Inside China's New Economy : Beyond Socialism and Capitalism - Professor Keyu Jin
Professor Keyu Jin is an Associate Professor Of Economics at the London School of Economics.
She specializes in international macroeconomics and the Chinese economy. Her research focuses on global trade imbalances, global asset prices and China's economic growth model.
She is the author of the best-selling book, The New China Playbook.
In this episode, we explore the dynamic forces shaping China's past, present, and future.
Chapters:
00:00 China's Economic Success
00:52 Why The New China Playbook
06:40 China As An Industrial Power
14:42 Is The Chinese Economy Excessively State-Heavy?
18:24 The Mayor Economy
24:16 Imagining A Mature Chinese Economy
27:59 Why Chinese Financial Markets Are Poor
32:39 China's Tech Crackdown
39:15 Household Spending on Education
45:25 Can China be More Innovative?
47:53 US-China Trade Tensions
52:21 Advice For Young Professionals
Keith Yap 00:00:00
Why do you think it's wrong to attribute China's economic success to the opening of its markets?
Keyu Jin 00:00:05
Of course, opening its markets was pivotal. The reform and opening up was really the impetus to the next few decades of growth in China. But if we think about the fact that China was the fastest-growing country for the longest period of time in all of human history, and being that big, it wasn't enough just for markets to work and for markets to open up.
That would have taken very slowly. If you think about Western markets, it really took hundreds of years to perfect. So with that accelerated growth and really going after investments, industrialization, and urbanization, the state had a helping hand rather than a grabbing hand, as some would say.
Keith Yap 00:00:57
What drove you to write "The New China Playbook?"
Keyu Jin 00:01:00
As we all know, US-China relations are increasingly fraught. There's a lot of chill in the air and it's becoming more dangerous. I have had the benefit of having a bi-educational, bi-cultural background. I know the US very well, and China very well. I went to the US at a very early age, and it seems that the misunderstandings and misgivings between the two countries are not only still there, but they have increased and widened, even though China became a more open and richer country that more people had visited.
I was puzzled by the fact that very sophisticated Americans had very little knowledge about China. I was frustrated that the U.S. imposed one particular lens to look at China, as it often does with other countries as well. But when you talk about US-China, it is the most essential relationship of this century, and you have to get it right. We have to work tirelessly to even contribute a little bit to each other's understanding.
This book is about telling China's truth. Some longstanding truths to bridge the two countries and give an inside perspective on what China is like, warts and all, but not quite as the Western media portrays it.
Keith Yap 00:02:29
You are a Chinese citizen yourself, and you were educated in China for the early part of your childhood, and then you went to the US for your higher education. What was it like to straddle between Eastern and Western cultures?
Keyu Jin 00:02:43
I think I benefited so much from Western education and from Chinese education. I think the best is really the combination of the two worlds. The Chinese with the disciplinary environment, the competition, which is so essential when you're young, and that drive to excel.
Western education is also supremely liberating, right? When I got to US high school, I was really puzzled that the first lesson we had in history class, my teacher asked us to question authority, to question textbooks. That was a very foreign and alien concept to me. To have an open mind, to not pass judgments so easily, these were really essential values above and beyond what you're taught in the textbooks. You can use a type of framework to analyze the world. And of course, that was supremely eye-opening.
But a little bit ironic is that many years later, the US university and school environment has gone the opposite way of being less open-minded, being more judgmental, and having fewer opportunities to really say what you think. But nevertheless, US education is completely different from the Chinese education. I really think it emphasizes a lot on unleashing your own potential and taking your own initiative.
China is focused on problem-solving. Hence, they have really great engineers, and reverse engineering is great as well. Of course, China is being very, very innovative. So because the entrepreneurs and the people are very innovative, I think the education system really requires a combination of both, the discipline and textbook training versus the creativity and the initiative.
You hear me, you hear American. I think it's impossible to rub it off because the culture is so dominant. I'm very grateful for that American drive and spirit in the workplace, the aggressiveness in the seminars, but in a very valuable way. I actually think the US and the Chinese have a lot more in common than they pretend to have.
Both cultures are very family-oriented, very driven, very competitive. They like to win. And they really value hard work. That's really, really important. It's an important place for young people to start their journeys, their careers off. This is why some of the best business unions have been US-China. They can do so much together.
They can really dominate the world together, but they choose not to. They choose to fight each other. And then other countries, it gives other countries a chance, which is also, unintentionally, not a bad thing for other countries. But the two values are very similar in contrast to Europe, which is struggling from low productivity, from a lack of entrepreneurial dynamism. All the talent is moving away from Europe. It's very hard to scale up a business here.
Sometimes business success is not as celebrated as it was the case in China and the US. Of course, China is actually starting to head somewhere between Europe and the US. China used to be like the US, or China and the US had very similar degrees of competition and celebrating success and rewarding people for their hard work and innovation, while China is now going somewhere in between the US and Europe on social issues.
That's a preference, that's a policy choice. I don't want to pass judgment on whether that is good for growth or bad for growth, but that is the path that it is at least currently choosing.
Keith Yap 00:06:45
One of the things that you have discussed quite often is that China seeks to be an upgraded or improved version of Germany. What do you mean by that?
Keyu Jin 00:06:53
I think that if you look at the history of the modern Chinese economy, and certainly the last 30 odd years, China has chosen the path of industrialization rather than developing its service sectors. China is the absolute dominant manufacturing power in the world, hands down.1 It is larger than the next nine countries' manufacturing output combined.2
A lot of that is going to exports, although less of it is going to exports because China's becoming big. How did China become such a dominant power in such a short period of time? Well, it was first of all, the right policies, but it started from a preference for making stuff, making industrial goods, and China excelled at that.
