creates opportunities for lower-income countries to industrialize by making those goods. Nations at different income levels specialize in making different kinds of products, and by trading with each other everyone becomes better off.

Xi’s vision of “completeness” or “comprehensiveness” does away with this. Rather than allowing China’s low-end industries to shift to other, lower-income countries, and then importing those products, the idea is to maintain the ability to produce the full range of goods within China. Low-end industries are not abandoned but become targets for technological upgrading in order to preserve their competitiveness. As the Chinese economist Xu Zhaoyuan explained in an exegesis of Xi’s remarks:

We cannot allow traditional industries to transfer abroad too quickly. This requires continuous strengthening of policy support for the upgrading and transformation of traditional industries, improving product innovation and efficiency to enhance their competitiveness, while also continuously reducing the cost burden of the real economy, especially reducing various transaction costs. 

The background assumption is clearly no longer that nations can specialize to take advantage of an open global trading system, but rather that they need to minimize external dependencies and vulnerability to trade disruption. The Chinese economist Yu Yongding called it part of China’s response to the US decoupling campaign:

Re-emphasizing the importance of comprehensiveness is a reaction to the new geopolitical reality. While China cannot and should not produce everything – autarky is impossible for a modern economy – it should be able to quickly launch or increase production of critical goods, as needed.

China does indeed have a very broad range of manufacturing competence: according to Yu, “China ranked among the world’s top three exporters (by volume) in 2,400 of 4,000 categories of intermediate goods traded globally between 2017 and 2020.” More simply, there are very few goods that China does not make. I looked at China’s exports broken down by 4-digit HS code; out of 1,241 categories, there were zero exports in fewer than 50, a share that has remained largely constant over the past decade.

In a sense, then, achieving a “complete” industrial industrial system would just mean maintaining the status quo. On the other hand, as China is probably only a few years away from qualifying as a “high-income” country on the World Bank’s definition, one might expect that rising incomes would have at least some impact on China’s cost structures and competitiveness in making in different products.

As is often the case with these high-level slogans, it’s not totally clear what the practical implications of Xi’s policy shift are going to be. It would not be that unreasonable for Xi to say, “I don’t think we should have government policies that actively try to shut down particular industries, because those industries employ Chinese people and earn money and there’s just no good reason to get rid of them.” It would be somewhat less reasonable, certainly from the perspective of China’s trading partners, for Xi to say “Instead of just subsidizing the high-tech industries of the future, I think we should subsidize every single industry that China has so that China can have a comparative advantage in making everything.”

At the least, the rhetoric of “completeness” does not offer a lot of hope that other countries are going to be able to benefit from China’s growth by selling it stuff. The “flying geese” theory is now criticized, not totally unfairly in my view, for contributing to the hollowing-out of industry in the US and other high-income countries. But it did offer a basis for mutually beneficial trade with the developing world: as high-income countries lost competitive advantage in some industries, the low-income countries gained it, and could use those industries to raise their own incomes.

China these days is trying to knit together a coalition of other developing countries also opposed to US dominance of the global system. But its official economic theory does not offer much of a basis for what it likes to call “win-win” ties with other developing countries. China wants to keep producing itself all the stuff that poorer developing nations in Africa, Asia and elsewhere might want to sell it. China acknowledges a need to import necessary raw materials, and that’s about it. Is this maximum mercantilism really an attractive vision for an alternative global economic order?

by Andrew

The political position of the private sector

Are China’s private-sector businesspeople unhappy about living under a Communist government? That is the increasingly explicit contention of some commentators on China’s current economic troubles. The idea is that Xi Jinping has reversed the Communist Party’s recent historical accommodation with the private sector, leaving entrepreneurs fundamentally uncertain about their future prospects. If business owners do not believe they can earn a profit without risk of intervention or confiscation by the government, then they will not invest, and the economy will not grow. As Adam Tooze put it in a typically thoughtful overview of this school of thought, the key contention is that “the problems of China’s economy are political and though they center on Xi they go beyond him and concern the entire system.”

Bill Bishop’s Sinocism newsletter of July 19 has a useful summary of some of the Party’s recent ideological pronouncements that “may have caused some skepticism in the private sector.” Among the most explicit was a 2020 document (English translation here) that detailed measures to “continuously strengthen the Party’s leadership over the private economy” and “educate and guide private economy practitioners to…unswervingly listen to and follow the Party.” While the document also discusses the Party’s duty to support private businesses and respond to their concerns, it is fair to say that it does not envisage a hands-off relationship in which the private sector is allowed to go about its own affairs.

