The Summer of 2021: Consolidation of the New Chinese Economic Model with Professor Barry Naughton
During the summer of 2021, a “regulatory storm” shook markets in China. While the crackdown had its most immediate effects on private education, internet business, and finance, the government has also rolled out new policies to shape manufacturing and infrastructure, and even household fertility and income distribution.
On September 28 Stanford Libraries and the Stanford Center on China’s Economy and Institutions welcomed Professor Barry Naughton, the So Kwan Lok Chair of Chinese International Affairs at the School of Global Policy and Strategy at UC San Diego to give the 2021 Dr. Sam-Chung Hsieh Memorial Lecture.
Professor Naughton offered his thoughts on how to make sense of what he called China’s “summer blizzard” of regulatory actions and crackdowns that have spanned a dozen industries in recent months, including finance, real estate, energy, education, online consumer platforms, videogaming, and more.
“The summer of 2021 is going to be something that we will be assessing and evaluating for many, many years…I think what we're going to see from these changes is an increasingly aggressive effort on the part of the Chinese Government and the Chinese Communist Party to shape the way the economy is developing, and I argue that it creates substantial medium run costs for the Chinese growth process.”
Rooted in Industrial Policy
According to Professor Naughton’s analysis, the policies of summer 2021 emerge from a decade-long series of industrial policies that, among other things, aimed to develop technology as a driver of growth.
While interventionist in nature, Naughton points out, “the policies were carried out in ways that, while wasteful, did not impost enormous costs on the economy.” This is because “they used market conforming financial instruments like government guidance funds, government run commercial and investment bank lending, tax and depreciation breaks, low land and utility charges, etc.” If successful, Naughton points out, private firms could become “national champions.”
Beneficiaries such as Alibaba, Huawei, Tencent and Didi were seen as, “members of the national team,” Naughton explained. “China was a ‘venture capital state,’ and the government’s impact was comparable to that of Softbank or a venture capital firm.”
Steering More Industries More Intensively
In contrast, Naughton interprets the events of summer 2021 as a major departure from the past, for two main reasons.
First, with the implementation of many of these policies, Naughton sees an activist “steering” approach appearing in many more sectors and with an intensity unseen in decades, all in order to promote a vaguely defined “common prosperity.”
According to Naughton, one impetus for the changes is China’s looming demographic problem.
“The government now suddenly seems to be displaying something near panic about falling birth rates, and we see a sudden determination to stress the idea that life for families with children, especially urban families with children, should be less stressful,” to promote more childbearing.
Whatever the reason, Naughton notes the assortment of policy objectives aiming to steer the economy has expanded tremendously.
“Instead of pursuing one or two simply defined objectives like new high-tech development as a growth driver,” says Naughton, “China has a portfolio of 10 or more objectives.” These span data security, enhancing control of the financial system, raising the birth rate, building new cities, keeping housing prices low, and reducing carbon emissions, among others.
A Changing Toolkit
The second reason these newer plans represent a departure from the past is that as the policy objectives have expanded, the instruments deployed to reach them have lost their “market-conforming” character, Naughton explains.
“The instruments used so far are very clumsy. Abolish the private tutoring industry. Punish [big private firms like] Ali, Ant, Didi, and Tencent. Encourage charitable donations from large corporations. What we haven’t seen is the utilization of much more effective policies that are known to work and have been applied in scores of countries around the world, in particular income tax policy.”
A Gap Between Intent and Impact
Naughton sees this haphazard roll out of directives as having unintended consequences that may weigh on future growth.
“What’s happening is that there are many built in conflicts between the different objectives and the different instruments and the way those instruments are deployed … without consideration for what their implications are going to be in other areas.”
Naughton points to the education sector as one example.
“Some of the policies that come from the desire to lower burdens on families in order to encourage them to have children,” – like the reduction in homework and elimination of cram schools – “But now a highly educated, high skilled labor force, which was always considered to be a part of the high-tech push, is suddenly in question.”
Naughton sees a similar contradiction at play in the real estate sector.
“[Embattled real estate giant] Evergrand is clearly caught between Chinese policies that are trying to push down the price of housing [for the middle class] and other policies that are trying to de-risk the financial environment by reducing leverage to property firms.”
In light of these contradictions, “you really have to wonder in any specific arena what's the particular outcome is going to prevail,” Naughton says. “And in the meantime, they have very substantial costs, particularly costs on private business.”
A Major Turning Point
Naughton concludes that the summer of 2021 is a turning point where China has begun to attempt to shape and steer China’s society and economy far more aggressively than what has been seen for the last 40 years.
“Without a doubt the policies are ambitious. But the proliferation of ambitions has outrun the instruments that are available to actually achieve them, and as a result we’re already seeing increased conflicts, contradictions and difficulties. I think that is going to continue…and will have extremely important ramifications that will ripple out not just in China, but on a world scale.”
