China’s regulation of its spirited tech sector could be a tipping point for the economy
- There are legitimate reasons for China’s anti-tech campaign, but when the full force of regulation is used to strangle the business models and financing capacity of the economy’s most dynamic sector, it weakens confidence and the entrepreneurial spirit
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.
The issue, however, is not justification. Actions can always be explained, or rationalised, 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 ageing 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 per cent 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.
This notion, widely popularised 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.
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.
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 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