Xi’s politicization of the private sector’s role in Chinese society is often contrasted, implicitly or explicitly, with the high-level accommodation of the interests of the private sector that existed under previous leaders. In 2001, Jiang Zemin famously welcomed private entrepreneurs into the ranks of the Communist Party and pledged that the Party would respect and support their interests, under his slogan of the “Three Represents.”

This dramatic ideological shift has sometimes been interpreted by critics on the left, inside and outside China, as a “neoliberal turn” in which the state served as the handmaiden of private capitalists. In reality, Jiang’s concerns were not so different from Xi’s: his goal was also to ensure that the private business sector would not evolve into a political opposition (in general, Jiang’s role in setting the fundamental parameters of China’s post-1992 political economy is often underrated).

The historian Frank Dikötter, in his recent book China After Mao: The Rise of a Superpower, points out that while the Three Represents did open Party membership to entrepreneurs, it also began a push to extend Party cells into private businesses:

Although few people knew exactly what the formulation meant, the general idea was that the party should not dilute its own political power and must ensure it remained in the vanguard of every area of life. This included the country’s ‘advanced culture’ as well as the ‘fundamental interest of the majority of the people’. A third principle posited that the party should ‘represent the foremost production forces’.

Foreign experts gasped with admiration, as the Three Represents included a decision to end a ban on party membership for private business people. But in typical Orwellian doublespeak, the campaign was designed to extend the hand of the state, not retract it, most of all in the private sector. Since tens of thousands of state enterprises were becoming shareholding companies, shedding millions of jobs along the way, the party insisted on maintaining control. The Three Represents meant that party cells must be established even within private businesses, subjecting them to closer party supervision.

Some of Jiang Zemin’s comments from the time on the issue of the Party and the private sector are reproduced in Volume III of his Selected Works. In May 2000, he visited Nanjing, Suzhou and Shanghai–some of the historical centers of China’s private businesses–and held discussions about “Party building,” meaning the establishment of Party cells in private businesses. Here are a few of the key passages, which also highlight the need to ensure private companies support the Party line:

There are nearly 1.5 million private enterprises and more than 31 million individual industrial and commercial businesses (getihu) nationwide, employing more than 82 million people. In terms of either economic strength or the number of people, the weight is not light. … This has raised a new topic for us, which is how to strengthen the party’s leadership in these fields, and effectively unite and organize the masses in these fields around the party. …

It is necessary to promptly carry out the work of party building in non-public economic organizations. Carrying out party building work in non-public enterprises is a new field. In recent years, some places have actively explored and achieved some results. But in general, the development is very uneven, obviously lagging behind the requirements of the development of the situation. According to incomplete statistics, currently 83.3 percent of private enterprises in the country have no party members, and only 1.4 percent of the total number of enterprises have established party organizations. …

Today’s private business owners have developed under our Party’s reform policy and the call to get rich first, and many of them are laborers. The Party organization should actively do a good job of uniting, educating, and guiding them in accordance with policy, unite them around the Party organization, and make them support the establishment of Party organizations in enterprises, support the Party’s various policies, operate enterprises according to the law, care for and protect employees’ rights and interests, and contribute to the country and society.

Surveys by the All-China Federation of Industry and Commerce document that the share of private companies with a Party cell rose sharply after the initial launch of the Three Represents slogan in 2000. Xi has also emphasized Party-building in the private sector, and has presided over a lot of political messaging and actions designed to enforce the idea that private businesses have a duty to be loyal to the Party and support the Party’s policies. But this is not a new idea, and private businesses have had a couple of decades, if not more, to get used to it.

To me, the historical evidence suggests Xi’s ideology probably does not differ a lot from his predecessors in terms of the private sector’s political position in Chinese society. And therefore I’m not sure that such ideological messaging is the real problem affecting private business in China today. What I do think is different under Xi, and where he has created instability and uncertainty, is his articulation of the goals that China’s political system is trying to achieve.

As Xi has repeatedly said, sometimes with evident frustration for those who still have not gotten the message, what he is trying to do is reorient China’s political system away from the pursuit of economic growth at all costs. From his perspective, that pursuit created a lot of political problems that need to be corrected: corruption, waste, loss of Party discipline.

But one of the political benefits of the orientation toward economic growth is that it offers a fundamental assurance that the interests of the Party and the interests of private businesses are aligned. If growth is the goal, then ultimately the Party wants companies’ revenues and profits to go up, and that is the same thing the companies want. If growth is not the goal, then the Party’s interests and the interests of private businesses can diverge. And that prospect could reasonably trouble businesses who understand their political position.

by Andrew

Stimulus is never just temporary

As China’s data continue to disappoint, there is a persistent theme in much of the outside commentary on its economic woes: that China is for some reason failing to take the “obvious” step of sending stimulus checks to households. The implicit argument is that the US handed out massive subsidies directly to households, got a great post-pandemic recovery and everything turned out fine. China did not deliver subsidies to households, and that’s why everything is very much not fine.

