(This piece is my year in review; here’s my letter from 2020)
I’ve by now lived in each of China’s main megaregions. It is time to make assessments.
Everything that can go wrong in urban design has gone wrong in Beijing. The climate is arid and prone to northerly sandstorms. Its streets are unwalkable, but a stroll would reveal that its imperial heritage, made up of alley houses called hutongs, is slowly being taken over by its socialist heritage, made up of gray Soviet blocks that tower over all. Beijing is therefore a desert steppe city with Stalinist characteristics. A decade ago, the city was a lively place. One can find no shortage of people reminiscing about visiting art shows and fun bars in hutongs, then grabbing roadside barbecue just outside. Today, it is a concrete no-fun zone and the most restrictive city in the country. But Beijing is redeemed by its intellectual life. It is the center not just of state power, but also universities and the biggest-dreaming startups. For those who can work up the courage to confront the mess of its urban city, a sparkling dinner awaits.
A hundred years ago, Shanghai (where I currently reside) was the city in Asia where the ambitious could live comfortably while making a great deal of money. A rough few decades later, that fact is true once more. Shanghai is by far the most westernized city in China, attracting perhaps the majority of foreign nationals as well as Chinese who have spent time abroad. One can live in the tree-lined former French Concession, which today hosts the greatest concentration of coffee shops in the world, and work in office settings little different from those in Singapore and Hong Kong. It’s easy to make day trips to the canal cities of east China that enchanted poets and emperors alike. Shanghai today is culturally on par with Beijing, offering no fewer selections of visual and performance art. A more valid contrast is that Shanghaiers are more concerned with practical affairs. Its people are focused on producing the sorts of food and fashion businesses that make the city still more livable.
The Greater Bay Area is a bit more of a mystery to me, given that I lived in the failing part—Hong Kong—rather than the growing part: Shenzhen. At the start of reform and opening, Shenzhen absorbed the shock troops of Chinese entrepreneurialism. The southeastern region has long focused more on commerce than culture, having produced relatively fewer objects of historical resonance. When the British seized Hong Kong, the port was a mostly-barren rock, while Shenzhen was barely a settlement at all. Even Guangzhou, a major mercantile hub, has never quite been a center of culture, only cuisine. The southeast is pursuing a strategy similar to Shanghai’s: the development of service sectors around a vibrant manufacturing base. But it is doing so with less taste. Although Shenzhen is less fun than Shanghai, its region is probably the most dynamic and forward-looking part of the country today.
The central government has delineated around a hundred million people to each of these megaregions and charged them to drive future growth. Beijing, the political center of the country for most of the time since Mongol rule in the 13th century, anchors the northern hub, which also includes Tianjin and relatively smaller cities. Shanghai leads east China, a manufacturing and cultural center since the 10th-century Song dynasty, which counts the nearby cities of Hangzhou, Suzhou, and other medium-large cities. And there’s no obvious leader in the southeast, but it is between Shenzhen, the richest city in the region, and Guangzhou, the political capital of the province and a hub of international commerce since the 18th century.
Each region has a different personality. The north is economically dysfunctional. Large parts of it suffer from resource dependency, environmental problems, and the population loss that results from these trends. Cities near Beijing showcase overcapacity in steel and coal, while Tianjin is well-known for having falsified its economic data. The northeast provinces nearby have seen a population decline of around 10% over the last decade, while the north as a whole has seen its share of the country’s GDP shrink from half in 1960 to a third today.
Beijing however has bucked the region and seen strong growth. It is the political center of the country and reaps every economic advantage from that status. That means retaining the bulk of the state sector as well as the industries most dependent on political rents. Thus it’s not so different from Washington, DC, with its mix of embassies, think tanks, and industries that need lobbying. Not every sector in Beijing though is dependent on the beneficence of government. Although Alibaba is in Hangzhou and Tencent is in Shenzhen, Beijing hosts the preponderance of consumer internet firms, like ByteDance, Meituan, and JD. Beijing is a good place to find talent because it has led for so long and because many of the country’s best universities are there. Whereas a lot of the entrepreneurs in Shenzhen are dreaming of building billion-dollar businesses, those in Beijing are at work building the kind that reach hundreds of billions.
Shanghai is more commercially oriented. Around a thousand years ago, the region of east China started to transform into the fiscal center of the country, as people moved from the millet-growing north into the more productive rice-growing east. The area received another boost with the influx of New World silver, propelling Nanjing, Suzhou, and Hangzhou into the first cities in the world that made luxury goods for global markets. Dotted around these metropolises were market towns producing rice, ceramics, silk, and other goods. Shanghai came into its own through the slow collapse of the Qing. By the turn of the 20th century, it attracted the most dynamic Chinese entrepreneurs and became the center of the country’s industrial works. At the same, Shanghai was the gambling and brothel capital of the world, the center of the country’s opium trafficking, and the extraterritorial playground for British, French, and American businessmen.
Today, Shanghai’s seedy past is mostly out of view. But the economic dynamism has not quite faded away. The city hosts the preponderance of the Chinese headquarters of multinationals. And it attracts Chinese entrepreneurs who appreciate its business environment: they tell me that local government districts compete against each other to host companies, and are constantly asking how they can help. While the area around Beijing is failing, the cities around Shanghai are many of China’s best economic successes. Simon Rabinovitch describes it best: “Beijing, a showcase for political power, is blotted by the hulking headquarters of state-owned enterprises. Day trips take reporters to China’s greatest economic calamities, from overbuilt Tianjin to coal-mine carnage in Inner Mongolia. In Shanghai, which functions remarkably well for a city of 25m, reporters instead hop over to see high-tech innovators in Hangzhou, nimble exporters in Wuxi and ambitious entrepreneurs in Wenzhou.”
