Author / Andrew

by Andrew

The political economy of financial discipline

China’s most consequential economic policy of the last several years, aside of course from the Covid lockdowns, was its turn to increased financial discipline. In the decade after the 2008 global crisis, the financial sector had exploded in size, but in 2017 that growth came to, if not quite a halt, then a very obvious inflection point. As the chart below shows, the size of China’s financial sector relative to GDP has been roughly stable since then (the spikes in 2020 and 2022 were due to sharp slowdowns in the growth of the denominator rather than accelerations in the growth of the numerator).

The new direction was signaled at the end of 2016, and then really got going after Xi Jinping made the Politburo attend a study session on financial risk in early 2017. At the meeting he declared that “financial security is an important component of national security,” launching a campaign against financial risk in a way that made it a top political priority rather than a matter of mere technical management. Since then, the government has been remarkably consistent in holding to a tough, conservative stance on monetary policy and financial regulation.

Although no Chinese official would express it this way, essentially what happened in 2017 is that China started doing what the IMF and similar worthies had been telling it to do: control debt, close regulatory loopholes, impose hard budget constraints. This was a pretty unexpected move for Xi, who up until that point had focused his attention more on foreign policy, security issues, propaganda and ideology. It was also a pretty unexpected success for the technocratic types who had been warning about the dangers of rising debt for several years, to little effect.

This episode in Chinese economic policymaking is still not well understood. Why did the people usually identified in the Western press as “market reformers” focus their energy and political capital on this issue of financial discipline? And how were they so successful at getting their agenda adopted at the highest levels? Maybe one day when the principals write their memoirs we will know the real story.

But until then, I have some theories–or, at least, speculations. Even in a top-down system like Xi-era China, major policy decisions usually need buy-in from a range of interest groups. My speculation is that there are two major interest groups that aligned in support of this new agenda of financial discipline.

Let’s call the first group the “reform faction.” These people are indeed concerned that the surge in debt after 2008 has raised the risk of a financial crisis in China. But they also see the easy availability of credit as encouraging the worst features of the Chinese economy: the continued large role of state-owned enterprises, and the corrupt and unhealthy relationship between property developers and local governments. Imposing more financial discipline on these actors will thus help push the economy in the direction of higher productivity and a larger private sector.

Let’s call the second group the “control faction.” Their diagnosis of China’s problems is almost the opposite of the reform faction’s. Rather than seeing easy credit as enabling the dominance of inefficient state enterprises, they see it as enabling the aggressive expansion of corrupt and unaccountable private-sector companies. The huge concentrations of private wealth created by booms in property and the internet undermine China’s governance and challenge the authority of the Party. Imposing more financial discipline on these actors will reduce social and economic polarization and allow for healthier growth.

The ideals of these two factions are almost diametrically opposed. However, both can agree that the lax post-2008 policies caused a lot of problems, and that tighter central control of the financial system will help address these problems. The consensus policy is to impose financial discipline on both the private sector and the state sector, not just one or the other. For me, this model helps account for some of the internal contradictions of the financial crackdown–how it married a seemingly technocratic agenda with a socialist political campaign–as well as for its surprising toughness.

An unholy alliance between the reform faction and the control faction does not sound like an inherently stable configuration. Indeed, the indications are that the balance of interest groups is now shifting. All the top officials who implemented the financial crackdown are headed for retirement due to age. Recent corruption probes have implicated senior officials at the central bank and financial institutions. And the government has just announced a wide-ranging restructuring of the entire financial-regulatory apparatus.

Even if my model is wrong (as it quite likely is), the political economy around financial regulation in China has clearly shifted. Whatever was the actual balance of personalities, interests and agendas that supported the turn to financial discipline in Xi’s second term, it will be different for his third term.

by Andrew

What I’ve been listening to lately

  • Marc Ribot – Plays Solo Guitar Works of Frantz Casseus. Ribot wrote movingly about Casseus, a family friend and his first guitar teacher, in his quasi-memoir Unstrung. The self-described noise guitarist plays these pieces straight, in support of Casseus’ ambition to make a distinctive Haitian contribution to the classical guitar repertoire. They are lovely, rhythmic miniatures.
  • The Temptations – Psychedelic Soul. Obituaries are a sad way to discover new music. In this case Richard Williams’ appreciation of Barrett Strong, who passed in January, led me to the 1968-1972 era of The Temptations and their collaborations with Strong and Norman Whitfield. This work is both extraordinarily creative and sublimely funky; everyone knows “Papa Was A Rolling Stone” but there is so much more great stuff on this collection.
  • Tyshawn Sorey – The Off-Off Broadway Guide to Synergism. This epic live recording topped many best-of-2022 lists, and deservedly so. Drummer Sorey here takes off his avant-composer hat to back his piano trio, and invites elder Greg Osby along for the ride to play standards and modern jazz classics. It’s all absolutely fresh and in the moment.
  • New Kingdom – Paradise Don’t Come Cheap. The golden age of hip-hop in the early 90s was a historic flowering of a new art form: a hundred flowers bloomed, though not all of them lasted. The unique sound of this album had few precedents (their previous album was pretty weak and inconsistent), and was not followed up. But the growled, hallucinatory lyrics atop echoey, bluesy beats still sound intense and compelling.
  • Muhal Richard Abrams – The Hearinga Suite. A sterling example of modern big band music, complex and interesting but not nearly as forbidding as some of Abrams’ earlier, more avant-garde excursions. Abrams deploys the full power of the massed ensemble sparingly, mostly preferring to string together different smaller combinations of instruments. The 1980s-vintage synthesizers now sound a bit dated, but otherwise this music is still remarkably cliché-free.
by Andrew

Re-de-industrialization

China’s government has never been particularly shy about supporting its manufacturing sector, a key engine of growth for decades. Since 2021, though, it has become even more vocal about the importance of manufacturing, officially adopting in its plans the view that manufacturing is a special sector of the economy deserving of special treatment. That view may well be correct, and I have some sympathy for the argument. But the metric the government has chosen to measure its success is likely to prove a disappointment.