Why is China, still, not taking this course in spite of the positive example of the US? Of course, an obvious answer is that the people in charge don’t think the US example was that positive, and anyway aren’t particularly prone to think of the US as a model to emulate. The merits of the pandemic fiscal-policy response are still pretty contested in the US. Plenty of people think of the stimulus as a fiscally irresponsible gamble that ultimately had pretty disruptive macroeconomic effects, because of the huge interest-rate increases that were required to bring inflation under control; my perception is that many people in China share these views. Still, the case for stimulus is probably getting stronger rather than weaker at the moment as China falls further away from potential growth and full employment.

My suspicion is that part of Chinese policymakers’ reluctance to use direct transfers to households as a short-term stimulus stems from a fear of setting a fiscally destabilizing precedent. If debt-financed transfers failed to generate a sustainable recovery, the money would be wasted. But if transfers succeeded in generating a good burst of growth, that could have even bigger longer-term effects. It would mean that, the next time China falls short of potential growth and full employment, the political pressure to roll out household transfers again would be overwhelming. What started as a one-off policy response could become entrenched as the expected response to any growth slowdown, and would add to government deficits and debt over many years rather than just one.

Why should this hypothetical possibility be a serious concern for Chinese policymakers? Because it is exactly what happened after the 2008 financial crisis. An unprecedented global shock led to an unprecedented policy response, as the central government encouraged local authorities to use off-balance-sheet borrowing to fund a wave of public works projects. If that had been a one-off measure, it would have been a powerful example of effective and unorthodox policymaking. Instead, the infrastructure stimulus institutionalized fiscal irresponsibility on a massive scale: a decade and a half on, the off-balance-sheet local borrowing is even bigger relative to the economy than it was in 2008, according to IMF estimates. It would be hard to find a better example of Milton Friedman’s quip that “nothing is so permanent as a temporary government program.”

China’s political system therefore does not have a good track record of being able to take away the punch bowl in good economic times in order to be able to share out more punch in the bad times. The dubious legacy of the 2008 stimulus means that China now needs fiscal consolidation to get long-term debt dynamics under control–at exactly the moment that it once again faces a shortage of aggregate demand.

Striking the right balance between the structural and cyclical issues is indeed quite difficult. Maybe the right answer is in fact that the cycle needs more attention at the moment, because a failure to address the loss of growth momentum would allow hysteresis to set in and create even more long-term costs for the economy. But it is perhaps understandable that the people inside China’s system are reluctant to experiment with new forms of fiscal stimulus before they have gotten the old ones under control.

by Andrew

What I’ve been listening to lately

  • Natural Information Society – descension (Out of our Constrictions). Joshua Abrams’ minimalism/trance/jazz outfit is one of my favorite current groups, and I’m still catching up to everything they’ve put out. This is a recent live recording, with Evan Parker sitting in. The sonic combination of Parker’s soprano sax and Jason Stein’s bass clarinet is naturally reminiscent of the great Coltrane/Dolphy band, but this group is more about interplay and rhythm than expansive individual solos.
  • James Brown – The Payback. This 1973 album features more laid-back, hypnotic grooves than I’m used to hearing from James Brown. My all-time favorites are probably still the relentlessly catchy and more uptempo numbers on the compilations In The Jungle Groove and Motherlode, but I was pleased to put these tracks into the mix too.
  • Greg Osby – Inner Circle. Osby was responsible for one of the best turn-of-the-century jazz albums, The Invisible Hand, on which he enlisted jazz elders Andrew Hill and Jim Hall. Recorded around the same time but with a band of all younger players, this album is also excellent. With its complex tunes and Stefon Harris’ vibes opening up the sound, the session feels like a fresh update of some of the modernist Blue Note releases of the 1960s.
  • Ella Fitzgerald – Sings The Duke Ellington Songbook. I feel like I’m committing heresy when I confess I don’t really love Ella’s string of songbook albums that much: the orchestrations are mostly just too stiff and middlebrow for me. The Ellington songbook album, though, is a revelation: it’s the Duke himself and the band backing her up, and you can’t get jazzier than that. A true classic.
  • Darondo – Let My People Go. I was pretty surprised to hear some of these totally unknown yet wonderfully soulful funk tracks come across the stereo in the bar downstairs from my office in Beijing. Darondo was a mysterious figure who recorded little and subsequently vanished from view, which is too bad: he gets close to the exalted level of Al Green, or Sly Stone’s solo records.
by Andrew

