China's Animal Spirits Deficit
NEW HAVEN – When it comes to the Chinese economy, I have been a congenital optimist for over 25 years. But now I have serious doubts. The Chinese government has taken dead aim at its dynamic technology sector, the engine of China’s New Economy. Its recent actions are symptomatic of a deeper problem: the state’s efforts to control the energy of animal spirits. The Chinese Dream, President Xi Jinping’s aspirational vision of a “great modern socialist country” 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 world’s largest e-commerce platform. Ma’s ill-timed comments at a Shanghai financial forum in late October 2020 about the “pawnshop” mentality of the bank-centric Chinese financial system crossed the line for China’s leaders. Early the following month, a record $34 billion initial public offering for Ant Group, the behemoth fintech spinoff of Alibaba, was canceled 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 it’s Didi Chuxing’s turn. Didi, the Uber-like Chinese ridesharing service, apparently had the audacity to raise $4.4 billion in US capital markets, despite rumored objections from Chinese officials. After forcing the removal of more than 25 of Didi’s 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), Kanzhun’s BossZhipin (recruitment), and online private tutoring companies like TAL Education Group and Gaotu Techedu. And all of this follows China’s high-profile crackdown on cryptocurrencies.
It is not as if there were a lack of reasons – in some cases, like cryptocurrencies, perfectly legitimate reasons – for China’s 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 artificial intelligence. 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 rationalized, 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 economy’s 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 households’ 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 GDP – 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 China’s economy finally to succeed.
Confidence among businesses and consumers alike is a critical underpinning of any economy. Nobel Prize winning economists George Akerlof and Robert Shiller view confidence as the cornerstone of a broader theory of “animal spirits.” This notion, widely popularized by John Maynard Keynes in the 1930s, is best thought of as a “spontaneous urge to action” 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 trust – trust in the consistency of leadership priorities, in transparent governance, and in wise regulatory oversight – 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 government’s 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 authorities’ recent moves against the tech sector could be a tipping point. Without entrepreneurial energy, the creative juices of China’s New Economy will be sapped, along with hopes for a long-promised surge of indigenous innovation.
China’s mounting deficit of animal spirits could deal a severe, potentially lethal, blow to my own long-standing optimistic prognosis for the “Next China” – 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.
Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.
Copyright: Project Syndicate, 2021.
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