China’s New Development Phase Part 1

The 2nd largest economy, China, has had some struggles in the stock market over the last several months. Chinese companies listed on United States markets have contributed $400 billion in decreased valuation by themselves, and the broader Asian market experienced a $1 trillion meltdown in July alone. The technology and private education sectors have been the dominant losers of the current routing of Asian firms. Chinese firms included in the Golden Dragon China ETF haven’t been doing exceptionally well all year -- ever since mid-February, the ETF of US-listed Chinese firms has been in a bear market with an additional loss of 20% since July 1st.

The investor hesitancy started around November 3rd when news hit that tech billionaire Jack Ma’s Ant Group had its initial public offering blocked by China’s State Department and President Xi Jinping. The People’s Bank of China ordered Ant Group to “rectify” their business only two days before its planned IPO. It was a massive blow as Ant Group held an expected valuation at the time of the offering of $320 billion and now has lost about 60-70% of that valuation.

Chinese firms continued to increase in valuation for a couple of months as investors seemingly swept the Ant Group case under the rug, reasoning that the punishment was more retributive rather than political. The argument being: Jack Ma shouted his mouth off in an October speech that criticized financial regulation for stifling economic innovation and said China’s global banking rules were like an “old people’s club.” Ma went as far as to include a line that attributed Chinese banks as having a “pawnshop mentality (that) is severe, and it also affects many entrepreneurs.” The result was quickly retributive financial regulation against the tech firm, which found itself submitting to regulatory policies geared towards financial corporations rather than the looser regulations governing growth-oriented tech firms.

A few clues trickled out that President Xi Jinping was indeed upset with Jack Ma. Still, by now, it is clear that we were at the time witnessing the beginning of a shift in the narrative where big tech would begin to be curtailed for state or (hopefully) citizen benefit. President Xi Jinping delivered an address in January that detailed China’s new development philosophy under their current five-year plan. The plan included more attention towards social welfare than previous plans with a new theme: common prosperity. Common prosperity was included as a goal for the Chinese state to actively address wealth inequality through changes in promoting employment, education, pensions, housing, healthcare, and child care.

Since the unveiling of the common prosperity goal, we have seen other tech firms targeted by China, including notable names currently undergoing “recertification” such as Didi (analogous to Uber) and Tencent (China’s largest social media company). In some ways, China’s current battle with tech firms has mirrored the United States’ antitrust battle with tech giants such as Google, Facebook, and Amazon; only, in this case, China has taken action – the degree, if not type, of action that the United States would doubtfully be willing to enact.

These moves by China are undoubtedly beyond what would be deemed appealing to United States regulators. The United States uses antitrust legislation to promote competition, reduce rents, and prevent monopolies. The last notable example of antitrust action taken was when Microsoft was sued for preventing competition between their internet browser, Explorer, and third-party browser Netscape. The most severe action to be considered for the current brand of technological behemoths under the judicial microscope for anticompetitive activity will be whether to break up and spin-off certain portions. For instance, Amazon, the digital store, may one day be required to break off its Amazon Web Services; but even that action is a long shot for the current political landscape. China went beyond mere antitrust action on its tech giants and appears to be centralizing decision-making over the future of its technological innovation spending. Essentially, is money being spent in the best areas for the future? Can a centralized lever on the future of technology spending be more helpful in growing an economy rather than the free market idiom of the United States?

There are some, such as economist Noah Smith over at Noahpinion that believe the recent changes to be all about centralizing and building technology that can serve to increase geopolitical and military power:

“And what do they think will serve the nation as a whole? My guess is: Power. Geopolitical and military power for the People’s Republic of China, relative to its rival nations.”

But this seems to a bit of fearmongering about the reigning in of big tech powers that the United States has also expressed an interest in. It could be true that China would like to increase the power of its military through technological advancements in sectors other than social media firms. That reasoning is in line with the typical neoliberal left opinion, such as the Matty Yglesias of the world, that China is a country to be feared and the United States needs to combat their growing world influence.

Noah gives the game away later: “I think any assessment of China’s government’s objectives that doesn’t recognize the central importance of comprehensive national power is probably being a bit too diplomatic.” The centralized importance of comprehensive national power is almost certainly true for China and every other significant world military power. Still, liberals fail to relate the potential boon of economic actions on military might for some reason. It is certainly not clear that social media companies are the correct area to devote billions of dollars or yen for the long term. Any good liberal economist should be able to see a win-win scenario between adopting a leadership position in crucial sectors such as semiconductors being good for labor and state military.

Should every move conducted by a state be viewed through the lens of centralizing state power for military might? Operation Warp Speed, the program installed under President Donald Trump to accelerate the COVID vaccine development, was almost certainly hoped to bring added glory and power to the United States… but was that indeed the goal? Or rather, was the thinking empathetic? Did United States politicians want to do everything to help their people in a time of crisis? Either way, by developing a vaccine quickly and saving the lives of countrymen America was able to stave off worse economic consequences than if they never attempted to develop a vaccine AND received some degree of respect from other countries around the world – the rest is conjecture for bloggers to pontificate their feelings.

Does China get the same treatment from the U.S. media? Seems doubtful. Does China deserve any positive reading given its authoritarian model? Those that dislike China, and those that rightfully have concerns about a future where Chinese influence may grow beyond U.S. influence, should consider Noam Chomsky’s thinking:

China has undergone spectacular economic growth, but it is still far from approaching U.S. power in just about any dimension. It remains a relatively poor country, ranked 85th in the U.N. Human Development Index, between Brazil and Ecuador. The U.S., while not ranked near the top because of its poor social welfare record, is far above China. In military strength and global outreach (bases, forces in active combat), there is no comparison. U.S.-based multinationals have about half of world wealth and are first (sometimes second) in just about every category. China is far behind. China also faces serious internal problems (ecological, demographic, political). The U.S., in contrast, has internal and security advantages unmatched anywhere.

…

China does confront U.S. power — in the South China Sea, not the Atlantic or Pacific. There is an economic challenge as well. In some areas, China is a world leader, notably renewable energy, where it is far ahead of other countries in both scale and quality. It is also the world’s manufacturing base, though profits go mostly elsewhere, to managers like Taiwan’s Foxconn or investors in Apple, which is increasingly reliant on intellectual property rights — the exorbitant patent rights that are a core part of the highly protectionist “free trade” agreements.

China’s global influence is surely expanding in investment, commerce, takeover of facilities (such as management of Israel’s major port). That influence is likely to expand if it moves forward with provision of vaccines virtually at cost in comparison with the West’s hoarding of vaccines and its impeding of distribution of a “People’s Vaccine” so as to protect corporate patents and profits. China is also advancing substantially in high technology, much to the consternation of the U.S., which is seeking to impede its development.

It is rather odd to regard all of this as a challenge to U.S. hegemony.

Over the next two weeks, I plan to analyze the changes brought upon the Chinese technological and educational sectors. Notably, in part two, we will examine the current paradigm of U.S. and Chinese large technology firms, including whether social media apps are a productive use of innovation. Private education, the current Chinese attitude of it, and the importance of private funding for education in the United States will be discussed in greater detail in part three.