The consensus on centralization

Dylan Levi King has a nice essay out in Palladium on the history of decentralization in China, opening with the assertion that “the most significant reform carried out in China after 1978 was one of systematic decentralization.” It is difficult to disagree with this. As the best China scholarship of the last few decades has made clear, local initiative played a central role in the country’s growth miracle–see for instance Jean Oi’s book on local state corporatism, or Xu Chenggang’s classic article on “regionally decentralized authoritarianism”.

Decentralization was one of Deng Xiaoping’s most important policies, but King’s piece is good on its pre-1978 history. Deng justified his experiments with reference to a principle that Mao articulated in a famous 1956 speech: “Our territory is so vast, our population is so large and the conditions are so complex that it is far better to have the initiative come from both the central and the local authorities than from one source alone.” Mao distrusted bureaucrats and central planning, and in fact economic planning in China of the 1950s and 1960s was error-prone and often incompetent. Mao instead celebrated bottom-up initiative and self-reliance, which were important themes of the alternative economic model he tried to implement in the Cultural Revolution. As a result the organizational structure of China’s state-owned enterprises became significantly more decentralized than in the Soviet Union and its European satellites.

Yet while Maoist decentralization was good at tearing down rational bureaucratic structures, it was bad at actually encouraging autonomy and local initiative. Local factories and agricultural communes may have been told they had authority to make their own decisions, but in reality they lived in an oppressive environment of repeated political campaigns in which the only safe thing to do was to parrot the slogan of the moment. Mao’s China rhetorically celebrated local self-reliance while harshly punishing political deviance–an incoherent combination. As a result local initiative remained a rhetorical trope rather than a concrete reality: there was for instance hardly any local economic specialization during the 1970s. After 1978, Deng made decentralization real by officially calling a halt to the endless rounds of political purges and telling cadres instead to focus on economic development.

The reason to review all this history now, of course, is that Xi Jinping seems to be pushing to revise this pattern of decentralization and implement more effective top-down control by the central government. King’s piece points out that “local experimentation has slowed” under Xi as he has formalized the legal boundaries of local government authority. (One recent example of this trend is how the National People’s Congress recently issued an authorization for local authorities to conduct trials of a property tax, a legal nicety that was not thought necessary when such trials were first launched in 2011.) Xi is also using the Party’s Central Commission for Discipline Inspection to investigate and punish not just corrupt officials but those who fail to carry out central instructions sufficiently expeditiously.

These are extremely important changes in China’s political economy that deserve attention. But the drive to recentralize authority in Beijing did not start with Xi: the reaction to the excesses and problems of decentralization had already begun while Deng was still alive. In the roughly two decades between Deng’s retreat from active decision-making and Xi’s ascent to the top job, the top leadership consistently pursued a centralizing agenda that sought to increase the share of administrative power and financial resources controlled by the central government. This trend began around 1993, shortly after Deng’s revival of market reforms in his 1992 southern tour. According to an account by Pieter Bottelier, the idea of re-centralization crystallized at a conference held in Dalian in June 1993 with participation from World Bank and Chinese officials:

The conference marked a turning point in the national debate on two major issues: (a) the appropriate degree of economic centralization for China and (b) the management of aggregate demand in China’s semi-reformed economy. Many reports on China’s reforms since 1978 rightly emphasize the importance and benefits of economic decentralization. Few focused on the partial re-centralization of 1993/94 which followed the Dalian conference.

In the early 1990s some central government leaders began to think that China’s irregular, stop-go pattern economic performance of the 1980s – with spikes of high investment and high inflation – was due to excessive administrative decentralization. By delegating fiscal and financial powers to lower-level governments, while at the same time transferring ownership of most state-owned enterprises to those governments, Deng Xiaoping had been very successful in stimulating growth, as was his intention. But the system had also led to a loss of control by the central government over investment planning by lower level governments and local financing. …To correct this problem, a partial re-centralization of administrative controls was thought to be needed, but it was recognized that this would be politically very unpopular in the provinces.

The debates at the conference were followed by a package of fiscal reforms that reversed the sharp decline in the central government’s share of tax revenue and gave it more authority to redistribute resources around the country. The debate over fiscal decentralization in the mid-1990s tied into the increasing discussion of widening regional inequalities; influential scholars argued for more vigorous central government action to spread the benefits of prosperity more widely. That line of thinking ultimately resulted in the launch of the Great Western Development program under Jiang Zemin, which was only the first in a wide range of regional aid policies that have been successively rolled out by the central government.

Since then, the argument over centralization has moved onto different issues but the general drift often remains the same. In 2007, when I was working at The Wall Street Journal, I wrote a piece about the Hu Jintao administration’s attempts to reassert central authority over local governments, focusing mainly on regulatory issues and real estate rather than tax revenue. Re-reading that piece now, it’s striking how essentially all the talking heads I interviewed saw this as a good and necessary thing: re-centralization was endorsed as the correct technocratic move, just as it was in the 1990s.

This consistency over three different decades suggests a long-standing elite consensus on the need for the central government to re-centralize authority and manage the country in a consistent and considered fashion. Hu attempted to act on that consensus, but his attempts to claw back more authority for the central government did not get that far. The ultimate reason for this is probably that Hu was never able to consolidate his own political power and centralize authority in his person, in part because Jiang Zemin kept hanging around to prevent it. Xi, of course, has consolidated political power with extraordinary efficacy, which means that his efforts at re-centralization are likely to more effective. He has also been able to take advantage of the US-China trade war and Covid-19 pandemic to create an atmosphere of national emergency. As the economic historian Charles Kindleberger once observed, societies are more amenable to centralization of authority during times of crisis.

