{"id":191521,"date":"2021-08-16T12:00:27","date_gmt":"2021-08-16T11:00:27","guid":{"rendered":"https:\/\/www.transcend.org\/tms\/?p=191521"},"modified":"2021-08-15T07:49:13","modified_gmt":"2021-08-15T06:49:13","slug":"what-the-west-must-learn-from-china","status":"publish","type":"post","link":"https:\/\/www.transcend.org\/tms\/2021\/08\/what-the-west-must-learn-from-china\/","title":{"rendered":"What the West Must Learn from China"},"content":{"rendered":"

There’s a Moral Force behind Beijing’s Recent Crackdowns<\/em><\/strong><\/p>\n

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Getty Images<\/p><\/div>\n

10 Aug 2021 – <\/em>The Chinese government has made an existential choice: rather than surviving by betting on the markets, it is going to produce stuff instead. It wants a nation full of engineers, not financial engineers; computer chips, rather than chocolate chips; innovation over financial experimentation. Beijing also wants an education system that actually educates, rather than creating a cottage industry of \u201cprogressive\u201d credentialism that engenders a self-perpetuating upper class, rich both in terms of capital and diplomas but provides little in the way of genuine scholarship.<\/p>\n

Needless to say, this is not the conventional reading of China\u2019s recent attacks<\/a> on fin-tech, internet monopolies and private education companies. Take Stephen Roach, former chief economist at Morgan Stanley, who recently decried Beijing\u2019s actions<\/a> \u201cas a tipping point for the economy\u201d. He goes on to lament the heavy-handed use of regulation \u201cto strangle the business models and financing capacity of the economy\u2019s most dynamic sector\u201d.<\/p>\n

As the proverbial expression goes, you can take the boy out of Morgan Stanley, but you can\u2019t take Morgan Stanley out of the boy. Roach still retains a Wall Street-centric bias in a country \u2014 the United States \u2014 where the stock market remains the ultimate arbiter of the American experience. Indeed, if one were to assess America\u2019s \u201centrepreneurial spirit\u201d via stock market metrics, then that would suggest that US has been stunningly successful. As economist David Goldman has noted<\/a>, \u201cin 2010, the five biggest tech companies accounted for just 11% of the market capitalisation of the S&P 500\u201d. Today, however, \u201cten companies in the S&P 500 hold two-fifths of all the cash balances of index members, and all but one is a tech giant\u2026 The top three cash holders in the S&P \u2014 Microsoft, Apple, and Google \u2014 hold a fifth of all the cash held by index companies\u201d.<\/p>\n

But as Goldman observes, these companies\u2019 profits have increasingly been the product of oligopolistic rents, rather than product innovation: \u201cApple is so cash-rich that it has bought back $327 billion of its stock since 2012. That explains why its stock price has risen by 82% in the past six years even though its operating income has barely changed.\u201d<\/p>\n

Far from deploying cash toward productive R&D investment, Apple\u2019s behaviour provides a case study of precisely the kind of situation that Beijing is seeking to avoid: companies deploying cashflow toward stock buybacks, rather than investing in stateside facilities to enhance the nation\u2019s productive investment and employment capabilities.<\/p>\n

How many times do we find ourselves in an elevator, in an airplane terminal or at home, looking at a screen with stock numbers whizzing by, and people fretting over whether America is about to disintegrate because of a 5% swing in Apple\u2019s share price? How did we get to point where our national economic conversation is dominated by chatter on the stock gyrations of GameStop<\/a>, when this just an economic irrelevance for most of the 330 million people who live in America, and are struggling to sustain a modicum of economic security?<\/p>\n

We ban the use of Chinese 5G equipment in US networks, but few ponder the question as to why there are no longer any American telecom equipment companies. After all, in the 1970s the two largest telecom equipment manufacturers were US companies: Western Electric and ITT. With this story of increasing manufacturing irrelevance as our backdrop, is it really fair to suggest that China is on the road to economic perdition because its government decries the \u201cspiritual opium\u201d of computer games<\/a>?<\/p>\n

A harsh charge, especially when one considers China\u2019s own tragic history pertaining to opium addiction. Yet it seems there is some moral force to the Government\u2019s argument which pressured China\u2019s largest gaming company, Tencent, to announce new restrictions<\/a> to limit gaming time for children under 12 to just one hour a day and two hours a day during holidays.<\/p>\n

Here in the United States, we lost our way decades ago, when we decided that the only social responsibility of a corporation was to increase its profits, community considerations and employees be damned. This laid the groundwork for economist Milton Friedman\u2019s \u201cstockholder theory<\/a>\u201d: the idea that shareholders, being the owners and the main risk-bearing participants, ought therefore to receive the biggest rewards.<\/p>\n

But while tying corporate decision-making and stock price to innovation and production may have sounded superficially attractive, the champions of this theory, including Friedman himself, never bothered to show how these outcomes could be achieved in the real world. In fact, the historical experience has been abysmal.<\/p>\n