The fact I appreciate best is that Shanghai is highly livable. Among cities in Asia, Tokyo is a singular miracle, but I think that Shanghai is not lesser than Singapore, Hong Kong, or Seoul. Business executive types tell me that New York is the only city that rivals its dynamism. I agree that both cities have a special energy: both are on major waterways, invest a great deal in greenery, and have a thriving business environment to support excellent leisure activities. A huge number of people moved from Beijing to Shanghai after the start of the pandemic, including me. Whereas Beijing is hit hard by every domestic outbreak, Shanghai hasn’t had many cases while being the least restrictive city in the country. It’s hard for us new arrivals not to smirk at our friends in the north each time we read about new restrictions in Beijing.
The Shenzhen region is harder to write about given its patchwork nature. Shenzhen surpassed Hong Kong to be the region’s richest city in 2018. But it hasn’t been able to wrest leadership away from Guangzhou, which jealously guards its political power. Dongguan, Zhuhai, and Huizhou each pursue their own strategies, while Macau fits into the constellation as well (although it is less interesting given that it’s a single-industry town). Hong Kong, meanwhile, is a world unto itself. Since the political problems there over the last three years, the central government has made it obvious that it can think of the city only with exasperation. Rather than expect it to lead, Beijing is treating Hong Kong as something like an ulcer: a problem to manage away with hopefully not much more pain.
I left Hong Kong in 2018, before its protests and the ensuing political crackdown. I had hastened to leave then because I already felt the keen disappointment of living in a city in structural decline. I acknowledge that Hong Kong is an urban paradise: a tropical island with a splendid geographic setting, featuring a ring of skyscrapers that hug thickly-forested mountains. There the amenities of the tropics are easy to find: beaches, forests, wild birds and animals galore, all accessible by excellent systems of public transit. Manhattan meets Maui, in other words, at the mouth of the Pearl River. And there is still an interesting cast of characters, many of whom have adventured on the mainland or the rest of Asia, to enliven the city.
But Hong Kong was also the most bureaucratic city I’ve ever lived in. Its business landscape has remained static for decades: the preserve of property developers that has created no noteworthy companies in the last three decades. That is a heritage of British colonial rule, in which administrators controlled economic elites by allocating land—the city’s most scarce resource—to the more docile. Hong Kong bureaucrats enforce the pettiest rules, I felt, out of a sense of pride. On the mainland, enforcers deal often enough with senseless rules that they are sometimes able to look the other way. Thus a stagnant spirit hangs over the city. I’ve written before that Philip K. Dick is useful not for thinking about Hong Kong’s skyline, but its tycoon-dominated polity: “governed by a competent but fundamentally pessimistic elite, which administers a population bent on consumption. Instead of being hooked on drugs and television like in PKD’s novels, people in Hong Kong are addicted to the extraordinary flow of liquidity from the mainland, which raises their asset values and dulls their senses.”
Therefore I think there is little excuse for young people to live in Hong Kong. They should hop over to Shenzhen, which is an hour away by subway and decades younger by spirit. Shenzhen and Guangzhou are still attracting entrepreneurial types, producing an even more commercially-oriented culture than Shanghai. But while Shenzhen is pleasant, it is also a boring city with minimal culture. A friend relates an anecdote from a gallery artist, who said that clients in Shenzhen rarely comment on the art that they plan to buy. Instead they ask only its expected price in five years.
Prophets, not pragmatists
One shouldn’t overdraw the differences between these regions. After all, people and officials rotate between Beijing, Shanghai, and Shenzhen all the time. But I will exaggerate their differences as part of an exercise to decompose the heterogeneity behind Chinese growth.
There’s a little joke that the ideal company is led by a Beijinger, who would provide the vision, leadership, and government-relations savvy; its finances would be led by someone from Shanghai, and its operations managed by someone from Shenzhen (who would hire people from Sichuan and Anhui to do the actual work). Entrepreneurial friends say that doing business is most straightforward in Shenzhen: people there get together over dinner, discuss how to allocate the workload, and then do things the next day. Dinner in Beijing features lots of drinking, bluffs about one’s connections in high places, and then little follow up.
Beijingers are the way they are due to the imperial and socialist heritage of the city. The currency of Beijing is power. The party-state maintains a formal system of rank, a holdover of imperial times, which denotes the status of every public official. In the imperial era, the powerful enjoyed official rank and connections to the court. In the sociaist era—when distribution of goods was meant to be equal—the powerful enjoyed official rank, access to the party farms and best primary schools, and connections to the Central Committee.
I used to live in the embassy district, and on any given day the full complement of security services might come into view: army, paramilitary, police, plainclothes police, and so on. The aura of state power is overbearing in Beijing. By power I mean the physical infrastructure, which is meant to intimidate. Beijing’s boulevards are so unwalkable because they are designed less for pedestrians than for army parades. And by power I mean the structure of personal interactions. Beijing locals have adapted to the proliferation of rules not with complete obedience, but discernment of which can be safely ignored. Northerners are thus often unruly. When I’m in Beijing, I find myself sympathizing with the Legalist school of philosophy, which enjoys the ruler to govern with a brutal fist. I speak from the perspective of a cyclist, an aggrieved class everywhere. It’s frustrating to see so many moped drivers going the wrong way or riding on the sidewalk when they see no cops in sight.