A good recent example of the new style of rhetoric around manufacturing is an article published in a recent issue of Seeking Truth, the Communist Party’s theoretical journal, by Jin Zhuanglong, head of the Ministry of Industry and Information Technology (MIIT). It does not break new ground but expresses the current line of thinking quite clearly; here are a few choice passages:

Industrialization is the precondition and foundation of modernization. … For a large country like ours, it will be difficult to achieve the goal of becoming a modernized superpower without a strong and large industrial sector. …

Industry is the main engine of economic growth, and plays a key role in stabilizing the overall macroeconomy. Industry is the main battlefield of technological innovation, it is the sector with the liveliest innovation activities, the most abundant achievements of innovation, the most concentrated applications of innovation, and the strongest innovation spillover effects. According to statistics, industry in the United States accounts for less than 20% of GDP, but 70% of innovation activities rely directly or indirectly on the industrial sector. …

We must hold fast to the real economy, especially the manufacturing sector, consolidate the advantages of a complete industrial system, keep the proportion of the manufacturing sector in GDP basically stable, and avoid the “virtualization” of the economy.

There are a lot of fairly abstract goals outlined in Jin’s article: many things that must be “improved” or “strengthened” in the common parlance of Chinese officialdom. The main one that can be actually measured is the manufacturing share of GDP; the goal of keeping that ratio “basically stable” was written into the 14th five-year plan.

That mandate is why, in the MIIT’s annual work conference in January, Jin proudly reported on the rise in the manufacturing sector’s share of GDP in 2022, to 28%. Such a shift in China’s economic structure is indeed a notable event, reversing a multi-year decline in the relative (not absolute) size of the manufacturing sector, which was over 30% of GDP as recently as 2014. But most of the change happened in 2021, when there was a simultaneous boom in both export manufacturing and in domestic demand, driven by property.

The property boom deflated in dramatic fashion in 2022, with historic declines in construction indicators. And while exports started off strong, by the end of the year they were declining, as China’s major export markets scaled back their spending on goods favored during the pandemic (furniture, electronics). The increase in the manufacturing share for the year as a whole was small, and higher-frequency data show it had actually begun declining by the end of the year.

China’s economic growth is universally expected to accelerate in 2023 thanks to the lifting of Covid restrictions, but a repeat of the 2021 manufacturing boom looks quite unlikely. Real-estate construction could pick up some, and with it demand for manufactured goods like steel, cement, and machinery, but a return to the boom years is not in the cards. While consumer spending in the US is solid, spending patterns are shifting to be less favorable to China (more services, fewer goods). A similar shift is likely to unfold domestically, with consumers splurging on the services, like travel, they have not been able to fully enjoy for three years.

It looks quite probable that manufacturing will lag rather than lead overall economic growth in 2023, resulting in a lower share of GDP. That may be why, at the latest MIIT work conference, stability in the manufacturing share was not mentioned as a specific goal for 2023, which it was for 2022 and 2021. There’s no point in emphasizing goals that are unrealistic.

Looking beyond the peculiar circumstances of 2023, I think it’s more likely than not that de-industrialization, meaning the decline of the manufacturing share of GDP, will resume. Rather than being an indication of the hollowing-out of the Chinese economy, as policymakers seem to fear, such continued structural change would probably be a fairly normal and neutral development.

The success of manufacturing in raising incomes in China naturally leads to some relative decline: as households’ incomes rise they tend to spend more on services, while at the same time Baumol’s cost disease raises the relative prices of services over time. Neither of those trends threatens the international competitiveness of Chinese manufacturing.

The manufacturing share of GDP stayed unusually high in China for decades in part because of typically socialist economic distortions: repressing consumer spending to channel investment into industrial capacity. Trying to maintain such distortions to prevent natural structural change could be quite costly in what is now a much larger, more marketized and globally integrated economy.

To really prop up the manufacturing share in an economy of China’s size would probably require extending the housing boom even further, or consistently undervaluing the currency, neither of which sounds like a great idea. My best guess is that China’s government won’t be able to stop a renewed decline in its manufacturing share of GDP, and, despite its rhetoric, won’t seriously try to.

by Andrew

A podcast with David Kimberley

Earlier in February, I did a podcast with David Kimberley of Kepler Trust Intelligence in the UK and talked about economic issues in China after the dropping of Covid restrictions. The full thing is online; the below is an edited transcript of the more substantive parts of the discussion. I’ve cleaned up the speech for easier reading but haven’t changed any of the content.

 David: Before we get started, I’ll just start with a small anecdote. So I went to Malaysia about six months ago, and a friend of mine from Hong Kong happened to be there at the same time. We met up and went out for dinner. And over the course of dinner, he kept complaining about things that were happening in Hong Kong and China at the time. Every time he was complaining about something, I would say, Why are they doing that? Why is this the policy? And and it went from mundane things to more serious things. And eventually he said, if you try to understand these policies, you’re just going to go insane. So it’s better to just accept them as they are and live your life accordingly.

