New paradigm for economic development

The year 2021 marked the start of a new paradigm for the Chinese economy. China is moving from a model favoring GDP growth to one emphasizing efficiency, consumer welfare and protection, climate change mitigation and environmental protection. As Chinese business growth becomes less unrestrained and more regulated and monitored, the goal of building a global manufacturing power has shifted towards the pursuit of technological autonomy.

Chinese leaders believe the country is on the verge of transforming into a truly “modern socialist economy.”

Whatever epithet they apply to their respective political systems, and despite bilateral tensions, China and the West face similar challenges. Both face growing income disparities, the limitless growth of Big Techs, and a deepening rift between the elites and the grassroots. But unlike the rest of the world, China has decided to tackle these issues head-on.

During the year 2021, the Chinese government took 20 to 30 major steps to regulate and discipline a range of leading companies, from consumer platforms to educational companies. The motives for these interventions were antitrust, data security and social equality, and sometimes all three.

While these measures have attracted many exaggerated comments in the international media, they have only scratched the surface of the deeper transformation underway. Regulatory and enforcement measures are both necessary and welcome in a country where the prospects for business growth and their contribution to GDP have long taken precedence over consumer welfare and protection.

The changes introduced in 2021 represent a “coming of age” for the Chinese economy, signaling that people matter more than aggregate numbers. Under the new heading of ‘common prosperity’, the government’s official goal for the coming decade is to create the conditions for the growth of a large and prosperous middle-income group, to generate better opportunities for everyone and to generate more “empathetic” behavior on the part of Chinese companies. The unbridled Western-style capitalism that has resulted in a “compression of middle income groups” must be avoided in favor of a more “olive-shaped” income structure.

A turning point for the economy

Forty years ago, late leader Deng Xiaoping lifted the ideological taboo on individual profit by seeking to allow some people to get rich first, then let the rising tide lift all boats. Today’s Chinese leaders believe it is time to let the wind rise.

The COVID-19 pandemic has exposed the inequality between the haves and have-nots. Big tech companies got even bigger and more powerful during the pandemic. With most of the people confined to their homes and snuggled together, from elites to common people, attention has shifted to national issues and the need for national self-reliance and independence.

Contrary to popular belief in the West, China’s push for greater regulatory oversight is not driven by a simple desire to indiscriminately crack down on the private sector, reduce the size of billionaires, or limit international access by consumers. Chinese companies. There were 407 public listings of Chinese companies in 2021, and more than 83% of them were private companies, not state-owned enterprises.

Common prosperity is linked to the larger goal of social harmony. One of the greatest ironies of contemporary Chinese society is the hyper-competition in education, which has left parents anxious and children miserable. Families spent an enormous amount of time and money on extracurricular activities, filling children’s schedules with things they didn’t necessarily need for the modern economy.

This phenomenon has been compared to a crowded theater in which a few people decide to stand up for a better view, forcing everyone to do the same. In the end, no one is better off.

Now that most Chinese have fully embraced digital life, there is growing concern about the misuse of personal data. In a few high-profile cases, such abuse has cost people not only their personal fortunes, but also their lives. Worse, the Chinese tech giants have shown little concern for the well-being of employees, leading to demotivation among overworked young people who had hoped to start a family and are now “flat” (no longer surpass themselves in their work).

Chinese authorities have recognized the social tensions and vulnerabilities that accompany unchecked market-induced growth. While the market failures and inequalities of the new digital age are not unique to China, China’s approach to tackling these issues is characteristically different from that of most other countries.

For starters, the responses are often faster and more dramatic. In contrast, U.S. policymakers have done next to nothing to curb Facebook, for example, despite serial revelations of the company’s questionable practices and frequent reminders of the deep societal problems its business model has caused.

Another difference is that China is unlikely to adopt the type of large-scale welfare state found in some European countries. The country considers hard work a national and traditional virtue. And, unlike the United States, the richest 1% aren’t castigated, although some individual humiliation (or worse, when it comes to breaking the law) sometimes plays a part.

Chinese leaders want to eliminate only “unfair” sources of inequality, such as barriers to entry, excessive monopoly powers and loopholes that allow “illegitimate income”.

An appropriate criticism is that China’s efforts to regulate businesses and limit their growth ambitions will kill the incentive for innovation. But this argument ignores the fact that Chinese entrepreneurship is motivated by more than monetary reward. Becoming “important” through a committed career or a major contribution to society is a way of “glorifying your ancestors”, as the Confucian saying goes. Driven by a larger goal, Chinese entrepreneurs are adapting to changing circumstances while tenaciously pursuing their goals.

Plus, for every hapless billionaire who needs to be ‘persuaded’ to contribute more in a philanthropic way, there are many more happy millionaires who genuinely welcome the new regulations on the size and reach of large corporations, as they will improve their own. chances of becoming billionaires.

Risks, rewards of globalization

The road ahead for China is strewn with pitfalls. No country of similar size has fostered a political economy that is both equitable and capable of fully harnessing dynamic innovation and efficiency. There are risks associated not only with de-globalization but also with further globalization that excludes China.

Another big risk, some foreigners say, is that policies designed to transform the investment climate and the business environment will make matters worse or become overkill. And an even greater risk is that ideology takes precedence over prudent economic management, reversing the mental unblocking that has enabled the shift to a fully-fledged market economy over the past 40 years. But this is unlikely to happen.

Fortunately, the past year has also brought many favorable market developments, from the launch of its first Chinese fund by BlackRock to the authorization of the Hong Kong Stock Exchange to offer A-share futures contracts. prepare to expand the reach of foreign-funded institutional investments in China, proving that greater economic liberalization can coexist with tighter regulatory oversight.

In addition, since the first phase trade agreement with the United States, China has approved 28 financial licenses and 100% of all tariff exemptions requested by American companies. And despite Sino-US tensions and pandemic-related disruptions, trade and financial flows have been maintained.

Climate commitments are reinforced

China has also stepped up its climate commitments and announced that it will end external funding for coal-fired power plants. With awareness of the problem growing among businesses and households, the People’s Bank of China, local governments and financial institutions have committed to supporting small businesses, and regulators have released a taxonomy of green bonds as part a broader effort to integrate climate issues into macroprudential management.

Climate diplomacy remains an important channel through which China can strengthen its ties with the rest of the world and demonstrate global leadership. This means both working with advanced economies and helping other developing countries meet their net zero emissions goals.

But like many other countries, China will need to be alert to a variety of short-term cyclical issues over the coming year, including the slow recovery from the pandemic, rising debt and risk of default, more frequent natural disasters and low investment and consumption.

Under the natural ebb and flow of market economies, however, the country will move towards greater serenity, tolerating lower growth rates with an emphasis on quality and greater cyclical volatility. As such, most Chinese will view the sacrifices made to achieve “common prosperity” as both necessary and wise.


Jin Keyu is Associate Professor of Economics at the London School of Economics and Political Science and Young Global Leader of the World Economic Forum.