But Beijing’s role is grander than mere enforcer of petty restrictions. Its control tendencies demonstrate a commitment to the transformative role of ideology. Shanghai and Shenzhen are creating wealth and leisure; Beijing is trying to lift their gaze towards its banner of utopia. The core of my letter in 2020 concerned centralized campaigns of inspiration, which is the need of the Communist Party to constantly mobilize the population through political campaigns. A distinctive feature of Chinese governance is to continuously fix slogans, like “reform and opening” to move the country away from socialism, and the more recent “common prosperity” to move it back. Beijing isn’t satisfied with greater national wealth. It is also seeking socialist modernization and the “great rejuvenation of the Chinese people.” That is a messianic drive, complete with sacred texts, elaborate rituals, and the occasional purge.
Shenzhen might stand in for the purest form of the Chinese moneymaking spirit. Many people, including northerners, move to Shenzhen for its relaxed political climate. Shanghai is a bit more of a middle ground between Shenzhen and Beijing. Although there is substantial economic dynamism in Shanghai, the data shows that the state sector makes up around the same share of the city’s economy as Beijing’s. Many of Shanghai’s favorite sons have moved up to Beijing to run the Politburo—including Wang Huning, the present head of ideology. And Shanghai of course was important for two of the most important political events in the Communist Party’s history: its founding in 1921 and being the political base of the Gang of Four during the Cultural Revolution.
In spite of my physical dislike of Beijing as a city, I find myself sympathetic to its spirit. There is a use for the hard men of the north. I appreciate this line from Amia Srinivasan in Tyler’s interview this year: “One thing history might show us is that it is the prophets, and not the mere pragmatists, who are the most powerful world makers.”
The apostles who govern in Beijing know that nothing can be more venal than the interests of capitalists, who dominate Shanghai and Shenzhen. That was the view of Chen Yun, a Shanghai native and state leader who was nearly the political equal of Deng Xiaoping. In the early debates around special economic zones, Chen noted that his home region was filled with opportunists who would destroy the social order for a dime.
A summer storm
Beijing’s goal is to channel entrepreneurial spirit towards useful goals. Profit cannot be the final standard of value, and the country’s best and brightest must work towards national salvation. I see that dynamic playing out in the regulatory campaigns this year.
The most important Politburo meeting of the year took place in April. The readout afterwards noted that the leadership identified a “window of opportunity” while growth was good to “concentrate on deepening structural reforms.”
It had previously signalled its unhappiness with the property and consumer internet sectors, and the leadership announced with this readout that there would be no better time to escalate its crackdowns. The central government subsequently launched campaigns to clean house. The tightening on every front has led the economist Barry Naughton to refer to the regulatory squeeze as a “summer storm” fit for the history books. I agree, and will make some remarks on the leadership’s goals as I see them.
When Beijing punished Ant Financial and DiDi, all of us were nervous that these companies were pawns in a game of elite politics whose rules aren’t revealed to anyone who isn’t a player. At this point, however, the punishment of these two firms looks rather small compared to everything that happened afterwards: the decapitation of online tutoring, new restrictions on video games, anti-monopoly actions against internet platforms, and passage of statutes governing data and privacy.
No small number of commentators have pointed out that any individual regulation passes muster on technocratic grounds. The US and Europe after all are debating rules with similar shapes—although they would never implement them with China’s speed and severity. I agree both with the commentators who see a sound technocratic foundation for these rules
as well as with commentators like Naughton who note that they add up to an unprecedented new program of political control on firms. Beijing expects companies to comply not only with formal regulations but also to a broader ideological agenda.
While Beijing has restrained internet companies, it has done nothing to hurt more science-based industries like semiconductors and renewables. In fact, it has offered these industries tax breaks and other forms of political support. The 14th Five-Year Plan, for example, places far greater emphasis on science-based technologies than the internet. Thus one of the effects of Beijing’s squeeze has been prioritization of science-based technologies over the consumer internet industry. Far from being a generalized “tech” crackdown, the leadership continues to talk tirelessly about the value of science and technology.
In nearly all of my letters over the years, I’ve lamented the idea that consumer internet companies have taken over the idea of technological progress: “It’s entirely plausible that Facebook and Tencent might be net negative for technological developments. The apps they develop offer fun, productivity-dragging distractions; and the companies pull smart kids from R&D-intensive fields like materials science or semiconductor manufacturing, into ad optimization and game development.”
I don’t think that Beijing’s primary goal is to reshuffle technological priorities. Instead, it is mostly a mix of a technocratic belief that reducing the power of platforms would help smaller companies as well as a desire to impose political control on big firms.
But there is also an ideological element that rejects consumer internet as the peak of technology. Beijing recognizes that internet platforms make not only a great deal of money, but also many social problems. Consider online tutoring. The Ministry of Education claims to have surveyed 700,000 parents before it declared that the sector can no longer make profit.
