Inside Story

Slapped by reality

A fascinating examination of the Chinese economy leaves one big question unanswered

Linda Jaivin Books 1 September 2023 2068 words

“Chairman of everything”: Xi Jinping at this year’s National People’s Congress. Mark R. Cristino/EPA

Michael Beckley of the American Foreign Policy Research Institute suggested five years ago that the world had reached “peak China.” He predicted that the country’s rocket-like economic growth would run out of fuel before reaching cruising height. That was before the pandemic threw a spanner in everyone’s economic works, but especially those of the People’s Republic of China, where lockdowns and shutdowns were longer and more severe than anywhere else.

In recent months, China’s exports, along with its currency, its consumer confidence and the price of pork, have begun to tumble. The real estate sector, broadly responsible for 30 per cent of the country’s GDP, is looking more and more like an empty tower block teetering on a foundation of debt. Banks have shaved another 2 per cent off an already modest economic growth forecast in 2023 of 5 per cent. One economic indicator that is rising is youth unemployment, though after it surpassed 21 per cent last month the government stopped publishing statistics.

Until recently, the Communist Party under Xi Jinping has been able to muddle through crises, including those of its own making. Yet fears are mounting that the People’s Republic could be entering the kind of deflationary spiral that took a rising Japan back to ground in the 1990s.

While trying to stamp out spot fires, the Communist Party has predictably grabbed the oldest fire extinguisher in its cupboard, labelled Blame the West. It has sprayed abuse at outside observers who have been so rude as to raise the alarm. “At the end of the day, they are fated to be slapped by reality,” asserted a foreign ministry spokesperson in August, doing his best to block the view of the front door burning.

What props up that door is the subject of economist Keyu Jin’s new book, The New China Playbook: Beyond Socialism and Capitalism. It lands in bookshops just as it has become urgently necessary to understand how China’s economy really functions, and the less obvious ways it fits into global economic and financial systems.

Beijing-born and Harvard-educated, Jin splits her time between Beijing and London, where she teaches at the London School of Economics and Political Science. She is well connected in Beijing — her father, Jin Liqun, is a former vice-minister of finance and current president of the Asia Infrastructure Investment Bank. Her intimate understanding of the system, ability to explicate complicated economic issues in plain English, and emotional investment in a thriving China all inform this most timely book.

China’s economic success, she writes, has defied all the usual assumptions about the necessary ingredients for long-term growth: a strong rule of law, for example, along with robust corporate governance and solid intellectual property protection. What’s more, neither its consumers, nor its entrepreneurs, nor the state itself have behaved like “conventional economic agents.” Rather, she contends, their actions are shaped by culture and history as well as ideology. These particular conditions cast doubt on whether China’s growth model could be replicated elsewhere in the developing world. But if it’s unique, she argues, it’s far from a “miracle,” as some have called it: China has simply caught up to its own potential.

How it has done this is the interesting part. The old playbook, Jin writes, referring to the first decades of reform, was all about “short and fast” development, a “febrile rush to boost GDP.” She chronicles how Deng Xiaoping and his successors progressively introduced market mechanisms into what had been a central planned economy, putting it on the road to becoming the manufacturing powerhouse and global economic power it is today.

One of the central and widely misunderstood aspects of the “new China playbook,” which she says aims for “a slower but saner pursuit of growth,” is how closely interconnected are the country’s state and private economies. There are numerous partnerships between state-owned enterprises and private businesses. These partnerships, in turn, are typically situated in what is nicknamed the “mayor economy”: a synergy between local government, state enterprise and private business. Other central aspects of the new playbook include the country’s idiosyncratic stock markets and the widespread “shadow banking” practices that introduce both risks and benefits into China’s finance sector.

Jin counters some common misapprehensions. In her chapter on China’s role in global trade, she shows that burgeoning US–China trade and investment did not in fact cause a net loss of American jobs. Less-skilled workers certainly suffered badly from trade-related job losses. Yet, she notes, that’s partly because the American economy privileges employers over employees: the impact of trade on workers was less in the European Union because of the strength of unions there and its fairer labour practices and laws more generally.

As for innovation, it’s often said that industry in China is better at copying than creating. But she points out that economists distinguish between “from zero to one” innovation — the production of a first-of-its-kind device, method or process — and “from one to N” innovation, which seeks to improve on existing technologies. She describes “from one to N” as China’s innovation “sweet spot.”

In March this year, incidentally, an Australian Strategic Policy Institute report concluded that China already leads the United States in thirty-seven out of forty-four critical technologies, including drone technology and critical minerals processing.

In discussing the agility of Chinese companies, Jin relates how the ridesharing company Didi has used its flexibility in adapting to local conditions to make inroads into places where Uber has failed to establish a presence. In Brazil, for example, where many drivers live hand-to-mouth, Didi pays them on a daily basis, and for those without a bank account, it helps them apply for one through its app.

Jin’s accomplishment is to illuminate the workings of this ever-evolving system, using a mix of statistics, narrative and anecdotes. Less impressive are some of her breezy references to Chinese culture and history, those “underlying fundamentals” (as only an economist could call them). She makes numerous minor mistakes. For instance, she places the invention of paper, the compass and printing in the Song dynasty (960–1269) when they arrived more than seven centuries earlier, in the Han.