Maybe to get started you could you talk a bit about why you think Chinese policy for Covid was so restrictive and also why there was this sudden change? I think for most people who are not keen watchers of the country, it felt like there was this really strict policy that was hard to understand, and then a very quick reversal that was equally hard to understand. So maybe you could talk a bit about both.

Andrew: Sure. I think the reversal is probably easier to understand because they had no choice, right? They were forced into changing policy. The Covid controls were breaking down. And they could either insist that people, local governments and companies continue to follow these extreme measures which weren’t working, or they could recognize that they weren’t working and tell people, okay, fine, we’re not gonna do it anymore. The reversal was basically forced on them by the realities of what was happening with the pandemic, which is that the virus had become so infectious that it was extremely difficult to control even with the very strict measures that China employed.

The local governments that were in charge of actually enforcing these measures had different levels of competence and enthusiasm for enforcing these measures. Some local governments were quite good at it and then others really weren’t that good at it or really didn’t want to do it for whatever reason. Because some local governments weren’t that good at restricting the spread of Covid, Covid spread. And so the weak parts of the system undermined the strong parts of the system, and then eventually the whole thing came crashing down.

So yeah, for the policy change, it’s not something I think was really decided in a considered way at the top. Of course they try to portray it that way, but if you look at the sequence of events, that’s not actually how it played out. They were trying to retain the Covid systems, but they basically just fell apart. And so they had no choice but to give up and say, okay, we’re done.

For the first part of the question, why did they do all this stuff in the first place? I think a lot of it is just path dependency. They got trapped into a certain set of a certain set of policies, a certain set of preconceptions that were difficult to get out of. In 2022, it was very popular for people to criticize China’s Covid policies and everyone’s like, oh, why are they doing this crazy stuff? But if you think back to the first half of 2021, actually China’s policies were looking pretty good.

The lockdowns in 2020 had effectively stamped out Covid. There was no domestic transmission of Covid in China, unlike everywhere else in the world. They had substantially reopened domestically, so for many people daily life had returned to normal. The economy was booming, and they had gotten this economic boom without having to borrow and spend in the way that a lot of Western governments were. They had low inflation and not a big increase in government debt. They didn’t overstimulate the economy. So actually the set of trade-offs that China made at that point in time was looking pretty good.

I think their strategy was essentially to say: okay, we’ve kicked this thing, but we are still going to stay closed off from the outside world because we want to prevent new infections from coming in. But basically what we’ll do is have a vaccination campaign that will achieve herd immunity. And then once we achieve herd immunity, we can gradually open up and then everything will be fine.

And of course what happened is that the SARS-CoV-2 virus continued to evolve into new variants, and these variants were so transmissible that herd immunity became impossible. And I don’t think they were prepared for that. There wasn’t an alternative strategy to achieving herd immunity. Because they had this this set of restrictions, the only thing they could do was to continue with them in order to not have a massive wave of Covid infections and deaths. Which of course is what they have just experienced.

David: That’s all very interesting. I think you did have some protests, which seems, again to someone that’s a casual observer, something that’s quite unusual in China. So did those things have any role to play or are those misconceptions?

Andrew: I do think that the protests had a very clear impact on Covid policy. At our firm, we put together a daily indicator of Covid policies. My colleagues did this heroic work of looking every day at the actual measures announced by 100 different city governments and then classifying them according to how severe they were.

If you look at the data series that we compiled, you see that the restrictiveness of Covid policies begins to immediately decline after the protests, before the central government had officially announced any change in policy. So it’s clear that the actual implementers of Covid policy, which are the local governments, responded to the popular discontent.

Another way you can see the same thing is just to look at the test results. What’s kind of counterintuitive is that immediately after the protests, the number of Covid cases plunges. This of course doesn’t reflect reality because the pandemic was spiraling out of control at that point. But what it means is that a lot of local governments simply stopped doing tests. Mandatory tests were a key part of the whole Covid control system.

So you can see very clearly in the data that the government immediately began to back off from the most restrictive policies in the face of these popular protests. I think there’s no question that they had a real impact.

David: To touch on something else people have been concerned about, which is the real estate sector. As far as I’m aware, most Chinese have their savings in real estate. Is that a bubble that’s about to burst? Is there a huge amount of risk there? Can you just talk about what’s happening in the real estate sector?

Andrew: What happened in the real estate sector last year was basically the biggest correction in housing, sales and construction in the history of the modern Chinese property market. You had something like 50% declines in new construction volumes, and 30% declines in housing sales volumes. We’re not in a situation where we’re waiting to see if bad things are going to happen. Very bad things have already happened. The question is whether bad things continue to happen or whether they get less bad.

This extraordinary collapse in the real estate sector is kind of a confluence of things that people expected and things that people didn’t expect. You’ve had this regulatory crackdown on property developers underway since about 2017. Basically the central government had decided, I think quite correctly, that property developers were a major source of financial risk because they were running highly leveraged business models and were incentivized to build too much housing. The government and financial regulators have been trying different ways to try to constrain the risk-taking behavior of property developers over the last several years.

The first two or three years of this campaign from 2017 to 2019 was partially effective, but did not really change property developers’ behavior. Then of course we have the Covid interlude in 2020 and 2021, and then this campaign comes back with a vengeance. They came up with some very tough, very restrictive measures that really reduced property developers’ access to finance and started to have pretty serious effects on their business.

And as the industry was feeling the effects of this in early 2022, it got this exogenous shock from the Shanghai lockdown. The Covid restrictions that had been fairly light up to that point became extremely strict all over again. And this created a lot of uncertainty among people. Everyone in China was like, oh, we thought this thing this stuff was over, we thought all these restrictions were going to gradually go away, and now it seems like they’re never going to go away and are going to be here forever. And this is terrible.