What was the industry profiting from? In the government’s view, education companies have become adept at monetizing the status anxieties of parents: the Zhang family keeps feeling outspent by the Li family, and vice versa. In a similar theme, the leadership considers the peer-to-peer lending industry as well as Ant Financial to be sources of financial risks; and video games to be a source of social harm. These companies may be profitable, but entrepreneurial dynamism here is not a good thing.
Where does Beijing prefer dynamism instead? Science-based industries that serve strategic needs. Beijing, in other words, is trying to make semiconductors sexy again. One might reasonably question how dealing pain to users of chips (like consumer internet firms) might help the industry. I think that the focus should instead be on talent and capital allocation. If venture capitalists are mostly funding social networking companies, then they would be able to hire the best talent while denying them to chipmakers. That has arguably been the story in Silicon Valley over the last decade: Intel and Cisco were not quite able to compete for the best engineering talent with Facebook and Google. Beijing wants to change this calculation among domestic investors and students at Peking and Tsinghua.
Internet platforms aren’t the only industries under suspicion. Beijing is also falling out of love with finance. It looks unwilling to let the vagaries of the financial markets dictate the pace of technological investment, which in the US has favored the internet over chips. Beijing has regularly denounced the “disorderly expansion of capital,” and sometimes its “barbaric growth.”
The attitude of business-school types is to arbitrage everything that can be arbitraged no matter whether it serves social goals. That was directly Chen Yun’s fear that opportunists care only about money. High profits therefore are not the right metric to assess online education, because the industry is preying on anxious parents while immiserating their children.
Beijing’s attitude marks a difference with capitalism as it’s practiced in the US. Over the last two decades, the major American growth stories have been Silicon Valley (consumer internet and software) on one coast and Wall Street (financialization) on the other. For good measure, I’ll throw in a rejection of capitalism as it is practiced in the UK as well. My line last year triggered so many Brits that I’ll use it again: “With its emphasis on manufacturing, (China) cannot be like the UK, which is so successful in the sounding-clever industries—television, journalism, finance, and universities—while seeing a falling share of R&D intensity and a global loss of standing among its largest firms.”
The Chinese leadership looks more longingly at Germany, with its high level of manufacturing backed by industry-leading Mittelstand firms. Thus Beijing prefers that the best talent in the country work in manufacturing sectors rather than consumer internet and finance. Personally, I think it has been a tragedy for the US that so many physics PhDs have gone to work in hedge funds and Silicon Valley. The problem is not that these opportunities pay so well, rather it is because manufacturing has offered dismal career prospects. I see the Chinese leadership as being relatively unconcerned with talent flow into consumer internet and finance; instead it is trying to fashion an economy in which the physics PhD can do physics, the marine biology student can do marine biology, and so on.
There are of course risks with a blunt reshuffling of technological priorities. The investment model of venture capital—in which a relatively small amount of funding can trigger explosive growth—fits like a hand in glove with consumer internet business models. VCs don’t tend to offer quite as much patience as semiconductors demand. Furthermore, many technological advances have been driven by consumer uses that Beijing no longer looks upon with favor. Demand for better video game graphics, for example, improved the sophistication of GPUs, which in turn produced better machine-learning algorithms.
But it’s also the case that state-driven technology efforts can work. The CPU, after all, grew out of the barrel of a gun. To be more precise, the beneficence of the Pentagon and NASA (another state-driven effort) gave the chip industry its crucial first customers. And venture capital did after all fund the first chip companies, including Intel. Beijing is trading unfettered exploration for state-directed goals, and it’s possible to argue that both the US and China are pursuing optimal strategies. As the technological leader, the US must encourage active exploration, because it has to blaze a new path. As the technological follower, China can simply follow the roadmap set by the US, while enjoying the easier task of reinventing existing technologies rather than dreaming up new ideas. It can worry about new invention after it has caught up.
A more serious risk with Beijing’s crackdown is its potential to dampen economic dynamism writ large. People working in online education today suffer from PTSD. Jack Ma has been mostly out of the public eye for a year. Meanwhile, many of the most successful Chinese founders have stepped down or into the background. No public figure in China dares to be too visible today. One motivation for dreamers to start companies might be to enjoy the outrageous excesses of being billionaire playboys. While I’m on the subject of Elon Musk, we should note that he did after all make his fortune in consumer internet before he embarked on manufacturing.
It’s too early to tell if in a decade China will have fewer founders of Jack Ma’s daring. So far at least, entrepreneurial types around me have found his example too removed to be worth bother. He remains, after all, one of the wealthiest people in the world, while he spends his time playing golf, doing calligraphy, or examining agricultural technologies in the Netherlands. My view is that it’s going to take more than this regulatory campaign to defeat dynamism in China. We might in retrospect see this summer as China’s high point in reining in the excesses of its own Gilded Age, which has produced ebullience as well as hucksterism. In this best case, Beijing would succeed at taming its robber barons without extinguishing dynamism in the following century.
Strangling the cultural sector
But there’s a serious problem with the regulatory squeeze. The summer storm has battered industries and left people feeling adrift. The trouble is that the party-state looks like the God of the Old Testament: a wrathful entity that demands harrowing displays of fealty to demonstrate commitment to a values-based faith. Disobedience provokes storms and other manifestations of celestial displeasure. Compliance means not just material gifts—honey, manna, and government sponsorship of factory financing—but also the realization of national greatness.