The persistence of markets under Mao

What accounts for the extraordinary rise of China’s private sector after the economic reforms that followed Mao’s death? The 1980s were a pivotal decade for China in many ways, as the rapid growth of the private sector transformed the structure of a still officially socialist economy. In 1987, Deng Xiaoping famously said that the explosion of private-sector activity in the countryside in particular came as a surprise to him:

In the rural reform our greatest success — and it is one we had by no means anticipated — has been the emergence of a large number of enterprises run by villages and townships. They were like a new force that just came into being spontaneously. …If the Central Committee made any contribution in this respect, it was only by laying down the correct policy of invigorating the domestic economy. The fact that this policy has had such a favourable result shows that we made a good decision. But this result was not anything that I or any of the other comrades had foreseen; it just came out of the blue.

Of course, the township and village enterprises–which is to say, private companies avant la lettre–did not actually come out of nowhere. They drew on China’s long traditions of commercial enterprise, and people’s experience with living and operating in a market economy before it was suppressed in the 1950s. In an interesting new paper, “Markets under Mao: Measuring Underground Activity in the Early PRC” (the link is currently open-access), Adam Frost and Zeren Li offer quantitative evidence to suggest that hidden market activities continued at scale even through the height of the Maoist period:

There was already substantial market-based activity prior to the launch of economic reforms. Even after the “socialist transformation” of the Chinese economy was ostensibly complete, Chinese citizens continued participating in “underground market activity,” i.e. private acts of exchange that occurred outside of systems of planned allocation and distribution and which were intentionally concealed from the state. A broad host of actors, ranging from rural people who “abandoned farming to take up commerce” to merchants who specialized in the illicit wholesale trade of ration certificates, devised novel strategies to evade state control and engaged in consensual private transactions. While these individuals often filled critical voids in the economy, they were collectively maligned as “speculators and profiteers” and, for three decades, were the recurring targets of mass campaigns. Yet, even at the height of the Cultural Revolution when anti-capitalist sentiments reached their zenith, “speculation and profiteering” were never wholly suppressed.

The authors use local administrative documents recovered from flea markets to compile data on 2,690 cases of “speculation and profiteering” that authorities prosecuted in two areas, the rural county of Chun’an in Zhejiang and the city of Zhenjiang in Jiangsu. These records often list what items the “speculators” were accused of selling, and at a what price. The value of the transactions was usually pretty substantial:

The mean case value (i.e. the estimated total value of activity described in each case) is about 334 yuan for Chun’an and 362 yuan for Zhenjiang. To put these figures into perspective, in 1955 the national average income was 102 yuan for an urban worker and 94 yuan for a rural farmer, and income levels remained stagnant for most of the 1960s and 1970s. In other words, the mean case involved activity that represented three years’ worth of consumption for the mean worker. Given that prosecuted individuals probably succeeded in concealing some portion of their gains, this figure is likely only a fraction of the true quantities of goods, cash, and ration certificates involved in each case.

The authors use various assumptions to estimate the total size of underground market activity from these figures. The results depend so much on assumptions that the exact figures are not particularly meaningful, but the range of estimates is consistent with contemporary estimates of the “shadow economy” of illegal transactions in most countries–perhaps suggesting that Maoist China was more economically normal than its ideology would indicate. This finding is also interesting:

We observe that the average spread between the purchase and resale price of items in underground market transactions was relatively low and remained so throughout the entire period of observation. There was, on average, no more than a 19% mark-up on items that were bought and resold in underground markets. These figures suggest that the maximum perceived risk of capture was low, even during the height of the Cultural Revolution.

The low black-market premium also suggests these kind of underground transactions were widespread enough that the scarcity value was not extreme, and that underground traders faced enough competition that they could not charge exorbitant prices. The repeated campaigns against “speculation and profiteering” that generated these administrative documents therefore do not seem to have been particularly successful. When the formal prohibitions on these private transactions were lifted in the post-1978 reforms, many Chinese people had plenty of experience with trading and business that could be quickly put to use.

Frost and Li’s account lines up with my own thinking about the reasons for the early success of China’s economic reforms–although when I pondered this question before, I focused more on the fact that China did not actually spend that much a time as a full-fledged socialist economy (see my previous post, “How long was China Communist?“). The time from the forced nationalization of private firms in the mid-1950s to the re-legalization of urban and rural private sectors in the early 1980s was barely three decades. By contrast, socialist prohibitions on private enterprise in the Soviet Union lasted two full generations, long enough to wipe out any previously existing base of skills and knowledge formed in the private commercial economy (which was not that developed in tsarist Russia anyway).