Nonetheless I suspect that, given the elite consensus on centralization, any other moderately competent Chinese politician would be trying to do something similar in Xi’s place (though perhaps using different methods). China’s real-estate boom has acted as a powerful centrifugal force in the economy over the years, increasing the resources under the control or influence of local governments. As a result, more than two decades after Zhu Rongji’s fiscal reforms, China remains a highly fiscally decentralized nation. It’s worth pointing out, as the chart above shows, that the central government’s share of total government revenues, once local land sales are included, is now as low as it was during the fiscal emergency of the early 1990s. Xi’s efforts to discipline property developers and stamp out housing speculation, which are currently causing great financial stress, can thus be seen as part of this long-running struggle against the fissiparous tendencies in the Chinese economy.

Mobilization and modules: what’s changing in China

A very simple way to think about what changed in China in 1978 is that the Communist Party changed its main goal from pursuing class struggle to pursuing economic development. This interpretation is so simple that it is almost not an interpretation at all: it is exactly what Communist Party leaders said they were doing. The first line of the communique from the third plenary session of the 11th Central Committee issued on December 29, 1978 is:

The plenary session unanimously endorsed the policy decision put forward by Comrade Hua Guofeng on behalf of the Political Bureau of the Central Committee on shifting the emphasis of our Party’s work and the attention of the people of the whole country to socialist modernization.

A lot of the Western misunderstandings of China since then are, I think, due to misinterpreting what the decision to pursue economic development actually meant. It did not mean that China had abandoned socialism and was going to transition to a Western-style market economy and political system (even though some people in China did want that). It did not mean that Marxist-Leninist ideology had become the mere repetition of empty slogans to cover the pursuit of capitalist self-interest (even though that was true for a fair number of people in China).

What the Party leadership meant was no more and no less than what they said: that the edifice of the Communist Party would turn its power and attention to the pursuit of economic development and away from the internal political struggles that had consumed it for the previous decade. The fundamental political system of China was not changing, but the aims it pursued were.

The implications of this are easier to appreciate if we understand the properly the nature of the Chinese Communist Party, and of Marxist-Leninist parties more generally. They have little to do with the political parties of Western democratic countries. In his recent book, Joseph Fewsmith summarized the essential characteristics: a Leninist party is a “hierarchal, mobilizational, task-oriented party that relies on cadres.”

The Communist Party is not a voluntary association of like-minded individuals, but a strict hierarchical organization in which cadres observe quasi-military discipline in obeying superiors. The way that organization rules the country is not by supplying leaders for a rationally organized and politically neutral bureaucracy for administering laws and regulations. Rather the Party itself interpenetrates the entire bureaucracy, and is oriented to mobilizing cadres to achieve political tasks and developmental goals. Those tasks and goals are decided by the Party leadership, and then the cadres mobilize all of society to achieve them.

I increasingly feel that this concept of mobilization is essential to understanding the nature of China’s political system. The Communist Party cannot just sit there and enforce the laws and deliver public services (if it were to do so, it would not be a Leninist party anymore). It must always be doing something. It has to mobilize toward some goal, be on some political campaign. And the people, or person, at the top of the Party get to decide what that goal is. If you like, they can swap out different modules in the mobilization machine.

Chinese history demonstrates the power of the mobilization machine for good and for ill: the Mao module of class struggle ripped society apart as neighbor denounced neighbor, while the Deng module of economic development supercharged growth as every village and town got into business. Many scholars have written about the unique nature of the “high-pressure system” or “high-powered incentives” that drove officials in localities across China to pursue economic growth, and the “campaign-style” enforcement often used to deliver policy priorities. Those are just different names for this mobilization machine.

Some important aspects of the nature of this mobilization regime are captured by Chalmers Johnson’s description of developmental states across Asia (Leninist parties are good at mobilization, but other political structures can do it too). The below is from his 1999 essay, “The Developmental State: Odyssey of a Concept”:

The source of authority in the developmental state is not one of Weber’s “holy trinity” of traditional, rational-legal, and charismatic sources of authority. It is rather, revolutionary authority: the authority of a people committed to the transformation of their social, political, or economic order. Legitimation occurs from the state’s achievements, not from the way it came to power. Such legitimacy based on projects or goals is, of course, fragile in that it normally cannot withstand failure. Equally serious, it cannot adjust to victory and the loss of mission. The legitimacy of the leaders of a developmental state is like that of field commanders in a major military engagement. It comes from people working together, and it probably cannot long survive either defeat or victory. This problem is an abiding source of instability in such regimes, one that often leads to severe crises, such as after Japan’s defeat in World War II or the Korean revolution of 1987.

These observations I think give us the right conceptual tools to understand just what Xi Jinping is up to–the central preoccupation of China watchers for a decade now, and an increasingly urgent one as his interventions get bolder. Xi is, I think, trying to preserve China’s Leninist system from the threat of both defeat and victory.

Mobilizing for economic growth created obvious risks. On many occasions over the past four decades, there have been real worries that the unrestricted pursuit of growth would unbalance the economy (and/or financial system) so much that a crash would result that would irreparably discredit the Communist Party. The risk of victory is more subtle: that the pursuit of higher national income is so successful that diminishing marginal utility sets in. People stop being so motivated by pursuing higher incomes, and are more focused on preserving what they have (what William Overholt has called a “crisis of success“). This gradually erodes the Party’s ability to successfully mobilize society.

Both of these worries are clearly visible in Xi’s various policy priorities: his rather surprising support for conservative monetary and fiscal policies oriented at reducing future risks, and his focus on the quality-of-life issues that are of increasing concern to the middle classes, like pollution and education. But Xi is doing more than just maintenance to keep the current mobilization campaign running a while longer (that was more Hu Jintao’s strategy). He is proposing a new national project, whose pursuit is intended to unify the people and bolster the continued legitimacy of the Communist Party.

