What the West gets wrong about China

Adam Minter: You're a Chinese-born, Harvard-educated professor at the London School of Economics. Your book, The New China Playbook: Beyond Socialism and Capitalism argues that China's economy is transforming in ways that western publics have failed to understand. The animating idea behind this book is that China gets lost in translation when presented to foreign audiences. Could you describe when you first realized that, and that you wanted to do a better translation?

Keyu Jin, author, The New China Playbook: It started when I first came to the US as an exchange student. People like me were so excited about what was going on in China: The changing face of the Chinese economy, our bidding for the 2008 Olympics, the vast amount of transformation. Hundreds of millions of people were moving out of the state sector into the private sector. It was the beginning of this vibrant economy.

Yet when I got to the US, whenever I said "China," people only talked about three things: Tibet, Tiananmen, and human rights. I thought, well, this is interesting, but it's rather selective. It doesn't give a whole picture of the Chinese economy.

AM: Why do you think it's so hard to translate China as China understands itself for a western audience?

Keyu Jin, author, The New China Playbook. Photo credit: Chen Man

KJ: There are some cultural and historical aspects to it, differences in preferences. No matter how economists want to brush these differences under the rug, they explain a lot of the gap in understanding. For instance, there's a recent survey that shows that the majority of Chinese prefer security over freedom. That's exactly the opposite in the US. In the US, people look at China's paternalistic state and find it intolerable.

AM: You focus on the idea of paternalism in the book. Could you explain what that means in China, especially to an American who hears "paternalism" and wants to back away?

KJ: I think one has to start from history. In China there was an implicit contract between the people and the emperor, that in exchange for stability and general well-being, we submit to the authorities. It's also part of the Confucian philosophy, of deference to senior people in the hierarchy, that's always been in our cultural traits.

That's one of the reasons why stability and the protection of households and retail investors feature so prominently in the Chinese authorities' agenda. In the end, if something doesn't go well, the Chinese people will blame the authorities. That turns into a sense of wanting to control the economy.

AM: I want to back up a little bit to what I'd call "the Old China playbook." When I was previously based in China, I found it interesting how little top-down management there was of the economy. I think the government's approach in many cases was very hands off. And that worked out really well.

KJ: China has moved from a less mature economy to becoming a very mature economy. So in the beginning, you innovate first. The government encourages you to innovate, and then they regulate after. The new playbook is no longer about lawless or reckless growth. We saw a lot of reckless growth in the old days: the copying, the vast expansion of companies that didn't respect consumer data privacy, rules and laws. The new era in China is about saying, "Look, we need more regulation." The emphasis has shifted from production and efficiency toward consumption and welfare protection. And this is an important shift, because in the old model, Chinese households were losing the race in relative terms. The share of household income as a share of GDP has actually been falling in China while it remained steady in America and Europe.

AM: Let's talk about innovation and copying. Shenzhen, China's innovation capital, grew out of an environment that tolerated copying. Companies like Huawei, Xiaomi, all emerged from that culture. How does China transition away from that culture and remain innovative?

KJ: I think the copying culture is part of the old playbook. It's deeply rooted in a culture where Confucius once said that stealing books is not a crime. The new playbook is, in part, about taking good technologies that already exist and making them better and much cheaper. 

If you have lower costs and better processes, something that China is very good at, that actually counts as innovation. But if you want to become an innovation-driven economy, you need to protect intellectual property rights. And that's something the government is now actively promoting.

AM: Since the 1980s, China's had population policies that have shrunk the size of families. That puts a tremendous amount of pressure on the single children to have stable incomes to support their aging parents. How do you encourage this naturally risk-averse generation to be more risky in their approach to their careers and businesses in life?

KJ: The older generation of entrepreneurs, the Jack Ma's, didn't have that much to lose. The majority of them came from dire conditions. They didn't have the same pressure, they didn't have as much to lose, and they really rode the wave of China ascendant.