These two explanations seem fully complementary to me: China’s socialist prohibitions on private transactions were neither complete enough to truly stamp out market-based activities, nor did they last long enough to for the population of people with experience running businesses in a market economy to die off. Once the state began to tolerate markets again, the hidden traditions of private enterprise could come out into the open.

by Andrew

Peak globalization and China’s EV exports

The rise of electric vehicles is one of the most interesting and consequential changes in the world’s industrial structure to come along in some time. Among other things, it has enabled the Chinese government to fulfill its long-held dream of becoming a globally competitive producer of passenger cars; in a very short period of time, China has become a major exporter of electric vehicles. The International Energy Agency has some useful summary statistics in its Global EV Outlook:

China is a leading exporter of electric cars, representing over 35% of electric car exports, as well as of batteries. Europe is China’s largest trade partner for both electric cars and their batteries. Indeed, over the past year the share of electric cars sold in the European market coming from China increased from about 11% in 2021 to about 16% in 2022.

Over the past five years, the share of global electric car exports coming from China has increased more than eightfold, with China becoming the largest exporter in 2021 and the gap further widening in 2022. The share of electric car exports from the United States peaked in 2019 and has since fallen below the levels exported from China, Korea and Europe.

This is an undeniable success for China’s strategy of building up a complete domestic supply chain for the batteries and other components going into electric vehicles. But it’s a success that has also depended on partnerships with multinational companies. According to EV Volumes, China exported about 580,000 electric vehicles in 2022, of which 407,000, or around 70%, were “Western brands.” (Just to give an idea of the speed of growth, exports in the first half of 2023 have already topped 500,000 units,)

By far the most important of those Western brands is Tesla, which according to the IEA accounted for about 40% of China’s EV exports in 2022. Another 20% of China’s EV exports were from European companies; this should include the Renault-Nissan group and BMW. (The remaining 10% are probably “Western brands” that are Chinese-owned: SAIC owns the British MG brand and makes MG-branded EVs in China, while Geely controls Volvo and Polestar, whose EVs are made in China for export).

The success of China’s EV exports is therefore inseparable from the decisions of multinational companies to make China their base for global EV exports (and of other countries’ willingness to allow a level of Chinese investment in their auto industries that China would not have allowed for foreign investment in its own auto industry).

Those decisions go back some years. BMW’s joint venture in China started making EVs as far back as 2013, started producing the iX3 in 2020 and opened another $2.2 billion EV plant in 2022. The Renault-Nissan group announced an EV joint venture with Dongfeng in 2017; it started out making models for the domestic market, but is also now making the Dacia Spring for export to Europe.

Tesla’s major investment in its Shanghai factory came a bit later, only after China’s decision to remove the requirement that foreign automakers operate through joint ventures. This liberalization took effect in 2018 for EVs and in 2022 for other vehicles. In addition to its direct effects on exports, Tesla’s entry into China is also generally credited with injecting new dynamism into the domestic market:

Despite all that government support, sales of EVs remained weak until 2019, when China let Tesla open a wholly owned factory in Shanghai. “It took this catalyst…to boost interest and increase the level of competitiveness of the local Chinese makers,” said Tu Le, managing director of Sino Auto Insights, a research service specializing in the Chinese auto industry.

Electric vehicles were less than 5% of domestic vehicle sales until 2020, really took off in 2021, and have surged since then to around 30% of domestic sales. According to another analyst:

Tesla’s brand appeal helped nudge more consumers to switch from gas-powered cars. A supply chain built around Tesla now feeds a wave of improving homegrown EV makers. “If you’re China: thank you Tesla for waking up the part of the market which was sleeping, which was retail consumers,” said Bill Russo, founder and CEO of Automobility, a Shanghai-based strategy and investment advisory firm.

The current success of China’s EV industry therefore has to be seen as a success of globalization–the flow of international capital seeking out the most efficient location–not just for domestically focused industrial policy. It’s the interaction between those two factors that has given China’s EV exports their rather unusual composition.

But in 2023, after the trade war, the Ukraine war and the collapse of US-China relations, the international structure of China’s EV exports also looks like the peak of a particular form of globalization that will not be reached again anytime soon. In 2013 or 2017 it was definitely not controversial for a Western multinational to choose China as the global export base for a major new product; in 2023 it certainly would be. In the current political climate it is very hard to imagine Western multinationals making such decisions again without hesitation.

The global rise of China’s EV industry looks like it is just getting started. But the model that kick-started that rise may not be available for repeat use.