You had a collapse in property sales that happened in part because of the the lockdown and the collapse in household confidence. It’s difficult to disaggregate these things, but at the same time it was also driven by the deteriorating financial state of the developers, where they became unable to complete projects. And that made people understandably reluctant to hand over a lot of their money to developers.

This sharp collapse in property sales was basically a death blow for developers who already had extreme financial stress from the loss of external financing. It’s one thing to be finding it more difficult to borrow from banks or to issue bonds. But the main way that developers finance their business is by selling houses. If they’re not selling houses, then they really don’t have any money. And they didn’t have any access to external finance to make up the gap.

That imposed huge financial stress on developers. They not only had to stop work on existing projects, but they massively cut back all the new construction or purchases of land for future construction, simply because they didn’t have any money. They had no money from sales coming in the door and they couldn’t borrow it.

What’s happened over the last few months is that, simultaneously with this relaxation of Covid policy, the government has come around, slowly and I think somewhat reluctantly, to the view that it overdid things by trying crush the developers with financial regulation and that the macro effects of this were just too severe.

The priority now is to get housing sales going again, and restore normal funding channels for developers and prevent a further collapse in the sector. That’s where we are now. What the market is going to be looking for over the next weeks and months is some indication that property sales are going to normalize. They may not ever go back to their pre-Covid levels, but if they increase a little bit, that will make a big difference to the financial situation for developers and help halt this free fall in construction activity.

David: To finish off, I think most people listening to this will be individual investors who are not in China, and they are probably pondering whether or not they should be invested in Chinese companies. I think that after Russia invaded Ukraine, a lot of people had this realization of what it means to be invested in a country that is governed in, let’s say, a less transparent, more authoritarian way.

If I’m investing in Russia, you could talk about how great a company like Yandex is, or Gazprom’s dividend, but actually it is kind of irrelevant if in a single day all of that can just be wiped out. And you can’t predict whether or not that is going to happen. Many people were starting to wonder whether actually exactly the same thing applies to China. So I’m curious if you have any kind of thoughts around that. Do you think that China’s going to be able to lure back foreign investors?

Andrew: The short answer is apparently yes, because inflows from foreign investors into Chinese domestic stocks had their biggest month of all time in January. So there’s been a pretty big change in foreign investor sentiment, at least in the short term. But let me try to give you a little more thoughtful answer on this.

Over the years, talking to our clients, who are mainly institutional investors, a lot of them were very interested in finding a way to benefit from the long-term growth story of China, but also avoid what they saw as the political risks and lack of transparency involved in the Communist system. A lot of investors came to the conclusion that the way to do that, to achieve both those goals, was to buy shares in the Chinese private-sector internet companies.

These were companies that were clearly in a growing part of the economy. They were targeting consumer demand rather than government spending. And crucially, they were run by profit-seeking entrepreneurs. They were run by guys who wanted to make tons of money by providing internet services to a billion people. And it seemed that generally the government was okay with that and had given them space to do that. So from a Western investor’s perspective, this is the best of all possible worlds. You have all of the Chinese growth potential, and then you have none of the weird China stuff of state intervention and Communist Party jargon.

What really what happened in that regulatory crackdown, or whatever you want to call it, in 2021, is that this thesis was proved to be wrong. That, in fact, there wasn’t a special sector of the economy that was immune to government influence, and where you didn’t have to worry about Communist Party slogans or state intervention. The internet sector was also vulnerable to these issues just like every other sector of the Chinese economy. And I think that was a pretty big shock for a lot of people who had hoped that the internet sector was going to be different.

by Andrew

The polarization of global R&D spending

How has China’s rise as a science, research and technology powerhouse reshaped how research gets done across the world? One admittedly simplistic way to track this is to look at a single widely available statistic: R&D spending. (It’s worth keeping in mind that R&D spending is not precisely “science”–it does include spending on research projects by academic institutions, but most of it is actually corporate expenditures.) The story those numbers tell is less alarming for the US than you might assume from a lot of reporting, but the shift in the global distribution of research does create new issues.

While the OECD is the usual go-to source for cross-country data on R&D spending, I am not sympathetic with all of the technical choices they make. In particular, they present all their figures in terms of purchasing power parity, which in China’s case means R&D spending is converted to US dollars at an exchange rate of around 4, instead of 6-7. While the OECD charts show China’s total R&D spending overtaking that of the EU and closing in on the US, that’s mostly an artifact of this particular methodological choice.

Using purchasing power parity certainly sounds all proper and economist-y but it’s not automatically appropriate for every purpose. The PPP exchange rates were developed to compare the living standards of ordinary people across countries by laboriously comparing prices for a basket of the goods and services they consume; since a lot of these are not traded across borders their prices can vary widely. It’s not clear this is the right choice for comparing R&D expenditures, which are going to be mainly on salaries of highly skilled staff and specialized equipment. To me it seems more likely that there is in fact a global market for top researchers and their gear, and that therefore market exchange rates are appropriate.

To come up with more accurate charts, I made my own cross-country comparison of R&D spending. The procedure is simple: take the R&D share of GDP reported for a country in the World Bank’s World Development Indicators database, multiply that by its annual GDP, and convert to US dollars at market exchange rates. Since the R&D share of GDP doesn’t change a lot from year to year, in cases where it hasn’t been updated yet I use the previous year’s share times the current year’s actual GDP.