A very simple way of thinking about what is changing in China under Xi is that he is in the process of swapping out the module in the mobilization machine. It is no longer economic growth, but something else. Again, this is hardly requires any interpretation at all, it is exactly what he has said in so many words. The theme of his speech to the Party Congress of 2017 was that the “principal contradiction” that the Party needs to deal with had changed: it was no longer satisfying people’s “basic needs” for material progress, but satisfying a broader set of political and cultural needs. Instead of the pursuit of economic development, Xi is proposing a more complex and explicitly political objective–“national rejuvenation” or making China a “great modern socialist nation.” I usually just call it “the pursuit of national greatness.”

Xi proposed this transition at the start of his second term in 2017, although in such general terms that it was hard to make out exactly where he was heading. And perhaps he did not yet know himself. In hindsight, the period from 2017 to 2022 now looks like a transitional one, where Xi pursued the traditional agenda of economic development in parallel with some new mobilizational campaigns. The “three critical battles” launched in 2018–against financial risk, poverty and pollution–were the most prominent example. The “regulatory storm” of the past several months looks is probably best understood as another such campaign. The big difficulty that officials are having in carrying out these campaigns is in figuring out exactly how they should be balanced against the old goal of economic growth.

In part this is because the exact content of Xi’s new module for the mobilization machine is not totally clear, and probably still being defined. As Jude Blanchette and others have observed, the recent ramping up of new slogans such as “common prosperity” looks like preparation for an agenda that will be presented in full at the Party Congress in 2022. That is when Xi is expected to start a third term, which is enough of a departure from recent political norms that it needs to be justified with a suitably grand set of goals. The scale of Xi’s ambition has long been clear: he wants to be the peer of Mao and Deng. And that means setting the fundamental direction for the Party and the nation in the same way they did.

Some facts about China’s state capitalism

That is the title of my contribution to a new book published by the Center for Strategic & International Studies entitled Chinese State Capitalism: Diagnosis and Prognosis. The book is the fruit of a very interesting workshop held back in February, organized by the estimable Jude Blanchette and Scott Kennedy. That event was one of the more interesting intellectual exchanges I’ve had in a while and it was a great opportunity to learn from some of the best people working on China today.

What I’ve tried to do in this short piece is very simple: just identify some basic empirical facts and established regularities about China’s economic system, based on my own findings and the insights of the other contributors. Our workshop started off as a discussion of “state capitalism,” which is probably as good of a shorthand description of that system as we’re going to get in the English language. Personally I think you can still make a case for calling China “socialist,” or perhaps “Leninist,” and some folks have recently made a good argument for preferring “Party-state capitalism” to account for the direction it has evolved under Xi.

But ultimately the label is less important than getting closer to a common understanding of the reality–even if Scott, in his conclusion to the book, feels that we have not yet managed to achieve that. Read it and decide for yourself.

Industrial policy, but for the whole society

What is the Chinese government up to? For several months the headlines have been dominated by what the papers call the “regulatory storm” or “regulatory crackdown,” whose targets have ranged from internet companies to real-estate developers to after-school tutors to steel companies. Interpretations of this wave of government activism have ranged from the benign (China’s government is just doing what Western governments wish they could) to the dire (Xi Jinping is bringing back socialism).

At a recent talk at Stanford, the always-insightful Barry Naughton made an attempt to synthesize and explain what’s been going on, arguing that we’re seeing “the consolidation of a new model, in which the Chinese government decisively steers a predominantly market economy.” I found the talk very useful, and took notes on some of the key points; here they are:

The vocabulary where people refer to these actions as regulatory actions I think is a little bit misleading. It creates the impression that there is some underlying static well-regulated market equilibrium. Some people explicitly say that although the initial application of these regulations may have been clumsy, may have caused some losses, that’s just the necessary cost of changing course and once the course is established markets will settle down to this new better-regulated mode. I think that’s a very wrong set of expectations. What we’re going to see from these changes is an increasingly aggressive effort by the Chinese government to shape the way the economy is developing.

What I want to do is pull back and look at the macro picture. That also means thinking of it not as a static adjustment from one set of regulations to another, but rather as an inherently dynamic process in which the government has taken lessons that it thinks it has learned from trying to foster high-tech development in China, and applies them to a broader canvas where it tries to paint the destiny of the Chinese people in increasingly vivid and assertive coloration.

This is something that admittedly draws on my own earlier work. Maybe my view is overly shaped by the fact that I was looking at Chinese industrial policy anyway, so it’s natural for me to see these recent policies as a deepening and expansion of industrial policy. Let me confess to that potential bias. But having confessed to that bias, I think it’s a good starting point for looking at what we see today.

China has been running a very interventionist and increasingly powerful industrial policy. It really gets going around 2009-10, when China articulates a vision of the strategic emerging industries. … While governments in the US and Europe kind of look at these technological changes and think maybe we should do something about it, China is already all in, it’s driving forward a set of changes based on this high technology orientation. …

My central assertions are that from an economic standpoint what really changed in the summer of 2021 was two things. First, that the policy objectives that the Chinese government was pushing for proliferated enormously. This portfolio of things that the government is pushing for really extended so quickly into so many new areas that I think most people were in shock. Probably the most dramatic of these is that the government seems to be displaying something near panic on falling birthrates even though we have known for 25 years what the trend of the Chinese birthrate was going to be. Instead of pursuing one or two simply defined objectives, namely new growth drivers and high-tech development, now all of a sudden China has a portfolio of six or eight or ten:

1. Data security and control

2. De-risk and enhance control of the financial risk

3. Raise the birth rate by reducing the burden on families

4. Rebuild new decentralized cities, while keeping housing prices low

5. Reduce carbon emissions, pollution and global warming

6. Common Prosperity

The even more surprising thing is the second one: which is that as these objectives have proliferated, the instruments deployed to achieve them have not been able to catch up. We see the widespread recourse to a bunch of actions and instruments that are no longer conforming to the requirements of smooth market development. This has created substantial immediate costs for Chinese citizens, and I argue that it creates substantial medium-run costs for the Chinese growth process. There are may built-in conflicts between the different objectives and the different instruments, and the way those instruments are deployed, suddenly, sometimes excessively, and in many cases without consideration for what their implications will be in other areas.