Boeing and GE, to cite two prominent examples, were once poster boys for the success of American capitalism. Today they are but a shell of their former glory. With its Max 8 737 plane, and the 787 Dreamliner, Boeing has become synonymous with airplane crashes and shoddy engineering, whilst GE, once a byword for thriving manufacturing and innovation<\/a>, suffered the indignity of being yet another target of Harry Markopolos, the accounting expert who first raised red flags about Bernie Madoff\u2019s Ponzi scheme.<\/p>\n

Both managements are now focused on financial engineering rather than manufacturing, much of which has been sold off, or outsourced to China. In doing so, they reflect an ethos that prioritises finance above all else in an economy increasingly characterised the layering of debt on top of debt. It means a greater share of GDP going to the financial system, going to interest rather than profit, and away from a goods-producing economy.<\/p>\n

Beijing has been paying attention as it increasingly bets on real innovation, and targets various companies as strate\u00adgic components within a broader industrial ecosystem to promote national development. True, the Government has fought to protect and promote its own companies within this sector. But what has been caricatured in the West as governments incompetently picking winners and losers has in fact created world-class companies such as Huawei.<\/p>\n

At the same time, American \u201cfree market\u201d solutions have resulted in a hollowing out of companies that were once world-class innovators, and a corresponding degradation of economic know-how and social capital as highly skilled jobs have been outsourced.<\/p>\n

This is the context in which we should understand Beijing\u2019s recent crackdowns. What Stephen Roach and others characterise as Beijing\u2019s politically motivated attacks on big tech behemoths such as Jack Ma\u2019s Alibaba, could more accurately been seen reining in Ma\u2019s attempt to convert his company into bank, all the while seeking to circumvent increased banking regulation. In other words, regulatory arbitrage.<\/p>\n

Likewise, China\u2019s State Administration for Market Regulation has been criticised for its fines on Alibaba Group, Tencent, and SF Holdings. But a closer look at the situations shows that these firms were singled out for what China\u2019s chief regulator called \u201cmonopolistic corporate behaviour\u201d, and the fines were levied \u201cto protect consumer interests\u201d. That sounds like the sort of thing that we are used to in the US, before our tech behemoths \u2014 Apple, Google, Facebook, Microsoft \u2014 gobbled up smaller competitors and began stifling competition and actively suppressing competitive innovation. These days, Beijing appears to believe in market competition more than we do.<\/p>\n

Similarly, the crackdown on private education companies should be seen as an attempt to curb a credential arms race as we have in the US. Attacks on cramming factories such as TAL Education Group and Gaotu Group are not an attack on education, but a deterrent to the need to furnish students with worthless diplomas while businesses lament a skills deficit.<\/p>\n

It\u2019s not as though Beijing\u2019s authorities are saying mathematics is Western and needs to be replaced with Han math or Confucian physics \u2014 which would be the real equivalent of what we are currently doing in many of our universities, where the extremes of progressive ideology mean that medical school professors are forced apologise for referring to a patient\u2019s biological sex<\/a> on the grounds that \u201cacknowledging biological sex can be considered transphobic\u201d.<\/p>\n

In America, among the biggest beneficiaries of the current economic system are not entrepreneurs or innovators, but parasites<\/a> who owe their wealth to rigged markets or government subsidies. But they are merely a symptom of the bigger problem: a newfound scepticism in the ability of American capitalism to deliver on its economic promise of prosperity.<\/p>\n

That is precisely the kind of thing that China is seeking to avoid. Stock market investors may be unhappy, but far from destroying consumer confidence, the measures now being undertaken by Beijing might have precisely the opposite effect.<\/p>\n

As Chinese fund manager Yuan Yuwei has argued<\/a>, \u201chousing, medical and education costs were the \u2018three big mountains\u2019 suffocating Chinese families and crowding out their consumption\u201d. Yuan went on to describe these measures as \u201cthe most forceful reform I\u2019ve seen over many years, and the most populist one. It benefits the masses at the cost of the richest and the elite groups.\u201d<\/p>\n

Unlike America\u2019s Federal Reserve, whose increasing tolerance and support of financial bubbles continues to engender profound systemic fragility in the American economy, Beijing is prioritising social cohesion above the narrow interests of financial rentiers. If only American policymakers had demonstrated such foresight in decades past.<\/p>\n

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Marshall Auerback is a market commentator and a research associate for the Levy Institute at Bard College.<\/em><\/p>\n

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Go to Original – unherd.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

10 Aug 2021 – The Chinese government has made an existential choice: rather than surviving by betting on the markets, it is going to produce stuff instead. Unlike America\u2019s Federal Reserve, whose increasing tolerance and support of financial bubbles continues to engender profound systemic fragility in the American economy, Beijing is prioritising social cohesion above the narrow interests of financial rentiers. <\/p>\n","protected":false},"author":4,"featured_media":191523,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[197],"tags":[867,244,354,70],"class_list":["post-191521","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-special-feature","tag-anglo-america","tag-china","tag-economics","tag-usa"],"_links":{"self":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/191521","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/comments?post=191521"}],"version-history":[{"count":0,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/191521\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/media\/191523"}],"wp:attachment":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/media?parent=191521"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/categories?post=191521"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/tags?post=191521"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}