If Beijing were only brutal or unpredictable, then people wouldn’t be so on edge. But it is both. No one is sure how far the state will prosecute its values-based agenda. A lot of things happened this year that remain too bizarre for belief. For example, the end of the summer was the time when everyone’s nerves were most short, as they wondered what “common prosperity” will herald and whether the state will ravage other industries with the ferocity it brought to bear on online tutoring. The organs of state media chose that moment to publicize the ultra-left ravings of an obscure blogger.
To the author’s own astonishment, he found his celebration of the crackdown splashed onto the homepages of state media and pushed into newsfeeds. The rest of us were left feeling bewildered that the propaganda officials selected such fringe view for a news push.
Government officials subsequently emerged to assure people that common prosperity will not mean egalitarianism. Still, precisely what it will mean is still not scoped out. Beijing reined in its control tendencies only after it had thoroughly terrified people. The essential bet of top leader Xi Jinping is that there will always be a large stock of dynamism in the country, and the job of the party-state is to steer that energy in the right directions. That bet might turn out to be successful, but this push is also demonstrating the odium of never-ending restrictions on personal liberty.
While it’s too soon to say that regulatory actions have snuffed out entrepreneurial dynamism in China, it’s easier to see that a decade of continuous tightening has strangled cultural production. I expect that China will grow rich but remain culturally stunted. By my count, the country has produced two cultural works over the last four decades since reform and opening that have proved attractive to the rest of the world: the Three-Body Problem and TikTok. Even these demand qualifications. Three-Body is a work of genius, but it is still a niche product most confined to science-fiction lovers; and TikTok is in part an American product and doesn’t necessarily convey Chinese content. Even if we wave nuances aside, China’s cultural offering to the world has been meager. Never has any economy grown so much while producing so few cultural exports. Contrast that with Japan, South Korea, and Taiwan, which have made new forms of art, music, movies, and TV shows that the rest of the world loves.
The reason for China’s cultural stunting is simple: the deadening hand of the state has ground down the country’s creative capacity. The tightening has been continuous. Consider that the Three-Body trilogy had been published in Chinese by 2010, which was a completely different era. I think it’s quite impossible to imagine that this work can be published or marketed today. It’s not just the censorship related to direct depictions of the Cultural Revolution. A decade ago, the CEO of Xiaomi went on Weibo to share his thoughts on the book; today, few personalities speak up to say anything except the patriotic or the mundane. Therefore I’m not terribly optimistic about the future of Chinese science fiction, which today has almost as many people studying the field as actual practitioners.
Throughout the last decade, Xi and the rest of the leadership have proved successful at convincing or coercing elites that it’s not worth their while to ponder such abstractions as whether the country is on the right path. These elites should keep their heads down and make money. There are lots of reasons for Chinese not to speak up: fear of the state; pragmatism from a sense that nothing they say can change the situation; as well as resentment against western voices for invalidating some of the positive aspects of the country. At the same time, the propaganda authorities have weaponized the public sphere to wring out dissent. A critical comment posted to Weibo or WeChat might prompt the platform to delete one’s account. If that doesn’t happen, then the internet mob will pounce. In spite of the greater visibility of this internet mob, I think we are still only scratching the surface of Chinese nationalism.
There’s little prospect of loosening in sight. Writer friends say that there’s no way that they can publish interesting work in 2022, given that the 20th party congress will be held at the end of the year. We have to accept that the direction of travel is towards still-more tightening. Just as a house can never be too clean, a city can never be too protected against Covid-19, and the country can never be too free of spiritual pollution. One of Xi’s legacies has been to push officials to err on the side of implementing controls too tightly, such that party officials are now trying to prove themselves to be more Marxist than the general secretary. It’s a safe bet that the government will control too much rather than too little.
The consequence is that there’s little way for Xi to achieve his exhortation this year for China to make its image more “lovable and respectable.”
Instead, the country is more likely to be seen as a land of censorious commies. In the developed world, China’s unfavorability ratings have reached an average of 60%, according to Pew Research. Foreign agitation against the regime used to be contained to Chinese dissidents and niche groups on the political spectrum; today, it is a generalized phenomenon.
Beijing worsens the situation with its need to answer every insult with insult. It unfortunately cannot practice restraint by invoking the proverb: “A decade is not too long for the gentleman to await his revenge.” Like clockwork, every time China decides to push back against claims that it is too brutal, the government can’t help but undertake an act of extraordinary pettiness to bully a critic. Last year, it expelled the cream of the western reporting corps for a reason still hard to believe today—that the opinion section of the Wall Street Journal published an insensitive headline—such that only a handful of reporters remain on the ground between the Journal, the Times, and the Post. This year, Beijing proved that there is no country, company, or individual too unimportant to be the subject of state-media tirades or state-sponsored economic punishment.
Thus China today faces a global surge of dislike. That’s due to the operation of detention camps for ethno-religious minorities, a political crackdown in Hong Kong, abusive threats against other countries, as well as other issues. And it is also because the country has failed to cultivate a “lovable and respectable” image. Sentiment can shift against the country so quickly because there is little curiosity in it. The party-state really seems to believe that the rest of the world must love China because of its economic growth. The joke is on them, because Americans and Europeans do not admire economic growth and have dreamed up a thousand reasons to avoid it for themselves. They care instead more about cultural issues, which is why people have fond views of Japan, South Korea, and Taiwan, which have combined economic growth with cultural creation.