Today there's a different generation that grew up in relative prosperity. We are more confident, but we still have responsibilities to our parents. There are still a number of younger elites who grew up in really prosperous families that don't have financial pressures. That's the class of entrepreneurs who can say, "Well, I can accept failure."

It's a really interesting dichotomy: in the past, it was those at the bottom rung who could take a chance and become entrepreneurs, while those who had connections to government officials went on to become investment bankers. Now it's kind of the opposite, where the majority have to seek more security and are flocking to work at state-owned enterprises. That's going to widen inequality, because entrepreneurs are going to come from the more educated or elite families.

AM: Expectations and aspirations have risen over the years as higher education has become more available. People want white-collar jobs. At the same time, the need for those white collars is not as great as it once was. You point out that China is planning to invest in the real economy, and that means higher skilled workers. In reality, that means probably more vocational and technical education. What's going to motivate the younger generation to climb up the next rung?

KJ: The post-'80s generation represents the country's biggest opportunity — and its biggest challenge.

China wants to be what I'd call a "big Germany": A smart manufacturing powerhouse. That's an economy that needs vocational and technically skilled workers. But manufacturing itself doesn't provide that many jobs in the end. It's really the service sector. China's service sector accounts for something like 60% of employment, as opposed to 80% in the US or Japan.

So there's still huge room for the economy to grow and provide jobs that this younger generation can be happy in. The big mismatch is between expectations and reality. All these students want to go into finance and real estate. According to one online recruiting site, 90% of CVs are going to sectors that provide only 50% of the jobs. A lot of those people are going to be disappointed.

AM: In reading your book I was very struck by the chapter on finance. It covered everything possibly wrong with China's financial sector, including shadow banking. But it didn't, unlike other chapters, provide a way out. Instead, you suggest that somebody in authority will have to loosen their control over this system. But at the same time, you don't seem to think that's likely to happen anytime soon.

KJ: China doesn't have the deep and broad financial system that a big innovative economy requires. I think a lot of it is due to the government's need for control and belief that they're creating more stability. The problem is there's a lot of asymmetric information in the system, which leads to a huge amount of inequality. Those who have that information can gain a lot at the expense of retail investors, who the government is trying to protect. The paradox, which I don't think the government has come to understand, is that the more you protect the retail investors, the less they learn, and the more you will always have to protect them. I don't know if it's called a vicious circle, but it's the kind of loop you can't jump out of.

AM: Will financial reform require political reform?

KJ: Well, I think to solve that problem, you need the policymakers to be able to let go. I'm not sure that's an issue of political reform, or the passing of a generation of leaders who like control. It's a deeply ingrained dilemma.

AM: In recent weeks, there have been increased reports about reduced business information transparency in China, including moves to restrict outsiders' access to financial data.  It feels to me like the kind of top-down action that might stifle economic growth and investment. How do you explain it?

KJ: This example shows that going forward, security concerns will more often than not take precedence over economic growth. These restrictions won't necessarily affect the dynamism of the domestic economy, which is more ground-up than top down these days, but the lack of transparency will likely spook foreign investors. It contradicts China's recent endeavors to open up the financial economy to the rest of the world. 

AM: Toward the end of the book you argue that Chinese capital will complement U.S. capital, not replace it. What did you mean by that?

KJ: In the developing world, the demand for safe assets and dollar assets will outstrip the ability of the US to supply them. After the 2008 financial crisis, there was a big liquidity gap for developing countries. The US basically had swap lines with six of its friends — you know, the more advanced economies — leaving this gaping hole for emerging markets. And so China provided assistance to many of them. If we see another global financial crisis, you'll need the two largest economies to work together to coordinate assistance and provide liquidity backstops. The US can't do it alone.

AM: Finally: Someone is late for a meeting and you only have a few minutes to convince them to read your book. What do you say?

KJ: We live in an increasingly dangerous world because of the lack of understanding between countries like China and the US. As in any relationship, I believe that having a better understanding and being able to see each other's perspectives can help us find more common goals to work on. And my book tells you why.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.