Stanford Center on China’s Economy and Institutions is a joint effort of the Freeman Spogli Institute for International Studies and Stanford Institute for Economic Policy Research.
Authors Ryan Hass and Jude Blanchette highlight Scott Rozelle's research on the human capital criss in rural China.
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.”
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.
Friday, November 12, 5:00 – 7:00 p.m. Pacific Time | Online
Saturday, November 13, 9:00 – 11:00 a.m. Beijing Time | Online
In a world characterized by significant challenges, unprecedented opportunities, and dynamic business environments, the Stanford China Economic Forum remains dedicated to fostering meaningful dialogue and collaboration between change makers in the United States and China.
Hosted by the Stanford Center on China's Economy and Institutions (SCCEI), the Stanford Institute for Economic Policy Research (SIEPR), and Stanford Graduate School of Business, the 2021 Stanford China Economic Forum will have panel discussions on two topics: Environment and Energy Sustainability and China's Financial System: At a Crossroads.
The event will be held online. For all inquiries, please visit the event webpage at scef.stanford.edu.
Mark Duggan, The Trione Director, Stanford Institute for Economic Policy Research
Szu-chi Huang, Associate Professor of Marketing at Stanford Graduate School of Business
Jonathan Levin, Philip H. Knight Professor and Dean of Stanford Graduate School of Business
Hongbin Li, Co-Director of the Stanford Center on China's Economy and Institutions
Michael McFaul, Director, Freeman Spogli Institute for International Studies
Jennifer Pan, Associate Professor, Department of Communication at Stanford University
Joseph Piotroski, Robert K. Jaedicke Professor of Accounting at Stanford Graduate School of Business
Scott Rozelle, Co-Director of the Stanford Center on China's Economy and Institutions
David Chao, MBA, Co-Founder and General Partner, DCM Ventures
Ming Lei, MBA, Co-Founder of Baidu; Founder, Kuwo
Gabriel Li, MBA, Managing Director, Orchid Asia
James Liang, PhD, Co-Founder and Executive Chairman of the Board, Ctrip
Annabelle Long, MBA, CEO, Bertelsmann China
Master Kong | 康师傅
Ed Baker
Annabelle Long
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The Los Angeles Times writes about China's new "common prosperity" campaign to narrow the gap between rich and poor. However Scott Rozelle doesn't think "any of these policies that they’re doing are addressing the real underlying issues.” Rozelle says they need to invest in rural education so that workers can move into higher-skill jobs.
Author Anne Stevenson-Yang exposes the unseen rural China and states that "the best corrective to misunderstandings about this “invisible China” is a book that came out in 2020 and remains the most important book on China in a decade: Invisible China, by Scott Rozelle and Natalie Hell."
China’s recent development strategy calls for the pursuit of ‘common prosperity’ and envisions the expansion of a prosperous middle class with high consumption that will stimulate sustained economic growth. Using household survey data and defining ‘prosperous middle class’ as being neither poor nor rich by developed-country standards, we show the rapid emergence of China’s prosperous middle class from 2002 to 2018. Using the 2018 data, we identify its main characteristics and investigate whether it is, in fact, a high-consumption group.
Terry Sicular is Professor and C. Robinson Distinguished Service Fellow of Economics at Western University (Canada). She is a leading North American specialist on the Chinese economy and has written extensively on inequality, poverty, the labor market and the rural economy in China. She is co-editor of and contributor to the book “Changing Trends in China’s Inequality: Evidence, Analysis and Prospects” (Oxford, 2020). Her work has appeared in the Review of Income and Wealth, the Journal of Development Economics, the Economic Journal, China Economic Review, the China Quarterly and the China Journal. She is a recipient of the Zhang Peigang Prize for Development Economics (2010) and the Sun Yefang Prize for Economic Science (2011, 2017).
Scott Rozelle is the Helen F. Farnsworth Senior Fellow and Co-Director of Stanford Center on China's Economy and Institutions in the Freeman Spogli Institute for International Studies and Stanford Institute for Economic Policy Research at Stanford University. For the past 30 years, he has worked on the economics of poverty reduction. Currently, his work on poverty has its full focus on human capital, including issues of rural health, nutrition and education. For the past 20 year, Rozelle has been the chair of the International Advisory Board of the Center for Chinese Agricultural Policy, Chinese Academy of Sciences (CAS). In recent years Rozelle spends most of his time co-directing the Rural Education Action Project (REAP). In recognition of his outstanding achievements, Rozelle has received numerous honors and awards, including the Friendship Award in 2008, the highest award given to a non-Chinese by the Premier; and the National Science and Technology Collaboration Award in 2009 for scientific achievement in collaborative research.
Hongbin Li is the James Liang Senior Fellow and Co-Director of the Stanford Center on China's Economy and Institutions in Freeman Spogli Institute for International Studies and the Stanford Institute for Economic Policy Research. Hongbin obtained his Ph.D. in economics from Stanford University in 2001 and joined the economics department of the Chinese University of Hong Kong (CUHK), where he became full professor in 2007. He was also one of the two founding directors of the Institute of Economics and Finance at the CUHK. He taught at Tsinghua University in Beijing 2007-2016 and was C.V. Starr Chair Professor of Economics in the School of Economics and Management. He also founded and served as the Executive Associate Director of the China Social and Economic Data Center at Tsinghua University. He founded the Chinese College Student Survey (CCSS) in 2009 and the China Employer-Employee Survey (CEES) in 2014.
Hongbin’s research has been focused on the transition and development of the Chinese economy, and the evidence-based research results have been both widely covered by media outlets and well read by policy makers around the world . He is currently the co-editor of the Journal of Comparative Economics.
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