I ended up with 56 major economies where the World Bank has more than scattershot data on R&D spending, with data up to 2021. That’s not a complete sample of the world of course, but if a country can’t report its R&D spending to international organizations consistently then it probably isn’t capable of doing a lot of R&D spending anyway. Aggregating the countries into large regions generates the following result in terms of absolute values:

The rise of China is indeed pretty dramatic. In particular it has overtaken the combined R&D spending of developed countries in its own region of Asia (Australia, New Zealand, Japan, South Korea, Taiwan, Singapore), which has been somewhat stagnant for the past decade. R&D spending elsewhere in the world has continued to grow at a decent clip though. So it’s also useful to look at the relative shares:

To me this chart is even more interesting. Back in 1995, when data for most countries becomes available, global R&D spending was roughly equally distributed across three groups of developed economies, those in North America, Europe and Asia-Pacific. China’s rise has come mainly at the expense of Europe and developed Asia, whose R&D spending has not grown as rapidly in dollar terms. The US has done better and has actually kept a high share of global R&D spending, with its share rising not falling in the last several years. Other developing countries (admittedly not as well represented in this sample) have attained a marginally higher share of global R&D over the past decade, but nothing like China.

Based on recent trends, it seems that global R&D spending is becoming less evenly distributed across the world, and is increasingly concentrated in the two hubs of the US and China. That does line up with anecdotal impressions: the US and China are home to the two main clusters of large internet companies, and are also the two leading locations for artificial-intelligence research.

These two hubs are, obviously, not talking to each as much as they used to. There has been only minimal travel in and out of China for the past three years, and the recent political climate in the US has made collaboration with Chinese researchers much more fraught. If ties between the US and China stay troubled, then this more polarized distribution of global R&D spending might turn out to be a less efficient allocation of resources.

Those research dollars will do the most good for technological progress in the world as a whole if they are spent in complementary ways. If instead the two hubs are pursuing conflicting or duplicative agendas, then the same global sum of R&D spending could produce fewer results. This is speculative, of course, as in general it’s hard to know how inputs of R&D spending translate into the output of actual productivity gains. But it is clearly the case that the main global locations for R&D spending are different than they were two or three decades ago, and that the relationships among those locations are more complex.

by Andrew

Interpreting China’s policy reversals

What should we make of China’s recent and dramatic policy reversals? Not only did the government summarily abandon its strict Covid policies in December, it has also dropped years of restrictions on the real estate sector. Officials are taking a softer line on internet platform companies, targets of the regulatory crackdown in 2021, and even adopting a marginally less confrontational stance in foreign policy. All of these now-abandoned positions had once been considered key political priorities of top leader Xi Jinping.

So what does it mean that he is doing things so much differently than just a few months ago? Here are four of the leading interpretations that I’ve heard:

Don’t get fooled again. The professional China-watching community is nearly unanimous in its view that all of these policy shifts are merely short-term tactical adjustments to get the economy back on track and restore public and investor confidence after the missteps of 2021-22. According to this view, Xi faces no constraints on his power as he begins a third term heading a government packed with officials he has personally selected for loyalty. Nor is there any evidence that his ambitious long-term goals–of greater global stature and influence for China, a strong national security state, and technological self-sufficiency–have changed.

The recent “pragmatic” focus on economic growth and stabilization is therefore likely to be just a phase. The more political priorities, which were such a feature of Xi’s second term, will return to prominence soon enough. Neil Thomas has a careful example of this analysis over at ChinaFile, and Bill McCahill a more cynical one at the National Bureau of Asian Research.

A more benevolent dictator. These skeptical takes are being advanced mostly to counter the euphoria in financial markets unleashed after China’s abandonment of its Covid controls. A more optimistic school of thought contends that while Xi’s power is indeed untrammeled, his priorities have shifted after three years of economic and market disruption. The policy reversals on multiple fronts are seen as evidence that Xi can course correct, and will continue pursuing a more pragmatic and markets-friendly agenda in the future. For instance, former Morgan Stanley strategist Ruchir Sharma argued in an an FT column that the policy shifts show that Xi is “willing to reform, at least in the depths of a crisis.”

Of course we have no way of knowing what Xi “really” thinks, and whether the current priorities are a tactical feint or a strategic shift. But it’s not out of the question that Xi has in fact just changed his mind. We do know that Xi has in fact changed course on economic policy lots of times, so changing course again is not in itself a shocker. After all, one of the benefits of having absolute power is that you don’t have to worry about consistency.

Furthermore, Xi probably cares more about maintaining his own power and control over elite politics than about the details of various policies. Since his control over the system and key personnel looks secure after the 20th Party Congress, he can be flexible about specific policies. The implication of this view is that Xi is less ideological than sometimes portrayed, and just does what is needed to preserve the power and authority of his government.

The new technocrats. A variant of this interpretation gives credit for the policy pivot more to Xi’s lieutenants. The argument is that while the new leadership team he put in place at the Party Congress was generally portrayed as a bunch of incompetent sycophants in the Western press, in reality they are effective, competent and broadly business-friendly.

Since Xi is confident in their loyalty, he trusts them to do what is necessary, even if that means having to tolerate some embarrassing policy reversals. And because Xi isn’t fighting all the time with Li Keqiang, who kept trying to promote his own agenda, actual policymaking will end up being more sensible. This interpretation suggests that while Xi’s long-term policy priorities of national security and technological self-sufficiency will still be a major focus of government policy, they can be implemented in a less disruptive way than in recent years.

A quiet revolt. There is also a more radical interpretation than any of these: that policies are changing not because Xi’s own priorities have changed, either temporarily or permanently, but because his power has been diminished. The repeated cycles of forced obedience to top-down political campaigns, the enormous costs of the ever-stricter Covid controls, and and ultimately the near-collapse of the economy have, on this view, discredited Xi’s program and cost him authority.

