China has a boom in ‘get rich quick’ schemes, instead of the economic reform it needs
Andy Xie says too much of China’s economic potential is being squandered on an endless series of bubbles. The start-up mania among Chinese youth is becoming one such bubble
The Chinese government has been promoting the slogan “All People Innovate, Tens of Thousands Start Business”. Tens of thousands of youth, especially college graduates without good job prospects, but armed with their parents’ savings, have answered the call. This movement is becoming a bubble with tragic consequences down the road.
Starting a business is hard. Innovation is harder. There are few who have the talent or temperament to succeed in either. For fresh college graduates, their odds are next to zero. In a battlefield, officers can send unarmed green soldiers to rush a hill defended with machine guns. One or two might succeed. But it doesn’t justify sending 99.9 per cent to their deaths.
The start-up mania won’t solve China’s economic difficulties. The economy has been in the doldrums for four years because the government is not addressing the structural problems. The truth is that the investment and export-led model has run into a brick wall; the world is just not big enough for China to develop like Japan or the Asian tigers. The only way out is to scale investment down to 30 per cent of gross domestic product from half, and shift spending power to the household sector.
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China’s needed reforms are not coming because they conflict with the political doctrine of concentrating economic power in the state sector. Hence one bubble after another has been stoked in the hope that a miracle would happen to the economy without the need to shrink the government. So many have been sacrificed in these bubbles while the economy slides deeper and deeper into quagmire. In the name of looking at the upside, shady or even unlawful practices have been overlooked, leading to huge losses for the credulous masses.
A well-known example is the P2P (peer-to-peer) lending mania. It is the unique Chinese phenomenon known as internet finance, combining the two hottest bubble words. Almost all P2P lenders promise high returns to attract funds, but they are in fact involved in subprime lending for stock and property speculation. As the bubbles burst, the P2P sector has joined that other unique Chinese phenomenon: vanishing bosses. In total, 2 trillion yuan (HK$2.3 trillion) of funds could be lost.
P2P is the latest, but by no means the biggest, example of the true nature of China’s bubbles. They are about robbing the masses to enrich the few, all in the name of innovation or boosting the economy. Stocks, bonds, properties, commodities – anything tradeable has been turned into a gambling instrument to fleece the people in rigged games.
“Get rich quick” is the reigning ideology today, especially for the young. Nothing fits the description better than the internet bubble. Every news story about how many billions an internet company is valued at in the latest fundraising is trumpeted nationwide, making the eyes of millions pop like ping-pong balls. But none of these businesses make money nor, in my view, ever will. That seems like a perfect dream for “get rich quick”: you get loads of money to subsidise consumers for market share and get rewarded with billions of dollars in valuation. And, if you are lucky, you can get listed on the A-share market and unload your dream on unsuspecting retail investors. As in every bubble, the end objective is to fleece the people.
Sending the young into predictable failures has far-reaching consequences for the nation’s future. When enthusiastic would-be entrepreneurs are slaughtered en masse, few will try again in the future. Just look at Japan and Hong Kong: these once-dynamic economies have the lowest start-up rates in the world. Once a generation gets crushed by a bubble crash, few brave souls try again.
The internet is often touted as the saviour for China’s economy. It is even considered a way for China to leapfrog the West. The truth is, it has the potential to squander the valuable time China has to upgrade the economy.
Today, e-commerce dominates China’s internet activities. Yet home delivery won’t change the economy much, let alone change the world. How a product gets from A to B is small beer. How good the product is is the real deal. China is just not focusing on the right thing.
The dark side of e-commerce is that it really thrives on selling fakes. Why would someone want to sell a good product on somebody else’s website? It wouldn’t cost much to open one’s own site. The fakes are harming China’s economic future tremendously. If anyone can sell a product using your technology or brand, would you invest to build either? Unless China enforces the law on the internet, Chinese companies won’t become world-class.
Online gaming is another booming business in the internet space. Unfortunately, its competitive advantage is a lack of legal enforcement against violence and pornography, while TV, movie and paper products are subject to enforcement.
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Online gaming has ruined one generation of boys in China. If left uncensored, it will ruin many more to come. How can China have a future if so many of the best and brightest boys have become gaming zombies?
Search is another internet business that has become corrupted in China. Search results are usually paid for. If you don’t pay, when someone searches for information on your company, your competitors show up. The extortion angle of China’s search business is worrisome for the development of China’s corporate sector. It is another unnecessary layer in the cost of doing business in China.
Instead of helping China’s economy, the internet seems to have become a magnifying glass for the worst elements in Chinese society. If you want to cheat, the internet helps you cheat millions at the same time. If you want to extort, the internet helps you do it quickly and on a vast scale. If you want to sell fakes, the internet can help you avoid the police. The internet is a tool. It can be used for good or bad. In China, the bad seems to prevail.
China should stop chasing pipe dreams and get back to basics. Its economy has great potential. Its per capita income could be doubled just by carrying out proper reforms: first, household disposable income should be lifted from 40 to 60 per cent of GDP; second, investment should decrease to 30 per cent from half of the economy; and third, the market, not the National Development and Reform Commission, should decide where and how much to invest.
The hard part is that all these necessary reforms depend on shrinking the state sector and limiting government power. China’s future depends on it.
Andy Xie is an independent economist