There’s a couple points implied by this “industrial policy for everything” concept that I think are worth drawing out more. First, this increased government intervention is oriented to the future, not the past. It is aimed at achieving aspirational goals for the development of Chinese society, not returning to an imagined past utopia. Second, it is driven by sweeping political objectives that cut across economic sectors, rather than a “target list” of industries that need to have tighter regulation. These are my preliminary conclusions anyway — no doubt the Chinese government will give us plenty more to figure out in coming months.

UPDATE: A full video of Naughton’s lecture has been posted here; it’s worth your time.

Contributing to common prosperity is compulsory

Xi Jinping’s slogan of “common prosperity” has finally gotten the attention of financial markets and foreign media, after he devoted most of the last meeting of the Central Committee for Financial and Economic Affairs to discussing the new campaign against inequality. There is little in the text of the readout from the meeting to explain this increased attention: the slogan remains mostly at the level of general rhetoric, and the discussion has not gotten much more concrete since its initial mentions.

What has changed in the context in which people are viewing Xi’s political priorities: the months-long slide in the stock prices of Chinese internet companies as they face a regulatory crackdown, and the effective outlawing of the for-profit tutoring industry, has clearly demonstrated that rhetoric can indeed have large effects. The question is what kind of real actions this new slogan produces.

The high political priority of “common prosperity” has been clear since the beginning of 2021: it was institutionalized in the five-year plan, and Xi highlighted it in a major speech in January (official English translation).

Realizing common prosperity is more than an economic goal. It is a major political issue that bears on our Party’s governance foundation. We cannot allow the gap between the rich and the poor to continue growing—for the poor to keep getting poorer while the rich continue growing richer. We cannot permit the wealth gap to become an unbridgeable gulf.

Implementing that political priority is still a work in progress: the promised “action plan” on common prosperity has not yet been released, probably because officials are still trying to figure out what will go in it. The textbook methods for addressing income and wealth inequality are through fiscal policy: greater taxation of high incomes (and/or wealth) and more transfers to households with low incomes. These methods did get a mention in the CCFEA meeting, which repeated calls for “equalizing” public services (meaning between lower- and higher-income regions), and improving systems for old-age pensions, healthcare, welfare and public housing.

There is some change at the margin visible already, as the central government de-emphasizes local infrastructure spending in favor of social transfers. And there seems to be new momentum for the most common form of wealth tax, a tax on the value of residential property: after years of delays, Chinese scholars now expect local trials of the property tax to be rolled out later this year.

But as I documented in a previous post, the conservative Ministry of Finance has signaled that it is not seeking a major expansion of tax revenue, still plans to cut taxes on some businesses, and will try to contain the costs of public welfare programs. So far, it does not sound like “common prosperity” is going to produce a radical increase in taxation or redistribution, and the CCFEA meeting explicitly stated the slogan is not about “uniform egalitarianism” (a reference to Mao-era policies).

Yet it’s clear the slogan of common prosperity has a broad reach that extends well beyond the usual areas of technical economic policy. In this context, officials have repeatedly invoked the “tertiary distribution” of income, a previously obscure technical term for private charities (the primary distribution of income is the income households earn themselves, while the secondary distribution refers to the effect of taxes and transfers). The CCFEA meeting again mentioned the tertiary distribution, and emphasized it further with a call to “encourage high-income groups and corporations to give back more to society.”

From any other government, saying “we are going to rely on private charities to solve the problem of inequality” would be an obvious abdication of responsibility and a clear signal that the government will not do much. That is not what it means in China’s case. In part this is because China’s system does not establish clear boundaries between matters of public and private involvement. Nothing is off limits to the government since the state is legitimately concerned with all aspects of society and national development.

But it is also because, as Joseph Fewsmith’s important new book reminds us, China’s government is not a Weberian system in which politically neutral bureaucrats implement rules, but a Leninist structure in which cadres are mobilized to achieve political tasks. If the political task is to increase charitable donations, then officials will ensure that charitable donations do indeed increase, using whatever means are at their disposal.

Those able to read the political signals are already trying to get ahead of the game. According to a count by Fortune, “In the past eight months, five of China’s richest and most high-profile tech billionaires have pledged at least $13 billion of their personal or corporate fortunes to charitable foundations and initiatives.” The day after the CCFEA meeting, Tencent announced it would spend 50 billion renminbi to help promote common prosperity, building on a similar pledge in April. More companies are certain to follow this example of what we might call “corporate social responsibility with Chinese characteristics.”

Given the institutional inertia and technical difficulties surrounding tax and welfare policy, the risk is that the common prosperity campaign ends up relying on political pressure and the use of arbitrary administrative interventions instead. One can easily imagine, for instance, a crackdown on tax evasion by wealthy individuals and corporations succeeding the current focus on internet regulation. It’s no wonder that, after the events of the last few months, financial markets are acting a bit nervous about this latest campaign.

Charts from World Bank China Economic Update June 2021

Vogel vs. Soros on Xi vs. Deng

Two new articles out this week provide an interesting counterpoint on how Xi Jinping, China’s current top leader, compares to his predecessor Deng Xiaoping, the “paramount leader” of the 1980s and 1990s. The first is an op-ed in The Wall Street Journal by George Soros, the investor and philanthropist, and the second is a posthumous article by Ezra Vogel, the eminent scholar of Asia who passed away last year, entitled “The Leadership of Xi Jinping: A Dengist Perspective.” It is probably his last piece.