Of course, he remains formally at the apex of the system, but his ability to enforce his views on the country has been diminished, and other people are quietly making more key decisions. The clearest evidence for this view is the way local governments started giving up on the whole system of Covid controls before receiving considered top-down instructions to do so. Anne Stevenson-Yang, always a thoughtful if jaundiced observer, says: “something very important has happened politically to reverse Xi’s power…I think there has been some kind of quiet internal revolt against Xi Jinping’s personal rule.”

I’m not yet a fully paid-up subscriber to any of these schools of thought.

The consensus view, that Xi is executing a short-term tactical correction while keeping his longer-term agenda basically unchanged, certainly has logic and much evidence on its side. But it’s also a product of a type of analysis, based mainly on careful reading of Party documents, that completely failed to anticipate the dramatic shifts in actual policies. That failure argues for giving more consideration to how feedback from economic conditions, public opinion and lower-level enforcement affect high-level policy decisions.

At the moment, I’m leaning toward an interpretation that combines some elements from all of these theories. I do feel that the reversal of Covid policies was a major political event for China. Although the suppression strategy actually worked for a while, by mid-2022, the evolution of new and super-transmissible subvariants made it no longer practical. The central government’s attempt to force local authorities and the populace at large to keep enforcing what had become unenforceable measures discredited both the policies and the decision-making behind them.

Perhaps the man at the top recognized that the center’s ability to enforce compliance with its dictates was at risk, and if the gap between rhetoric and reality became too wide it would expose dangerous weakness. Rather than try to force the bureaucracy to do things people really didn’t want to do, and risk failure, it was better to instead focus on the things that everyone wants and can agree on, like stabilizing the economy.

It’s not a complete course reversal. Some parts of Xi’s recent agenda do have widespread support, like reducing technological reliance on the US. But some other parts, like the common prosperity push, do not. So that’s why we see the most recent rhetoric emphasizing the former and downplaying the latter: it’s an effort to emphasize consensus within the bureaucracy and re-establish compliance. But because norms of authority are unsettled, the longer-term trajectory probably hasn’t yet been locked in. Depending on how the internal political maneuverings evolve from here, maybe this could be a sustained course correction. Or not.

by Andrew

Naming the blog

When I first set up this blog, I couldn’t think of a cool name for it. So I just called it Andrew Batson’s Blog, not as a title, really, just a description. But I was never really happy with it and stayed on the lookout for an actual name. I think I found one.

The phrase that captured my fancy is in this short passage from Raymond Chandler’s The Big Sleep, which I was re-reading last year.

I went upstairs again and sat in my chair thinking about Harry Jones and his story. It seemed a little too pat. It had the austere simplicity of fiction rather than the tangled woof of fact.

It’s a great line. In Chandler’s books, the private detective Marlowe spends his time breaking down people’s pat, plausible but wrong stories about what happened, and finding the messier truth underneath.

The phrase appealed to me as, I’ve come to realize, I’m largely empirically oriented: I’m most interested in explaining actual things going on in the world, not in constructing grand theoretical edifices. My formative educational experience was in anthropology, which teaches the understanding of society through participant observation, and my formative professional experience was in journalism, which (at least in my experience) emphasizes relentless effort in discovering and establishing facts. Living in China further demonstrated that, yes, the facts are often pretty tangled.

So that’s it. I’m calling this blog The Tangled Woof.

by Andrew

The best music I heard in 2022

All this music was new to me this year, if not necessarily to the rest of the world. I’ve listed my favorites by release date to highlight the more recent ones:

