The full article is published in Foreign Affairs, the following text is an excerpt from the article, read the full article here.

On Monday, SCCEI released its first three China Briefs spotlighting findings central to China’s economy, U.S.-China trade competition, and their implications for U.S.-China relations:   

In “Did ‘China Shock’ Cause Widespread Job Losses in the U.S.?” Stanford's own Nicholas Bloom and his co-authors find compelling evidence that import competition from China did not, in fact, cause aggregate employment loss in the U.S. – a finding that contradicts prevailing views. Read our brief for a fuller picture of how “China shock” impacted U.S. employment dynamics and how this might impact regional inequality and political polarization in the U.S.

Only a handful of countries have escaped the middle-income trap since 1960. In “Invisible China: Hundreds of Millions of Rural Unemployed May Slow China’s Growth,” SCCEI’s co-director Scott Rozelle finds that approximately 70% of China’s labor force – 500 million people – concentrated in rural areas do not have a high school education. Our SCCEI China Brief sheds light on why these statistics matter – not only for China, but for the rest of the world.

In “Rise of Robots in China,” SCCEI’s co-director Hongbin Li presents strong data revealing China’s global leadership in the use of industrial robots. What is driving this relentless growth of automation in China? What future trends and implications can we glean from China’s use and production of robots? Read our SCCEI China Brief to find out more.

Read the Briefs

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Did "China Shock" Cause Widespread Job Losses in the U.S.?
Findings in this brief challenge prevailing views regarding net jobs lost in the U.S.
 

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Invisible China: Hundreds of Millions of Rural Underemployed May Slow China's Growth
Education is the key for China to realize its goal of moving from a middle-income to high-income economy

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Rise of the Robots in China
Data representative of China’s manufacturing sector reveals China’s global leadership in the use of industrial robots

Join our mailing list to receive SCCEI China Brief email announcements. The briefs are also posted on our SCCEI China Briefs homepage every other week. 

Read the Briefs

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Findings in this brief challenge prevailing views regarding net jobs lost in the U.S.
 

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Education is the key for China to realize its goal of moving from a middle-income to high-income economy

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Data representative of China’s manufacturing sector reveals China’s global leadership in the use of industrial robots

Join our mailing list to receive SCCEI China Brief email announcements. The briefs are also posted on our SCCEI China Briefs homepage every other week. 

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.”