Comprehensively deepening reform
But Beijing’s control tendency isn’t the only story in this country. That spirit is resented by Shanghai and Shenzhen, which mediates it with their commercial tendencies. Pushback from local governments can occasionally mitigate Beijing’s worst ideas. Shanghai and Shenzhen are also sometimes able to help improve the institutional capacity in Beijing. The Chinese growth story is not simply produced by the government or by entrepreneurs. It is a heterogenous entity where different regions dialectically engage to obstruct and improve each other.
One can tell a story of stagnation in cultural production in China. And one is right to worry that the same will happen to the economy writ large. But we’re not quite there yet. The economy did not do well this year, but almost the entirety of the slowdown can be attributed to policy choices: either pandemic controls or regulatory tightening. Economists have said for years that China needs to deleverage its property-driven economy, and this year the leadership decided to do so. The central government embarked on this agenda because it has judged that its program of structural reforms will support growth in the medium to long term. It has certainly made mistakes, especially in the power market, but the campaigns of this year display a willingness by Beijing to actively shape events. Ironically, it is these self-proclaimed Marxists who are willing to resist grand forces of history, for example in the cases of globalization or financialization.
The influence of Shanghai and Shenzhen are visible in the trajectory of economic improvement. First and foremost is the continued buildup of wealth, not just in big cities but also rural areas. Air quality has also substantially improved in Beijing and Shanghai over the last decade.
The government of daily life has also gotten better. One can now obtain business licenses fairly straightforwardly; the intellectual property system has become robust, such that Chinese firms are bringing huge numbers of cases against each other; regulations tend to be relatively transparent and professional; and many types of risks are being squeezed out of the financial system. I submit that Chinese local government functions today would look fairly ordinary in any other advanced country. Outside of the security and propaganda apparatuses, government departments work as they would in the US or Europe, only with greater digitization.
In more tangible matters, residents in Shanghai like to talk about improvements to city life that accelerated in only the last few years. The government keeps building new parks, bike trails, and commercial areas to improve the city’s already substantial livability. Chinese firms have not created many global brands, but I have confidence that will change. Entrepreneurs are still full of big dreams, having failed to receive the memo that globalization is dead. Those who sense foreign hostility towards China would keep their identity quiet, with the hope that the product quality will speak for itself. In segment after segment, I find that the quality of Chinese products has become strong. And I expect that good branding will follow good quality.
A metric of general quality improvement I like to use is the standardization of slow-casual chain restaurants. No, I’m not mostly eating out in the likes of Din Tai Fung. But chains featuring Sichuan sauerkraut fish and Shaanxi breads and meat are now plausible and even fun places to go to lunch. Anyone in food management can tell you that it’s hard to achieve a high degree of consistency across stores and across cities. That is something that Chinese managers have in recent years figured out. Although I’m pessimistic about the creation of Chinese cultural products, I acknowledge a possible exception in visual art. There’s energy in the art scene in Shanghai, driven by the buildout of new museums, a lack of established pieces to fill spaces, and curiosity among the public for new things. These are ideal conditions for art experimentation. If anyone can push the art paradigm beyond displaying long-dead masters in a white cube, Chinese spaces are a good bet.
A lot of macro indicators on China are disappointing, like a rise in the amount of credit needed to create growth and a fall in total-factor productivity growth. But we can’t let these poorly-measured data points govern as the gospel truth to understand this economy. Figures must be reconciled with observations on the ground. During my time in Hong Kong, I found it absolutely hilarious to see annual rankings by think tanks giving the city-state the highest marks on economic freedom, while its business landscape has been static for decades. I submit that observers are making a mistake in the opposite direction when they use macro indicators to underrate dynamism in China.
China’s economy is in structural slowdown. But there’s still lots of catch-up growth available to a country with one-seventh the level of GDP per capita of the US. And there’s strong growth momentum in individual sectors, especially the science and technology fields that I spend my days studying. An American friend who sends his kids to school in Shanghai tells me that Chinese schools teach math the way that American schools teach sports: with the expectation that every child is capable. China’s semiconductor industry remains weak, but broader science efforts haven’t done too poorly. China’s space program, for example, might be years or decades behind NASA, but it has shown the capability to learn from past missions and take on increasingly difficult tasks. A steady capacity to execute on bigger and bigger projects also describes China’s energy infrastrastructure buildout. These produce the sort of national confidence to do hard things that the US had in the ‘50s and ‘60s.
For someone in the middle class, there has never been a better year to live in China. That comes down to the entrepreneurs, who are creating businesses to please people. They are not at all different, I submit, from their counterparts in the west. The control tendency of the government would every once in a while assert itself, which annoys entrepreneurs to no end. Their ability to push back has shrunk during Xi’s administration, but it has not completely disappeared. Every so often, they are able to tell Beijing to stuff it, through accepted administrative channels, for example in the case of excessive pandemic controls.
And the central government is itself keen for improvement as well. It has displayed a stronger record of reform than any other developing country, as the leadership keeps pulling off politically-difficult tasks: shrinking the state sector, re-orienting the economy towards export-led growth after WTO accession, and so on. One major question now is whether the central government still has the stamina to reform. After this summer, I think the answer is yes.
We have to avoid the triptych that outside observers perfected through the course of the pandemic. “There’s no way that China can control this problem at the start of the crisis; “These numbers aren’t real” during the crisis; and “It wasn’t that big of an accomplishment, and anyway authoritarian systems are perfectly suited to managing these situations” by the end of the crisis. China has strong entrepreneurs as well as a strong state, and these two sometimes reinforce each other. An interesting fact I noticed recently is that the party secretary of Zhejiang province, one of the country’s most important, used to be a director of China’s manned space program.