Vogel and Soros happen to have been born in the same year (1930), so they belong to the same generation of China-watchers, although of course their backgrounds are quite different. And so are their conclusions. Soros argues that Xi is reversing many of Deng’s reforms, and indeed is trying to overturn his legacy. Here’s a key passage:

Mr. Xi came to power in 2013, but he was the beneficiary of the bold reform agenda of his predecessor Deng Xiaoping, who had a very different concept of China’s place in the world. Deng realized that the West was much more developed and China had much to learn from it. Far from being diametrically opposed to the Western-dominated global system, Deng wanted China to rise within it. His approach worked wonders.

Mr. Xi failed to understand how Deng achieved his success. He took it as a given and exploited it, but he harbored an intense personal resentment against Deng. He held Deng Xiaoping responsible for not honoring his father, Xi Zhongxun, and for removing the elder Xi from the Politburo in 1962. As a result, Xi Jinping grew up in the countryside in very difficult circumstances. He didn’t receive a proper education, never went abroad, and never learned a foreign language.

Xi Jinping devoted his life to undoing Deng’s influence on the development of China. His personal animosity toward Deng has played a large part in this, but other factors are equally important. He is intensely nationalistic and he wants China to become the dominant power in the world.

There are some issues with this argument. Joseph Torigian, who is very well informed on the history of Chinese elite politics, has explained why it is not quite right to blame Deng for the elder Xi’s political purge in 1962. In the late 1970s, Xi Zhongxun played a pivotal role in the creation of the special economic zones in the late 1970s, a move for which Deng probably took more of the credit than he deserved. But both Deng and Xi Zhongxun were committed to the project of reform and opening, and the elder Xi’s greatest legacy is his contribution to that project. It makes no sense to argue that Xi Jinping is trying to undo Deng’s reforms because of resentment over his father’s treatment.

Moving away from armchair psychologizing to documented public statements, it’s clear that Xi Jinping has consistently presented himself as Deng’s heir. He wants to be the ruler who is realizing the aspirational goals that Deng set for China decades ago. This is obvious both in the focus on achieving “moderate prosperity” in Xi’s first term, and in the more recent campaign of “common prosperity.”

That term is an explicit reference to Deng, as all Chinese would understand. When Deng famously endorsed inequality in the 1980s by saying “We should let some people and some regions get rich first,” he justified that by insisting it was “for the purpose of achieving common prosperity faster.” By talking about common prosperity now, Xi is saying the time has come to deliver on what Deng had always wanted. Overall, my view has always been that Xi Jinping is a giant Deng Xiaoping fanboy: what’s remarkable is not his rejection of Deng but how often and how explicitly he has linked his own actions to Deng’s.

It’s true that on foreign policy Xi’s more aggressive approach is obviously quite different from Deng’s low-key one. But Deng was making hard-headed decisions based on his intimate knowledge of China’s very weak domestic and international position after the Cultural Revolution. It would be a mistake for Western commentators to interpret that tactic as some kind of principled acceptance of China’s subordinate role in a US-based world order.

In reality, Deng Xiaoping was an outstanding Chinese nationalist, and if he had presided over a China that was as strong as Xi’s he would probably have made quite different decisions. On this question my view is closer to Vogel’s: China is acting differently in the world today because China is different, not just because someone different is in charge. Here’s a bit from his piece:

Because of the changes introduced by Deng, Xi Jinping inherited a China that was far stronger than China during Deng’s era. Deng’s approach for dealing with foreign relations, ‘taoguang yanghui, juebu dangtou, yousuo zuowei’ (avoid the limelight, never take the lead, and try to accomplish something” was well-known. In the 1980s, Deng held back on increasing military expenditures in order first to build up an economic base. After 1995, the Chinese began to increase military expenditures even more rapidly than the economy was growing. Thus by the time that Xi Jiping came to power, since China had much greater economic and military power than during the period of Deng’s rule, he could take a much stronger stand in dealing with foreign countries.

Vogel’s piece also has some interesting comments on the differences in the management styles of Xi and Deng. While Xi is a famous micro-manager, taking personal charge of policymaking on every important issue, Deng was happy to let his subordinates make decisions most of the time. Vogel attributes this to Xi’s insecurity and lack of experience in central government before he took over, a big contrast to Deng’s decades of service.

Xi is also more focused than Deng was on exerting control over localities and their officials, but again Vogel sees this as a difference of circumstances more than personalities:

In the early years of Deng’s rule, when the economy was much smaller, local Chinese governments depended on allocations from the central government and the size of the resources they were forced to forward to the central government. There were no sizeable pockets of local wealth that allowed local areas and local enterprises to carry on activities apart from the national budget.

During the decades under the leadership of Jiang Zemin and Hu Jintao, businesses and local governments acquired resources that enabled them to initiate activities on their own. When Xi Jinping became the pre-eminent leader in 2013 Party officials gave him the power to clamp down on corruption. Popular support for clamping down on corruption was also very strong. But from the perspective of Beijing, the problem was broader than corruption. It was the problem of keeping control over local areas and successful enterprises.