  • Sun Ra Arkestra – The Living Sky (2022). The latest release by the posthumous Arkestra is one of the gentlest and most purely beautiful albums in the Sun Ra canon. Even Marshall Allen’s squealing alto playing, which never seems to land straight on a note, fits into the mellow grooves. 2022 also saw new reissues of two of the best Sun Ra albums from the 1970s, Omniverse and Universe in Blue.
  • Steven Lugerner – It Takes One To Know One (2022). A charming trio recording — bass clarinet, bass, drums — in which two younger musicians enlist jazz elder Albert Heath to deliver fresh interpretations of modern jazz tunes.
  • Matthew Shipp Quartet with Jason Hao Kwang – Vision Festival Wednesday June 22 (2022). Now that I’ve started going to concerts again, I’m including live music in this list. This was without doubt the best performance I saw this year — a stunning hour-long improvisation driven by Shipp’s powerfully thematic piano and extraordinary sounds from Kwang’s violin and viola. The performance is archived online but honestly I haven’t dared listen to it again for fear the initial impact would be lost.
  • Dave Easley – Byways of the Moon (2021). Fellow practitioner Susan Alcorn has called the pedal steel guitar “the last musical instrument borne of the mechanical age,” and Easley’s recital shows how its potential in a jazz context has still been barely tapped.
  • Bill Frisell – Valentine (2020). Frisell’s stripped-down guitar trio, with long-time partners Thomas Morgan on bass and Rudy Royston on drums, is marvelously responsive and delivers a distinctive and very personal sound. I saw this group in concert this year and their interplay had advanced even beyond where it was on this excellent record.
  • Lucky Thompson – Complete Parisian Small Group Sessions 1956-1959 (2017). Thompson had one of the most beautiful tones on tenor saxophone of any jazz player, but never got recorded as much as he deserved. This collection of sessions from his sojourn in France is just classic jazz.
  • Jason Roebke – Cinema Spiral (2016). Bassist Roebke leads an octet of top-notch players from the Chicago scene through pleasingly complex tunes. To me the vibe was reminiscent in the best way of the more avant-garde Blue Note recordings of the 1960s.
  • William Parker – O’Neal’s Porch (2002). An incredible record that reworks the “freebop” of Ornette Coleman’s quartet (sax, trumpet, bass, drums) with a radically different and funkier rhythmic approach (this 20th anniversary appreciation has good context). I also enjoyed this year’s Universal Tonality, a release of some of Parker’s large-ensemble recordings from the same period; it’s less consistent but the high points are very high.
  • Ornette Coleman – Sound Museum: Hidden Man (1996). Coleman famously blew up traditional jazz ensembles with his pianoless quartets of the 1960s, so it’s surprising and pleasing to hear just how good he sounds here with the “standard” backing of piano, bass, drums.
  • Julius Hemphill – Fat Man and the Hard Blues (1991). Composer and alto saxophonist Hemphill is generally acknowledged as the guiding spirit behind the World Saxophone Quartet, one of the essential groups of the 1980s. After leaving the WSQ he started recording with an all-saxophone sextet which, for me, is even better.
  • Scientist – Meets The Space Invaders, Heavyweight Dub Champion, Rids The World Of The Evil Curse Of The Vampires, Encounters Pac Man, Wins The World Cup, Big Showdown At King Tubby’s, Dub Landing, Dub Landing Vol. 2 (1980-82). This run of albums on the Greensleeves label was perhaps the last gasp of classic dub reggae before electronics changed its sound forever. I listened to them all this year and there’s not much to choose among them: every one is killer (perhaps the albums with sports metaphors slightly edge the video-game-themed ones). Starting in 2016, these were reissued, for unclear reasons, under the names of other musicians, but the Scientist sound is consistent.
  • Art Pepper – Winter Moon (1981). I’d always heard this was a good record but didn’t quite believe that jazz-with-strings could escape boring middlebrow tastelessness. Once I listened to it I had to admit it’s wonderful, with some of Pepper’s most gorgeous ballad playing.
  • Marvin Gaye – Here, My Dear (1978). Much of what has been written about this classic album focuses on the lyrics rather than the music; Gaye was going through a divorce at the time. It’s not the subject matter that makes it great, though, but the music, a novel soundscape of complex, subtle funk. Stanley Crouch wrote a fascinating essay in 1979 on how it cut across boundaries of jazz and funk in new ways.
  • Enrico Rava – Enrico Rava Quartet (1978). This session pairs Rava’s lyrical trumpet playing with the earthier style of the legendary trombonist Roswell Rudd; the tunes are lovely and the interplay is top-notch. Reportedly Rava’s favorite of his own albums.
  • Burning Spear – Man in the Hills (1976), Dry & Heavy (1977). In preparation for seeing Burning Spear in concert this year, I filled in some of the gaps in my previous listening. His run of albums in the 1970s was just great, with horn ensembles that make for a deeper, more complex reggae sound. And he still puts on a great show at age 77.
  • Pepper Adams – Plays The Compositions of Charlie Mingus (1963). One of the first and best Mingus tribute albums, recorded with input from the composer himself. Adams’ powerful baritone works wonderfully as the lead voice.
  • Sonny Stitt – Sonny Stitt / Bud Powell / J.J. Johnson (1957). It’s easy to overlook all those unhelpfully titled jazz jam session records from the 1950s, but don’t skip this one: it’s pure, fierce bebop, recorded when the style was still fresh. Thanks to Ethan Iverson for the tip.

Previous lists: 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | 2014

by Andrew

The best books I read in 2022

As usual, this list is a purely subjective account of the books I most enjoyed reading this year. In each category my favorite is the first one, the others are in no particular order.

Nonfiction

  • Geoff Dyer, The Last Days of Roger Federer, and Other Endings. Impossible to adequately describe, a truly unique book–and how many of those are there? Not actually about Roger Federer but also not not about him either; it’s a series of reflections on late style, failure and decline in sport, arts and life. The writing is casual and the connections seem enjoyably free-associative and arbitrary at first, until the rigorous structure begins to emerge.
  • After finishing it I went straight on to read more Dyer: the essay collection Otherwise Known as the Human Condition, from a decade earlier, covers a similar eclectic range of topics (photography, music, fiction and non, personal history) at greater length. Dyer has great taste and, as with the best critics, his enthusiasms are infectious.
  • Sebastian Faulks, The Fatal Englishman: Three Short Lives. One of the many interesting books discussed by Dyer in Last Days; he has a particular interest in nonfiction of literary quality (he also champions Eve Babitz, who I too think is amazing). I don’t often enjoy biographies: too often they are neither analytical enough to be of intellectual interest nor well told enough to be of narrative interest. But Faulks’ treatment of three people who did not live to realize their early promise succeeds on both fronts.
  • Harald Jähner, Aftermath: Life in the Fallout of the Third Reich, 1945-1955. A fascinating exploration of German life during the end of one social order and the creation of another one; it covers everything from “rubble tourism,” mass migration and regional cultures to to jazz dance halls, sex toys, interior decoration and avant-garde art (here’s an excerpt for flavor).
  • I read it together with Volker Ulrich’s Eight Days in May: The Final Collapse of the Third Reich, a less thematic and more plainly narrative account of the period immediately before the one covered by Jähner that usefully sets the stage. Both books are great examples of how interesting the history of transitional and interstitial periods can be.
  • Patrick Radden Keefe, Say Nothing: A True Story of Murder and Memory in Northern Ireland. I had never previously cared enough about UK or Irish politics to educate myself on the Troubles of Northern Ireland, and I can’t remember why I decided to pick this one up. But I couldn’t put it down; the deeply reported detail is impressive and immersive, the stories compellingly told. I can’t speak to how better-informed readers might receive it, but for me it was eye-opening.
  • William Deresiewicz, The Death of the Artist. A well-reported look at how working artists at the middle and low levels of fame actually make a living. The arts turn out to be an excellent lens through which to look at the 21st century service economy, and the lessons here are of broader interest.