A skim through the Wikipedia pages of provincial party secretaries would reveal a diverse range of technocratic experiences.
An important factor in China’s reform program includes not only a willingness to reshape the strategic landscape—like promoting manufacturing over the internet—but also a discernment of which foreign trends to resist. These include excessive globalization and financialization. Beijing diagnosed the problems with financialization earlier than the US, where the problem is now endemic. The leadership is targeting a high level of manufacturing output, rejecting the notion of comparative advantage. That static model constructed by economists with the aim of seducing undergrads has leaked out of the lecture hall and morphed into a political justification for only watching as American communities of engineering practice dissolved. And Beijing today looks prescient for having kept out the US social media companies that continuously infuriate their home government.
A willingness to assess foreign imports as well as a commitment to the physical world combine to make me suspect that Beijing will not be friendly towards the Metaverse. Already state media has expressed suspicion of the concept.
If the Metaverse will exist in China, I expect it will be an extremely lame creation heavily policed by the Propaganda Department. Xi’s speech on common prosperity in October noted that: “The rich and the poor in certain countries have become polarized with the collapse of the middle class. That has led to social disintegration, political polarization, and rampant populism.” The Metaverse, which represents yet another escape of American elites from the physical world, can only exacerbate social differences. It is too much of a fun game, like cryptocurrencies, played by a small segment of the population, while the middle class dwells on more material concerns like paying for energy bills. It might make sense for San Franciscans to retreat even further into a digital phantasm, given how grim it is to go outside there. But Xi will want Chinese to live in the physical world to make babies, make steel, and make semiconductors.
The new peer competitor
When we speak about the growing competition between the US and China, we can’t focus only on the structural headwinds of the latter. Serious analysis demands an assessment of both. One of the major themes in Xi’s speeches over the last few years is that victory is certain, but the struggle will be difficult. That is identical to the rhetorical strategy behind Mao’s essay “On Protracted War,” which told adherents that victory is in reach, but only if they fight for it. Beijing is hunkering down for long-term competition, and I think it’s time for the US to get more serious.
The US, for starters, should get better at reform. The federal government has found itself unable to build simple infrastructure or coordinate an effective pandemic response. Somehow the US has evolved to become a political system in which people can dream up a hundred reasons not to do things like “build housing in growing areas” or “admit people with skills into the country.” If the US wants to win a decades-long challenge against a peer competitor, it needs to be able to improve state capacity. China by contrast has invested a lot more in domestic competitiveness and to make its economy more resilient.
The Chinese state has long placed greater value on resilience over efficiency, which has dragged down its performance on metrics that economists care about, like return on assets. In my view, that is as often an indictment of the economic profession. The US focus on efficiency has revealed the brittleness of its economy, which has neither the manufacturing capability to scale up domestic production of goods nor the logistics capacity to handle greater imports. Decades of American deindustrialization as well as an aversion against idle capacity has eroded domestic manufacturing. The US scientific ecosystem, with help from the federal government, has accomplished the spectacular feat of scaling mRNA vaccines. But it’s hard to name many other great things the US government has done since the pandemic. Too much of Washington, DC’s attitude smacks of “Are our people unable to handle a five standard-deviation shock? Well, let them eat black swans!”
Since the US government is incapable of structural reform, companies now employ algorithm geniuses to help people navigate the healthcare system. This sort of seventh-best solution is typical of a vetocracy. I don’t see that the US government is trying hard to reform institutions; its response is usually to make things more complex (like its healthcare legislation) or throw money at the problem. The proposed bill to increase domestic competitiveness against China, for example, doesn’t substantially fix the science funding agencies that are more concerned with style guides than science; and the infrastructure bill doesn’t seem to address root causes that make American infrastructure the most costly in the world. Congress is sending more money through bad channels. That’s better than nothing, but the government should attempt to make some bureaucratic tune-ups.
The US is ahead of China on the sort of mathematical economics that win Nobel Prizes. But China is ahead of the US on the actual practice of political economy. One study I enjoyed this year noted that the Chinese government sends more jobs through state-owned enterprises to counties with greater labor unrest.
I wonder how different the US would look today if the government did more to help workers. The US critique that “China stole the jobs” looks instead like a critique of its own economic system. China’s main activity was to invest in domestic competitiveness, thus becoming attractive to American firms, which relocated operations there. Meanwhile, the federal government did little to help disaffected workers at home. If there was a problem with this arrangement, fault should be on the US government for failing to restrain its firms or retrain its workers.
In the face of this challenge against a new peer competitor, the US has demonstrated a superb capacity for self-harm. I published a pair of essays this year that can be read in conjunction. In July, I wrote for Foreign Affairs on US technology restrictions. Entrepreneurial firms in China previously had no time for domestic technologies, preferring instead to buy the best, which is usually American. Then the US government designated them to various blacklists, giving them for the first time ever a business case for building up the domestic ecosystem. The result is that the US has turbo-charged Chinese competition by aligning the country’s most dynamic firms more firmly with Beijing’s self-sufficiency agenda. And in December, I wrote a piece for the Atlantic on US prosecutions of scientists. The state has subjected scientists to the tender mercies of the US criminal justice system, usually for charges related to relatively unimportant issues implicating research integrity. The theme of both essays is that the US is right to react to China’s predatory practices; but it has done so with methods that are mostly hurting itself.