China in the 2020s is not France in the 1960s

That sentence seems obvious enough that I would not need to write it. But there does seem to be a strain of thought out there that sees China’s economic system, with its high levels of state ownership and extensive planning, as basically the same thing as the mixed economies that Western Europe had in the immediate postwar decades, which featured more state ownership and planning than after the 1980s. In this view, China today confronts the Western economies not with a completely foreign economic system, but with an image from their own past, a reminder that they have drifted too far in a market fundamentalist direction. The most prominent proponent of this line is probably Thomas Piketty; his recent commentary on China includes this passage:

On the economic and financial level, the Chinese state has considerable assets, much greater than its debts, which gives it the means for an ambitious policy, both domestically and internationally, especially regarding investments in infrastructure and in the energy transition. The public authorities currently hold 30% of everything there is to own in China (10% of real estate, 50% of companies), which corresponds to a mixed economy structure that is in many ways comparable to that found in the West during the period of prosperity 1950-1980 (known in France as the ‘trente glorieuses’). Conversely, it is striking to note the extent to which the main Western states all find themselves in the early 2020s with almost zero or negative patrimonial positions. 

Piketty’s comparison is based on empirical data: the estimates he made, in a joint paper with Li Yang and Gabriel Zucman, of the extent of government ownership of assets in China. He finds that China’s recent level of 30% is similar to the 15-25% that prevailed in Western countries in the 1970s. So if you squint at his chart, the line for China today does get close to the lines for Britain and Germany in 1978.

The good thing about data is that they can challenge your intuitions. Still, the claim that an authoritarian state that spent decades under socialism has basically the same political-economic structure as that of the postwar European democracies is not the world’s most obviously plausible argument. And looking at different data indeed tells a different story.

When I’ve tried to grapple quantitatively with the question of the role of the state in China’s economy, I’ve focused on state-owned enterprises, whose large role is one of the most obviously distinctive features of China’s system. China’s own official data on state-owned enterprises imply that they have generated value-added equivalent to around 25-30% of GDP in recent years. (If you don’t believe my numbers, there is a World Bank paper that comes to basically the same conclusion using different methods). Conceptually, these figures represent the flows of income generated by the stock of assets counted by Piketty.

We can compare these numbers to historical figures for European and other economies thanks to an IMF research project from 1984 published as the the book Public Enterprises In Mixed Economies. According to these estimates, state-owned enterprises accounted for 12-13% of GDP in France in the 1960s, 10% of GDP in Germany in the 1970s, 7% of GDP of Italy in the 1970s, and 10% of GDP in the UK in the 1960s and 1970s. After the privatization wave of the 1980s, state-owned enterprises in the UK accounted for about 2-3% of GDP, according to the 1995 World Bank study Bureaucrats in Business (it did not have more recent estimates for continental Europe). In the US and Japan, state-owned enterprises have historically been about 1% of GDP.

The state-owned enterprise sector in China today, therefore, is actually two to three times larger relative to the economy than it ever was in continental European economies. And China’s state enterprise sector is 10-15 times larger than the now quite minimal state sectors in the English-speaking economies. Those are big differences! It seems clear that China’s socialist market economy is quantitatively and qualitatively different than the mixed economies of the postwar European social democracies, as indeed we should expect given their quite different political foundations. When these economies engage with China, they are not engaging with a version of their past selves but with a quite different kind of entity. I think these differences make China more interesting and worth understanding than if it were just retreading the past trajectory of Western Europe.

It is true that the European economies had sustained fast growth in the postwar decades, which invites comparison to the sustained fast growth of China in more recent decades. But in both cases I would point to the magic of catch-up growth and trade liberalization as the most obvious drivers (on this, see Brank Milanovic’s interesting comments on the misplaced nostalgia for Europe’s postwar years). Europe in 1945 and China in 1978 both had quite backward capital stocks that could be rapidly expanded and modernized, as well as relatively high levels of human capital that could be productively deployed once war and political turmoil were over. And in both cases increased participation in global trade, through the European Community/European Union or GATT/WTO, could further accelerate specialization and technological progress.

Food security and structural transformation

There is a new working paper out from the Bank of Japan, written by four authors from its international department, considering the prospects for China’s productivity growth over the long term. It’s pretty interesting and not just the usual stuff. One of the novel aspects is its analysis of food security. While that’s not a traditional topic for a productivity analysis, the logic is pretty straightforward.

Part of the growth in China’s labor productivity is coming not just from improving the productivity of specific industries, but from the shift of workers across industries (since China’s workforce stopped growing about a decade ago, labor productivity growth accounts for virtually all of its GDP growth: GDP growth = growth in output per worker + growth in number of workers). The structural transformation of the economy–moving workers from sectors where they produce less value-added, like agriculture, to those where they produce more value-added, like manufacturing–is one of the fundamental motors of economic development.

The authors estimate that out of China’s 10.7% average annual productivity growth from 2006-10, moving workers across sectors accounted for about 2 percentage points, and about 1.5 percentage points of the 7.6% growth from 2011-15 (these numbers are not given in the text, so I estimated them from a chart; apologies for any inaccuracy). But the reallocation of labor across sectors contributed less than 0.5 percentage points of the 6.9% growth over 2016-19, so a slowdown in structural change does seem to a factor in China’s overall growth slowdown.

The authors suggest that if the government’s concerns for food security lead it to try to keep workers in agriculture, that could impede structural transformation and therefore slow growth. They model a future growth trajectory for China that suggests that if its industries continue on the same path of productivity convergence and structural change as Japan, South Korea, Taiwan and Singapore, it can grow by an average of about 4.8% until 2035. But that trajectory of structural transformation would mean a continued sharp decline in the agricultural share of employment, and thus (since labor productivity growth in agriculture is slow) in agricultural output. So a continued rapid pace of structural transformation may not be compatible with food security. Here’s the relevant passage from the paper and the supporting charts:

The first issue concerns the balance between food security on the one hand and the shift of labor from agriculture to other industries on the other. In China, agriculture at present accounts for a larger share of GDP than in the East Asian 4 when they were at a similar per capita GDP level, reflecting the Chinese government’s policy of achieving a rate of food self-sufficiency of 95% or higher. However, in the baseline estimate, the employment share of agriculture and the share of agriculture in GDP will decrease significantly in the future due to a combination of the movement of labor across sectors and the effects of the aging of the population. As a result, real output in agriculture would drop to less than 40% of the current level, which means that China would have to effectively abandon food self-sufficiency.

