Revisit China's Industrial Policies and Common Prosperity
Reading Notes Series
Dear readers, I am writing this post because a friend of mine who has a strong interest in Chinese politics recommended that I read the shareholder letter from Ronnie Chan Chi-chung, Chairman of both the Hang Lung Group and Hang Lung Properties. He has a thoughtful perspective on the Chinese economy and politics, and in his 2021 shareholder letter, he discussed several issues including industrial policy (tutoring industry and internet industry) and common prosperity, which are topics I have also written about in previously posts. Therefore, I hope to share his thoughts and provide a new perspective for those interested in understanding the logic behind China's government decisions and the future development of the Chinese economy.
Before diving into the content, here are some baisc background information: Ronnie Chan Chi-chung is the Chairman of both the Hang Lung Group and Hang Lung Properties. He was born in Hong Kong and has obtained a Master of Business Administration from the University of Southern California. The Hang Lung Group, which has a stock code of 0010.HK, is a well-established listed company in Hong Kong with over 50 years of experience in property development. In the 1990s, the company expanded into mainland China and has built two landmark projects in Shanghai: the Hang Lung Plaza and the Grand Gateway Shanghai.
Please note that the following excerpts are from the 2021 shareholder letter. It may take approximately ten to fifteen minutes to read through them.
Related posts on topics discussed:
#1 Thoughts on China's Stringent Regulations on the Tutoring Industry
#2 China in the Post-Pandemic Era
#3 Three Considerations for Investing China
Now let me turn to two major societal and economic issues on the Mainland. The first is common prosperity and associated policies such as limiting Internet platform companies and certain educational institutions.
Everyone who overreacts to Beijing’s common prosperity pronouncement has forgotten that China is a socialist state, albeit practicing market economics in the past four decades. Many in the West still cannot accept that there are other forms of capitalism that can also create wealth for society. Consequently, they subconsciously or unconsciously reject China’s mode of market economy with socialistic characteristics. It is my way or no way. No wonder such narrow-minded individuals have a hard time understanding China. The source of their prejudice is usually more emotional than intellectual.
Remember what Mr. Deng Xiaoping said at the very beginning of the Reform and Opening Up Policy – let some get rich first. The key words are of course “get rich” but let no one forget the word “first” as well. Every society must first create wealth and then distribute it somewhat fairly.
To me and my family, the best way to “distribute” is to voluntarily give all, or substantially all, of the wealth away. As a principle, which we have held for many decades, we do not believe in inherited wealth; we prefer to recycle the capital back to society. But this should not be done involuntarily, so the government’s role becomes significant. Taxation and other means of redistribution are necessary, and every country must decide for itself what the right level is.
Enlightened wealthy people should accept, if not welcome, such measures, as long as they are not excessive to a point where the incentive to create further wealth is seriously curtailed. After all, the balance of wealth redistribution is an important factor in maintaining a relatively peaceful social environment. If not, history amply demonstrated that there will be severe backlashes, which is not good for anyone. By definition, the one who has the most will, in such a situation, also have the most to lose.
Let us also not underestimate the intelligence of the Beijing leaders. They did not greatly lift the standard of living of 1.4 billion people by being foolish. When China did not adopt market policies from 1949 to 1978, the country was poor, very poor. Once she changed, she became rich. Will Beijing reverse policies again? Only the foolish would think so. From what I as an outsider can observe, Beijing knows well what they are doing. The methods they employ are far from perfect, but there is a clear logic to their decisions. And when they discover that they are wrong, they usually quickly adjust, and adjust they can. Can they falter? Of course, but so far so good after 43 years of reform.
So why common prosperity? In fact, the question should be: why not? On the questions of why now and what it means, I have the following opinions. First, timing. After four decades of fast economic growth, considerable wealth has been amassed. However, its distribution in society is highly uneven. As long as most people in society still see their livelihoods improving and their future may well be better off than the past, people are relatively content. Economic opportunities are still available to those who try. Consequently, society is still somewhat calm. However, it is also true that some of the nouveau riche, including some super wealthy, have not been behaving wisely. For example, flaunting wealth is usually not a good idea. As a result, there is always the possibility that tensions may one day rise between economic strata. The government’s job is better to prevent tension than to fix it after it causes serious trouble.
To be sure, China does not have a monopoly on these problems. Huge wealth gaps are also found everywhere, including in almost all advanced Western economies. For the past 20 years or so, financial wizards from investment bankers to private equity investors have accrued an inordinate amount of wealth. Around the same period, tech moguls have racked up perhaps even more personal fortune. In my opinion, the latter group at least added tremendous value to society (with concomitant problems) compared to the former.
All that goes to show that humankind in the West and East probably has never witnessed another time when personal wealth could have piled up as much as in the past two decades. If not handled carefully, this cannot end well. Whereas the U.S. seems incapable of addressing this issue, Beijing is at least trying to do something about it.
In China, because the government is very cautious about financial security, the private sector’s participation in the financial services sector is limited. However, some of the technology firms, mostly in software, have grown to unimaginable sizes, and certain of them have increasingly encroached on financial services. Not being regulated as financial services entities, some have become extraordinarily powerful.