One redeeming fact for the US is that there has been significant domestic pushback to some of the government’s actions—especially the prosecutions of scientists—such that it’s within the realm of imagination that the US government will substantially modify bad policies. This sort of correction after public criticism is more difficult in China, where critics might end up jailed. The US though should take more seriously the task of cultivating both strong entrepreneurs and a strong state.
I’m genuinely unsure of the outcome in one of the most crucial fronts of competition: whether there will be very substantial decoupling of businesses. It’s obvious that the US government and American intellectuals have succeeded in creating a climate of moral shame for doing business in China. But they have not won over the hearts and minds of the American business and financial communities. Some businesses and investors are ready to drop China, but I think they are far outnumbered by those who want to invest more. I don’t know how these forces will play out over the next decade.
The US exports on the order of $200bn in goods and services to China each year; but according to the Bureau of Economic Analysis, that figure is dwarfed by the $600bn of US sales in China. (The latter counts a sneaker or a phone made and sold by a US company in China.) I spend quite a lot of time engaging with US multinationals. They tend to cite with approval the Five-Year Plans, which make clear targets for say renewable energy deployment, which companies can match to their expansion plans. Policy continuity is less certain in the US, where economic incentives might disappear after the next election. The rule of thumb for US businesses is that China makes up half of global demand for most products, from wind turbines to structural steel; and China will account for a third to a half of expected growth over the next decade. These aren’t the figures of the Chinese government, but company projections. Of course these projections might be wrong, but US businesses feel that it’s mathematically impossible to lead the future without being active in the Chinese market.
None of them are keen to be pieces on a geopolitical chessboard. For the most part, American firms are unwilling to think too hard about the moral issues of doing business in China, choosing instead to say that Beijing’s actions are outside their scope of control. Their strategy is to keep out of the headlines while figuring out how to make more sales. One of the smart things that Beijing has done is not to retaliate against American companies for the actions of the US government; for the most part, Beijing has hugged them even closer by loosening restrictions in manufacturing and finance. Thus American companies are quietly localizing more of their Chinese production to remove their products from the jurisdiction of US controls. The response by Congress to this perverse consequence is to introduce yet more complex restrictions, like a possible national-security review mechanism for US outbound investments. It’s still early days in this big story.
Untangling the jumble
To figure out how far decoupling will go, as well as a hundred other important questions, we’ll need a better understanding of what’s going on in China. I believe that an essential analytical prior is to recognize that things are getting better and things are getting worse. As Chinese businesses and the government are growing more capable, the leadership is becoming more brutal towards many of its own citizens as well as foreign critics. China is, in other words, a place that both moves fast and breaks things and moves fast and breaks people.
China is like the thinking ocean in Stanislaw Lem’s Solaris: a vast entity that produces observations personalized for every observer. These visions may be a self-defense mechanism, allowing leftists to see socialism and investors to see capitalism; or, as Lem’s ocean might be doing, China is vastly indifferent to foreign observers and generates visions to play with them. Whatever the case, we need a better understanding of this country. Too many commentators have been interested in the story of China’s collapse. When the collapse doesn’t come, they lose interest and move on. It’s a more important and more subtle skill to figure out how this country can succeed, because that is the exercise the Chinese leadership is engaged in.
The modal piece of commentary on China focuses mostly on the country’s mistakes and weaknesses. In my view, much of this type of opinion is both useless and dangerous. It’s useless because it doesn’t make a serious attempt to engage with the country’s strengths; and dangerous because it implies that the west can do nothing since China will fail on its own. It’s possible, perhaps even likely, that China will fail. But it’s a mistake to assume that it will happen as a matter of course. Instead we should expect that it will become a major competitor to the US, which should not only do better itself but also make better assessments. That means producing more disinterested analysis. A lot of my work today involves benchmarking China’s capabilities to the US, in fields that include semiconductors, renewables, and manufacturing. Every time I get together with peers to exchange notes, we remark on how small our circle remains. People who do tracking exercises tend to care about China because it’s important in their professions, in say nuclear power deployment or space exploration. I think there should be more systematic efforts.
The good and/or bad thing about China is that everything changes every 18 months. So it’s all the more important to observe reality on the ground. Graham Webster has a good line that the reality of China includes “a mix of brutality and vitality and mundanity.” It’s important to recognize the entire medley. For newsrooms, that entails spending time away from Beijing. For the good of readers, papers should deploy journalists in places where politics is not the only concern, instead of devoting still more reporters in the capital to obsess over Xi Jinping Thought.
Leaving Beijing would offer a better appreciation of the heterogeneity of its growth story. I believe that Shanghai and Shenzhen are driving a great deal of economic dynamism, probably in enough quantity to allow the country to figure out its technological deficiencies. Meanwhile, the control tendencies of Beijing will continue to strangle free thought domestically and lash out at critics globally. Not only will China fail to create successful cultural exports, its speech restrictions and detentions of minority groups en masse will invite further global condemnation. But global hostility won’t be quite enough to derail its economic success. Therefore China will not have any sort of a compassionate return to grace; but it might be enough, perhaps, for a hegemonic return to greatness. The rest of the world won’t be able to avoid that through continued condemnation. It demands a more serious effort to compete.