Her insistence that China has had meritocratic government since the third century BCE stretches the definition of meritocratic: it wasn’t until the late seventh century that Empress Wu Zetian, incidentally the only woman to rule in her own name in all Chinese history, reformed the procedures for entry into the civil service so that exams would be held on a regular schedule and be open to men of humble background for the first time. (Women, no matter how meritorious, were never eligible). There would still be debates, which heated up in the late nineteenth and early twentieth centuries, about whether the exams produced an actual “meritocracy” or simply elevated to power men who were able to memorise and regurgitate classical texts.

Jin similarly credits Confucius with providing the Chinese with an ingrained work ethic married to respect for authority, nodding to the popular view that Confucianism has been a foundation for economic success not just in China but in South Korea, Japan and other societies influenced by Confucian thought. She speaks of “996” (Chinese slang for working 9am to 9pm six days a week) as a “work ethic,” when in most Chinese discourse it’s more of a complaint. If it is a work ethic, it’s one many young people have rejected, choosing instead to “lie flat,” to engage in extremely non-Confucian “quiet quitting” or even actual quitting. It’s also a reason that the public service, with its regular hours and less hectic demands, has re-emerged as a desirable employer for many of China’s youth.

Simplistic and uninflected views of history chime with contemporary Communist Party narratives aimed at promoting cultural pride, but they can’t carry the full freight assigned to them here of providing a meaningful explanation of Chinese economic and other behaviours.

Jin confronts problems such as ballooning debt and an ageing population head-on. Yet she doesn’t adequately address the underlying ideological and political issues that have in many cases an outsize impact on China’s economic policies, performance and behaviour. The party, by its own proclamation, wants to control everything; there is no sphere of life exempt from political “leadership.” The recent draft patriotic education law made that clear by mandating that its demands extend to how parents speak to their children.

If the party controls everything, Xi Jinping controls the party. It seems odd for an economist not to question whether this will lead to better or worse economic decision-making. Jin notes that Xi Jinping has “himself taken over the job of overseeing China’s technology advancement, previously under the supervision of a government minister.” She likens this to wartime mobilisation, explaining that “China sees being at the forefront of developing key technologies as a matter of survival.”

But she doesn’t ask whether having Xi — a non-technologist — in charge is the best bet for guaranteeing that survival. After all, Xi, dubbed by Geremie Barmé the “chairman of everything,” is not just leader of party and state but chair of the Central Military Commission and numerous other central bodies, including those with responsibilities for Taiwan affairs, Hong Kong and Macau affairs, foreign affairs, national security, financial and economic affairs, defence and military reform, and cyberspace. What’s wrong with having a dedicated minister in charge of each of these important portfolios? Xi’s assumption of leadership in the technological sphere hardly seems the acme of rational decision-making, economic or otherwise.

It would certainly not be comfortable for someone who lives part of the time in China and has family there to focus on such things, but the avoidance of politically sensitive topics and analysis compromises the value of The New China Playbook. It also draws attention to the odd narrative lacunae.

For example, Jin speaks in positive terms of the rising demands of the people for civil society, and backs this up with statistical evidence. The problem is that the data refer to the period right before Xi took power in 2012–13. She doesn’t add that, almost from that moment, Xi has ruthlessly set about crushing that civil society, silencing legal academics, detaining feminists planning to protest sexual harassment on public transport, clamping down on LGBTQI activism, and imprisoning lawyers who argue for rights given to the Chinese people by the Chinese constitution itself.

She also writes admiringly of China’s data protection laws — and yet doesn’t tackle the problem of the clauses regarding “national security” (which is defined very loosely in China) that allow the state itself to access pretty much whatever data it wants. Her claim that Chinese people “feel very differently” from those in the West about issues like privacy and surveillance, thanks to a cultural preference for stability and safety, might be broadly true. There are plenty of people, including in Xinjiang, on the other hand, who feel rather similarly to people in the rest of the world.

On the subject of Xinjiang, the vulnerability of the Chinese economy to political boycotts of its products would seem a useful subject for examination in a book like this, but no.

The problem is that China’s political and economic goals are frequently in conflict: the need for foreign investment, for example, is frustrated by increasingly strident anti-foreign rhetoric and rising party interference in the business sector that make China a more difficult, or at least less enjoyable, place for non-Chinese to do business in. She does acknowledge that China’s relative lack of soft power acts as a barrier to global economic leadership (including greater use of its currency in international trade). She also observes the paradox that the pursuit of economic stability through control can actually trigger instability.

We’re seeing plenty of evidence of that now, and it’s unclear whether Xi Jinping and the party he leads can control their way out of the mess. There’s no pleasure in contemplating the possibility that Xi might steer the Chinese economy off a cliff and drag the rest of the world down with it. Jin professes to feeling optimistic “that pragmatism and rationality will eventually prevail.” I’m not persuaded. But I hope she’s right. •

The New China Playbook: Beyond Socialism and Capitalism
By Keyu Jin | Swift Press | $36.99 | 368 pages