Elsewhere in the world, the largest banks, which are considered a systemic risk to the global economy if they fail, have been put under severe prudential rules, especially since the Global Financial Crisis of 2008. In China, some non-bank financial institutions, a prime case being Ant Financial, are hardly regulated at all, but in size, they are far bigger than any of those highly regulated banks around the world. Precisely because they are at best lightly supervised, their growth rates can be wild. If some of them become publicly listed with shareholders from around the world, the ramifications will be even more complicated. What if one of them fails? How contagious will this be to other similar institutions? Imagine the systemic risks that will be posed to the Chinese economy, and indeed the global economy given how connected the world has become. The risk to the world of one such bankruptcy is incalculable. But even if such a calamity does not happen, one can foresee the further concentration of wealth. In the 20th century, it was said that oil was black gold. Remember the two oil shocks of 1973 and 1979. In general, it redistributed wealth from the energy poor countries to those that are naturally endowed. Today, in the 21st century, data is digital gold. Companies and individuals with access to data will be king. With China being one of the most advanced digitalized economies in the world, and with Internet companies being predominately privately owned, the wealth gap can only widen further.
There are two added complications. First, the regulation of data anywhere in the world is a new phenomenon. With new technology such as AI, the amount of data will proliferate. Who then will own this digital gold and to what end? It can be seriously misused and create grave social or even political disasters. Every government is watching it with a hawk’s eyes. The second complication is that, given terrible China-U.S. relations, data security has become a top national security issue.
From this discussion, it is clear that Beijing’s clamping down on certain Internet platform companies is not to rob the rich to give to the poor. It is not a matter of the government now being against rich people. It has many bigger and more critical considerations of national financial stability, data security, and even political stability.
If common prosperity is not to pull the wealthy down, then what is it? First, it is to enlarge the pie so that more people can benefit. Second, much work remains to bring the lower economic echelon up. Yes, China has successfully lifted some one hundred million of her people out of abject poverty, but that poverty line is still rather low compared to international standards, such as those set by the World Bank. Besides preventing those recently lifted out of poverty from falling back, Beijing now has to meet a higher bar in the coming years and decades. Yes, Beijing is encouraging the haves to take care of the have-nots. But as both theory and practice tell us, philanthropy alone can never solve the poverty issue. It is helpful but inadequate.
The only solution is to enlarge the pie, while using administrative measures including taxation to redistribute. If anyone understands the consequences of removing individual incentives, it is Beijing. For the first 30 years of its existence, the PRC tried, and the result was common poverty and not common prosperity. Beijing leaders today all grew up in the 1950’s and 1960’s. They know this lesson best.
I believe there may be at least one other critical reason why the Chinese government is cracking down on some Internet platform companies and educational entities. Educationalists, psychologists, and social workers in the U.S. know all too well that their society is increasingly suffering from another epidemic, that of mental illness, especially among young people. 70% of the undergraduates of a top Ivy League school need some form of psychological counseling. In my alma mater, which is a large reputable American university of which I was once a trustee, the mental health of students was solemnly discussed at the board. These are definitely not isolated cases. The problem is ubiquitous.
I do not believe that the U.S. has a monopoly on this, although unfettered personal freedom, not properly balanced by responsibility, must have exacerbated the problem. Europe is not exempt, and Asian countries including China have their share. At issue is what is being done about it. Given their social norms and political systems, what Western governments can do to prevent the problem is rather limited. They can at best do more to treat the symptoms. But it is frankly already too late. The Chinese system, on the other hand, may have a better chance, if not to prevent it, at least to minimize it.
Herein is a negative aspect of technology. We know all the good that technology has brought to humankind, but it is almost a taboo to discuss its negative sides. Let me illustrate this with an anecdote.
Recently I bumped into a longtime friend. He and his 30-year-old daughter both love computer games and have more recently taken up virtual reality (VR) games. He told me that whereas now they have to put on a pair of goggles to get into the VR world, the next generation technology may just be a pair of contact lenses with a chip in them. Whatever the case, his daughter often has nightmares because of the long hours spent in the VR realm, and we know how violent such programs can be.
My friend’s experience and his daughter’s troubled me greatly. I ask the question: what if our ten-year-olds spend hours each day in the VR world? What would happen to them? After a while, would they be able to differentiate between the real world and the virtual world? Whether such children are being actively manipulated – easily done with technology – or are passively responding to what they see and experience, what would be their mental state and mental health? What would happen to their independent thinking, analytical ability, moral discernment, and social skills? I do worry greatly for the next generation everywhere, but especially in the West.
I suspect that such an epidemic could not have escaped the attention of China’s top leaders. Could it be that the limiting of students’ daily time on computer games and the like is a way to protect the country’s youth from mental distortion? I believe so.
The curbing of certain educational institutions is also meant to prevent exacerbation of a similar problem. Chinese schools are known for the pressure they exert on students such as for rote learning. It cannot but have an effect on the overall development of the youths of the country. The latest policy will hopefully improve their general well-being, including their psychological health. Moreover, the new policy attempts to equalize opportunities of the poor versus the rich. Whether it is effective is another issue. The purpose nevertheless seems clear.
Thanks for your reading and I hope you enjoy it. Stay safe and see you next time.
Truly a philosopher businessman