However, in practice, it is unlikely that the Chinese government will tolerate such a change in industrial structure from the perspective of food security. Therefore, to consider a more realistic path, we assume that the shift of labor from agriculture will be limited to an extent that maintains the current level of real output in agriculture. In this case, GDP in 2035 would be about 10% lower than in the baseline estimate and only 1.87 times the current level.

It is possible to quibble with some of the details in this analysis. The Chinese government does not actually have a target of 95% self-sufficiency in all food supply. In the past, there had been an official target of 95% self-sufficiency of staple crops (liangshi 粮食, which is usually translated as grain but also includes beans and tubers). But this was difficult to enforce, and in practice large imports of soybeans have been tolerated. Xi Jinping proposed adjusting this policy early in his tenure to have a more realistic target (see my previous post from 2015 on the food security policy debate).

The white paper on food security published in 2019 mentions 95% self-sufficiency in cereals (rice, wheat, corn), but as an achievement rather than a strict target. The white paper does articulate an overall goal of self-sufficiency–“China makes sure it relies on itself for food supply”–but this is not given a strict quantitative definition, which allows the government flexibility (see this analysis from the excellent Dim Sums blog on Chinese agriculture). The government’s actual goal is probably to maintain certain levels of output of staple grains rather than to limit all food imports. It’s likely that could be accomplished even as the shares of agricultural employment and value-added continue to decline.

Nonetheless, I think the paper’s point that official food security concerns can act as a brake on structural change is correct. China’s actual agricultural policy has been fairly conservative, in the literal sense of trying to conserve an existing order. The trade war with the US reinforced the risks of relying on imported food, and Xi urged more focus on domestic production. While there may not be hard target on the acceptable level of food imports, there is a general push to maintain a large population of agricultural workers and slow rather than accelerate their shift into other sectors. Xi’s government for instance is encouraging rural residents who migrated to the cities for nonagricultural work to return to rural villages. The government has been clear that it wants to preserve the collective system of rural land ownership, which prevents farmers from being dispossessed of their land but also limits their freedom to leave it (for more on this point, see this Dim Sums post from March).

The paper is entitled “China’s Long-Term Growth Potential: Can Productivity Convergence Be Sustained?” and is worth a read.

Xi Jinping on a September 2018 tour of Heilongjiang province

The deep roots of China’s financial conservatism

A growing theme in China’s recent policy rhetoric is the forceful contrast between economic policymaking in China and “the West,” particularly the US. Not just in the old-school “our socialism is better than your capitalism” way, though there is some of that, but more in the vein of: “we do orthodox fiscal and monetary policymaking better than you do.” Central bank governor Yi Gang wrote an impressive article in 2019 in which he laid out China’s determination to avoid zero interest rates, quantitative easing, and all the rest of it. A more recent example of the genre was a speech this month by Guo Shuqing, China’s top financial regulator; here’s a couple of samples from the official English translation:

When fiscal spending has been largely supported by money printing, it is like an airplane getting stuck in a spinning vortex: it would be very hard for the airplane to get out easily on its own. Before 2008, the Fed balance sheet was less than about US$800 billion, but it has now expanded to almost $8 trillion. Meanwhile, the ratio of the US federal debt to its GDP has surged to a record high since the World War II. …

China didn’t flood the market with liquidity while strengthening its macro policy responses. Some countries criticize that China failed to implement adequate policy responses and make sufficient contribution to global economic recovery, which is evidently a bias or misconception. In fact, China has made quite strong policy efforts.

What I’ve only recently started to appreciate is just how deep the historical roots of this kind of thinking are in China. During the civil war between the Communists and the Nationalists, each side issued its own currency in areas they controlled, so there was competition between the different monetary and fiscal regimes. The Nationalists lost that battle: their money printing to finance fiscal obligations led to dramatic hyperinflation in the mid-1940s, with triple-digit increases in the money supply and price indexes (see for instance the 1954 article “Hyperinflation in China“). After the Communist victory in the war, one of the new government’s first great accomplishments was to stabilize the currency and end hyperinflation.

That seems to have been a formative experience for many of China’s economic thinkers. Even a couple of decades later, they were still touting the benefits of a stable currency and low government debt to Western visitors. There’s an interesting anecdote to this effect in John Kenneth Galbraith’s A China Passage, his diary of a 1972 visit to China in the company of Wassily Leontief and James Tobin (I did not know about this book before but recently stumbled across a copy at my favorite bookstore in Philadelphia). Here’s the relevant passage:

The government has no external or internal debt–a loan from the Soviets negotiated at the time of the Korean war was paid off ahead of schedule in 1968. The budget operates with a slight surplus. In our discussions in Peking information on Chinese finances was provided with great precision and competence by a member of the Institute of Economics of the Academy of Sciences. She notes that “The Chinese currency is one of the most stable in the world. In contrast with some capitalist countries, no borrowing, no inflation, no devaluation.” Being, like all our hosts, impeccably polite, she did not specify the capitalist country.

One of the more engaging moments of the visit was when James Tobin, who with Walter Heller was one of the men who made the New Economics legitimate under President Kennedy, undertook to explain in response to a question why it was often good for the United States to have a budget deficit and increase its debt. He might have had it easier with Andrew Mellon.

There seems to be a pretty direct line from Galbraith’s unnamed Chinese interlocutor in 1972 and the defiantly conservative posturing of today’s top economic policymakers. With the commemorations of the 100th anniversary of the Party’s founding in full swing, there’s even more attention than usual to this history. The Economic Daily newspaper has been running a series of articles on the Party’s pre-1949 economic policies: one focuses on Chen Yun’s success in containing inflation in 1943-44, while another highlights Xue Muqiao’s achievements in stabilizing currency in 1940-41. The message from such historical arcana is pretty straightforward: the Party’s track record of steady economic management goes back a very long way.

