What to make of Chinas animal spiritsdeficit
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When it comes to the Chinese economy, I have been an optimist for over 25 years. But now I have serious doubts. The government has taken dead aim at its dynamic technology sector, the engine of Chinaâs New Economy. Its recent actions are symptomatic of a deeper problem: the stateâs efforts to control the energy of animal spirits. The Chinese Dream, president Xi Jinpingâs aspirational vision of a âgreat modern socialist countryâ by 2049, could now be at risk.
At first, it seemed as if the authorities were concerned about a one-off personnel problem when they sent a stern message to the irreverent Jack Ma, founder of Alibaba, the worldâs largest e-commerce platform. Maâs ill-timed comments at a Shanghai financial forum in late October 2020 about the âpawnshopâ mentality of the bank-centric Chinese financial system crossed the line for Chinaâs leaders. Early the following month, a record $34 billion IPO for Ant Group, the behemoth fintech spinoff of Alibaba, was cancelled less than 48 hours before the scheduled listing. Five months later, Alibaba itself was fined a record $2.8 billion for alleged anti-monopoly violations.
And now itâs Didi Chuxingâs turn. Didi, the Chinese ridesharing service, apparently had the audacity to raise $4.4 billion in US capital markets, despite rumoured objections from Chinese officials. After forcing the removal of more than 25 of Didiâs apps from Chinese internet platforms, talk of a fine that might exceed the earlier penalty imposed on Alibaba, or even a possible delisting, is rampant.
Moreover, there are signs of a clampdown on many other leading Chinese tech companies, including Tencent (internet conglomerate), Meituan (food delivery), Pinduoduo (e-commerce), Full Truck Alliance (truck-hailing apps Huochebang and Yunmanman), Kanzhunâs Boss Zhipin (recruitment), and online private tutoring companies like TAL Education Group and Gaotu Techedu. And all of this follows Chinaâs high-profile crackdown on cryptocurrencies. It is not as if there were a lack of reasonsâ"in some cases, like cryptocurrencies, perfectly legitimate reasonsâ"for Chinaâs anti-tech campaign. Data security is the most oft-cited justification. This is understandable in one sense, considering the high value the Chinese leadership places on its proprietary claims over Big Data, the high-octane fuel of its push into AI. But it also smacks of hypocrisy, in that much of the data has been gathered from the surreptitious gaze of the surveillance state. The issue, however, is not justification. Actions can always be explained, or rationalised, after the fact. The point is that, for whatever reason, Chinese authorities are now using the full force of regulation to strangle the business models and financing capacity of the economyâs most dynamic sector.
Nor is the assault on tech companies the only example of moves that restrain the private economy. Chinese consumers are also suffering. Rapid population aging and inadequate social safety nets for retirement income and health care have perpetuated householdsâ unwillingness to convert precautionary saving into discretionary spending on items like motor vehicles, furniture, appliances, leisure, entertainment, travel, and the other trappings of more mature consumer societies.
Yes, the absolute scale of these activities, like everything in China, is large. But as a share of its overall economy, household consumption is still less than 40% of GDPâ"by far the smallest share of any major economy.
The reason is that China has yet to create a culture of confidence in which its vast population is ready for a transformative shift in saving and consumption patterns. Only when households feel more secure about an uncertain future will they broaden their horizons and embrace aspirations of more expansive lifestyles. It will take nothing less than that for a consumer-led rebalancing of Chinaâs economy finally to succeed. Confidence among businesses and consumers alike is a critical underpinning of any economy. Nobel-winning economists George Akerlof and Robert Shiller view confidence as the cornerstone of a broader theory of âanimal spirits.â This notion, widely popularised by John Maynard Keynes in the 1930s, is best thought of as a âspontaneous urge to actionâ that takes aggregate demand well beyond the underpinnings of personal income or corporate profit.
Keynes viewed animal spirits as the essence of capitalism. For China, with its mixed model of market-based socialism, animal spirits operate differently. The state plays a far more active role in guiding markets, businesses, and consumers than it does in other major economies. Yet the Chinese economy, no less than others, still requires a foundation of trustâ"trust in the consistency of leadership priorities, in transparent governance, and in wise regulatory oversightâ"to flourish.
Modern China lacks this foundation of trust that underpins animal spirits. But while this has long been an obstacle to Chinese consumerism, now distrust is creeping into the business sector, where the governmentâs assault on tech companies is antithetical to the creativity, energy, and sheer hard work they require to grow and flourish in an intensely competitive environment. I have frequently raised concerns about the excesses of fear-driven precautionary saving as a major impediment to consumer-led Chinese rebalancing. But the authoritiesâ recent moves against the tech sector could be a tipping point. Without entrepreneurial energy, the creative juices of Chinaâs New Economy will be sapped, along with hopes for a long-promised surge of indigenous innovation. Chinaâs mounting deficit of animal spirits could deal a severe, potentially lethal, blow to my own long-standing optimistic prognosis for the âNext Chinaââ"the title of a course that I have taught at Yale for the past 11 years. As I caution my students in the first class, the syllabus is a moving target.
The author is Faculty member at Yale University and former chairman of Morgan Stanley Asia
Copyright: Project Syndicate, 2021
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