Fiction

  • Willa Cather, The Song of the Lark. Is this the Great American Novel? It is, at least, a great telling of a classic 20th century American story, of someone from a small place who goes to a bigger place to pursue bigger dreams, and what they gain and lose along the way. Which is also my story and the story of so many people I know, American and otherwise.
  • Gabrielle Zevin, Tomorrow, and Tomorrow, and Tomorrow. Probably the most popular book on my list–I actually saw people reading it in the airport–and deservedly so: I found it utterly charming and free of cliché. What I enjoyed most was its combination of very contemporary material (video game designers) with a quite old-fashioned narrative voice, wry and opinionated.
  • Lionel Davidson, Kolymsky Heights. Not a great book, but for certain tastes a very pleasing one. The opening is awkward and the McGuffin around which the thriller plot revolves is ludicrously implausible. But the meat of the book is a very detailed process of solving desperate logistical problems in the Siberian winter. Great fun, in other words.
  • Anthony Doerr, Cloud Cuckoo Land. What is usually called an “ambitious” novel, this yokes together quite different narrative strands written in modes of historical fiction, sci-fi and contemporary realism. Doerr pulls it off in a very satisfying way that is not at all gimmicky, in just lovely prose.
  • Walter Jon Williams, Metropolitan. Nothing dates faster than visions of the future, but this 1995-vintage science fiction novel still seems fresh and strikingly contemporary: great technological power coexists with depressing social stagnation, its capabilities used mostly for bureaucracy and status-seeking.
  • James Kestrel, Five Decembers. An excellent historical mystery revolving around the bombing of Pearl Harbor, with vivid evocations of wartime Hawaii and Hong Kong.
  • Damon Galgut, In a Strange Room. A compact, concentrated novel about backpacking and missed connections. “He is intensely happy, which is possible for him when he is walking and alone.”

Previous lists: 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | 2013 | 2012

Acadian Books & Prints, New Orleans, Louisiana

by Andrew

The Jiang Zemin Consensus

Former Chinese leader Jiang Zemin, who died Wednesday at the age of 96, managed to be underestimated for most of his life, despite rising to exalted heights. He was not considered an inspiring figure when Deng Xiaoping plucked him from Shanghai to run the government after the 1989 purge, and in accounts of the pivotal economic reforms of the 1990s he is often overshadowed by the charismatic and decisive Zhu Rongji.

Yet looking back, it seems clear that Jiang was responsible for establishing many of the basic political and economic contours of contemporary China. The best short summary of his legacy I have seen came from historian Frank Dikötter, in an interview earlier in November; the whole thing is worth reading but here is the key excerpt:

I think that we have been fooled by very superficial impressions of a man who occasionally comes across as something of a buffoon. He likes to burst in song; he has a smattering of foreign languages; it’s rather easy to mock him. But this is a man who really has made all the key decisions.

However you look at it, it is very much Jiang Zemin who has shaped the China we know today: the giant flagship conglomerates; the grip that the party has on the private sector; the shift towards much greater support for state enterprises; the determined effort to ward off any attempts at so-called ‘peaceful evolution’ [i.e., toward democracy]. The list goes on. A remarkable man, if I may say so.

There are two biographies of Jiang, both of them making a good case that he should not be underestimated. Bruce Gilley’s Tiger on the Brink from 1998 offered an early assessment of Jiang’s tenure from a journalist who was on the ground in China for it, while Robert Kuhn’s hagiographic The Man Who Changed China from 2004 has more of the flavor of an authorized biography, valuable mostly for the interviews he scored with Party insiders.

In my own notes on the history of the 1990s, I’ve been tempted to call the political economy that emerged the Jiang Zemin Consensus. Deng usually gets the credit for restarting economic reforms in 1992 after the conservative turn in 1989, and it does seem that Jiang was initially slow to figure out what Deng wanted.

But once he did, Jiang was able to establish a much more consistent direction than the contentious back-and-forth of the 1980s. Jiang forged an enduring elite consensus on two fundamental issues in China: the relationship between politics and economics, and the relationship between the state and the private sector.

With his formulation that China is a “socialist market economy with Chinese characteristics,” he managed to finally end the long-running ideological debate within the Communist Party over whether market economics could be consistent with a socialist (or more precisely Leninist) political system. Today, almost everyone in China accepts that both market forces and state planning can be deployed to achieve particular goals.

And with his two-track reforms to state-owned enterprises, Jiang reset the balance between the state and private sectors. Thousands of small or underperforming SOEs, mostly belonging to local governments were closed or privatized, reducing the fiscal burden on the government and enlivening the private sector. But the remaining SOEs were consolidated into larger entities and received more direct government supervision and support.

That balancing of interest groups has also proved remarkably durable: in purely quantitative terms, the share of economic value-added generated by the state and private sectors has hardly changed at all since the mid-1990s (see my piece Some Facts About China’s State Capitalism).

For all of Xi Jinping’s power and ambition, he hasn’t yet altered the basic tenets of the Jiang Zemin Consensus.