Skeptics will be quick to point out that this kind of rhetoric is a bit incongruous coming from the country that, in the decade after the 2008 global financial crisis, engaged in one of the largest and most expansions of debt in economic history. Yet the effects of the old conservative line of thinking were visible even then. Because the Ministry of Finance was obsessed with keeping its own debt and deficit metrics under control, it ended up tolerating excessive borrowing by local governments and SOEs.

A couple of further comments on the Galbraith book: I wish it had had more of the kind of anecdotes I quoted above. On the whole it is not very insightful: he is too obviously and easily swayed by the fact that his Chinese hosts fed him well and put him in nice accommodations. He modestly announces his lack of China expertise at the opening, but does nothing to compensate for how those gaps in his knowledge kept him from understanding the context of what he was seeing (a problem that is blindingly obvious now but was clear even to other contemporary non-specialists; see for instance Martin Bernal’s 1973 review). As a result, me makes some fairly cringeworthy comments.

China census reveals the true scale of the Northeast’s decline

China’s northeastern rust belt, dominated by state industry and comparatively isolated from global trade, has been in relative economic decline for decades. Hardly any younger friends who had grown up in the Northeast still lived there. But a few years ago, after the industrial recession of 2014-15, a lot of anecdotal information suggested that decline had entered a new and more aggressive phase.

Stories about empty neighborhoods and abandoned schools were more widespread. Local journalists documented shrinking cities throughout the Northeast. Some cities indeed reported declining population numbers, but others just stopped publishing population figures altogether. I wrote a blog post entitled “China’s Northeastern Rust Belt is headed for demographic crisis” in 2016. Yet the official population figures from those years did not really show a crisis: the population of the three Northeastern provinces–Liaoning, Jilin, Heilongjiang–declined by only 1.1 million people from 2010 to 2019. That’s still a pretty poor showing for a period when the population of the nation as a whole was still growing, but not a massive change in the trend.

The 2020 population census has revealed, however, that those numbers were completely wrong. According to the results, the three northeastern provinces have actually seen their combined population decline by 11 million people, or roughly 10%, since the 2010 census. The chart below shows the difference between the population numbers that have been published annually for the previous decade, and the trend implied by the 2020 census. The dotted lines are a simple linear extrapolations between the 2010 and 2020 census data points, so they assume the population decline began in 2010. If instead more of the population decline happened after 2014-15, which seems plausible, then the downward slope of the lines would be even steeper. In either case, population trends have clearly changed dramatically over the past decade.

Asked about the Northeast’s population loss at the press conference on the census results, Ning Jizhe, the head of the National Bureau of Statistics, gave the following response:

The population decline in the Northeast is influenced by a variety of factors including the natural environment, geography, population fertility levels, and economic and social development. The Northeast is located at a high latitude with relatively long and cold winters, and some Northeastern people are migrating to the warmer south. This is a trend of population movements in many countries around the world: both Europe and the US have seen this kind of phenomenon. In addition, the natural population growth rate in the Northeast has been lower than the national average for a long time, because of fertility-related values and behavior. It is also important to see that the economy of the Northeast is in a period of structural adjustment. The economically developed coastal provinces and cities offer diverse opportunities and employment prospects, which are very attractive to people in other regions including the Northeast.

Although his carefully neutral language does not quite do justice to the scale of the outmigration, this is a fair summary of the drivers of the population decline. While fertility has declined across China, the decline has been much sharper in the Northeast. Government family planning policies were more effective at changing behavior, as more of the population worked for state-owned enterprises that aggressively enforced restrictions. Fewer births translated into shrinking numbers of young people, and there were many more reasons for young people to leave than to stay. The state enterprises that had been located in the Northeast for strategic or geographic reasons were cutting rather than adding jobs. Corrupt and inefficient local governments did little to promote new industries or the private sector, and few entrepreneurs sought out the Northeast. As a result, more and better jobs were on offer elsewhere. And it is not surprising that, given a choice, fewer people are willing to endure winters where temperatures regularly reach -30° C.

Economic decline and population loss in older industrial regions is a widespread phenomenon in developed countries, and has been particularly challenging for Europe. So what’s unfolding in China’s Northeast is not unique. But it also has some Chinese characteristics. The Northeast has always been the most socialist part of the country–officials still call it “the eldest son of the revolution”–and some of its problems are a payback for the distortions of socialism. The disastrously low birth rate as a result of the authoritarian intervention in families’ childbearing plans is one example.

So is the scale of the out-migration, which is large partly because too much of China’s population was located in the Northeast to begin with. Socialist China located a lot of industry in remote places for strategic and ideological reasons, much as the Soviet Union did with developing Siberia. In the 1950s, the northeast benefited from proximity to the Soviet Union and its assistance in building China’s new industrial base: it was the site of half of the civilian industrial projects supported by the Soviets. In the 1960s, the Daqing oil field in Heilongjiang became the national model for a new style of Maoist industrialization.

The economy of China today, which is much less focused on natural resource extraction, much more focused on global trade, and more open to consumer preferences, is not going to keep as much of its productive capacity in an isolated and inhospitable region. Some adjustment is probably unavoidable, but that doesn’t mean the Northeast can’t be a better place to live than it is now. Slowing or stopping the population decline, as various Chinese scholars have suggested, probably requires making the Northeast more like the rest of China: more hospitable to private investment, with local authorities more engaged in developing new industries than protecting old ones. The population exodus does make that harder, as the younger generation who could lead a transformation increasingly go elsewhere.