Even today, as the world is moving a little bit away from just manufacturing output and industrialization, China still believes that making real things, real products, is more real than the knowledge and financially driven, property-driven economy like the US. So it prefers to be a bigger, smarter Germany in the sense that you're utilizing the latest emerging technologies like AI and robotics to still dominate manufacturing, climb up the value chain, rather than focus on the real estate agents, the property developers, the lawyers, the IP, intellectual property, which defines the US. It is purely a preference.
Keith Yap 00:08:39
Talking about industrialization, one of the things that we can't forget to talk about is the role of SOEs, state-owned enterprises, in China's economic miracle. I think if you look at how traditional economists view SOEs, they would label them as inefficient, and that the best way to approach them is to probably get rid of them altogether. After all, they are venues and spaces for crony capitalism. Are we wrong?
Keyu Jin 00:09:08
We do misunderstand a great deal about SOEs. SOEs main objective is not just profit-driven.3 They don't act purely like a private or public company that aims to maximize the value of its shareholders. Instead, they bear a lot of social and economic national responsibilities. One can't purely judge them based on economic and financial efficiency.
If Beijing wants to build an Olympic park, who does that? SOEs bear the brunt of the burden. A long time ago, when China had very little technology, who was in charge of carrying forward China's national innovation strategy? It was the SOEs. Now, of course, the private sector has thrived and they have taken it over, but back then it was the SOEs. When the financial crisis hit in 2008-2009, who bore the burden of resuscitating the economy, saving the stock market? SOEs.
So, SOEs have a broader set of objectives than private enterprises and the private sector.4 But SOEs have been also increasing their efficiency over time.5 They're not the clunky old dinosaurs that one imagines of a planned economy. They are actually very competitive. They obviously have a lot of resources, and they have successfully gone overseas, starting with the state banks, but many others.
They're also just mainly concentrated in the strategic sectors and the resource sectors where the nation, where a country believes it needs to have more state influence, state dominance, or state control. As to whether they are dominating too much these days, I mean, there are some mixed views. I think the data suggests that they're becoming a bit more dominant than they were in the past few years. But at the same time, I do think that it is also focused on a few strategic sectors. If you look broadly at manufacturing or service industries, obviously, this is not where the SOEs play the biggest role.
Are they still going to be around and wield very big influence? Of course, they are. That's also the case in many countries, including France and Brazil. But do they necessarily crowd out the private sector? I think that's more debatable. But also, if you look at a very interesting phenomenon, they are now equity stakeholders of private companies. So in this business network, which connects all the Chinese firms, they are often a shareholder of some of the most productive and best private companies. In some cases, they do offer some help, assistance. So it's good to be connected to a central or local SOE.
It's a more nuanced situation than we imagine, not one suppressing the other, but all part of the same network. If you're in the same network, then you can actually benefit from having SOEs as an equity stakeholder.
Keith Yap 00:12:35
But at the same time, I think in China, especially in the 90s, SOEs were highly inefficient, and many of them actually did slow down the economy. I remember in your book, you wrote about Premier Zhu Rongji. Under his time of leadership, he had this idea and concept called "grasping the big and letting go of the small." How did that reform China's SOEs?
Keyu Jin 00:13:01
You see, every time there was an economic downturn or major crisis, at least in the last 40 years, the government came out and did something, enacted some very drastic reforms to give the economy a boost, and they were very successful. In the late 90s, the SOEs were doing very badly, and that was impinging on the state banks with a lot of non-performing loans.6
The Chinese government decided to undertake SOE reforms, also as a way to pave the path for the accession of China to the WTO, which needed a lot of SOE reforms and more market-driven disciplines.7 Their strategy was to consolidate some of the SOEs that were worth saving or that could pursue particular objectives, and to let go of some of the smaller ones and the loss-making ones.
Once these reforms were undertaken, you really had radically fewer SOEs run in a more efficient manner. Some even had more monopolies in certain areas, although that's not necessarily a good thing, but it also raised profitability. You saw that the productivity gap between the SOEs and the private sector started to close because the productivity levels of the SOEs were rising very quickly.
So I'd say that that was a very, very successful reform. Just the sheer drastic reduction of the number of SOEs and their influence meant that more resources could be released to the private sector. That also kind of initiated a wave of greater competition and drive for the private sector.
Keith Yap 00:14:59
I think we've seen for the past 20 years a huge wave of Chinese entrepreneurship that's not just come out of China or stayed in China, but has become global. I think there is a step that you previously mentioned, which is that if you just look at the consumer application economy, many of the top American downloads are actually Chinese apps.
I guess the question I had was that if the state has such a huge role in managing or controlling the economy, then how did such dominance of Chinese private sector efforts, that not only just began to flourish in China, but managed to become global? How did that phenomenon emerge?
Keyu Jin 00:15:42
Well, you see, I think the misunderstanding is that the state wields a really heavy hand on the economy. We have to be a lot more nuanced and a lot more specific about what we mean in that sense. The state can wield a very important influence on the economy when it comes to interventions in the stock market or major policy directional moves, setting the country up for a new path or changing the rule or even the law to alter the path of certain entrepreneurs and businesses.8
Yes, in that way, it does wield a much more radical and heavier, but also faster hand in some sense, but they're not micromanaging. One thing that was emphasized in my book is its political centralization. Yes, centrally these leaders have a lot of power, but the success was brought about by economic decentralization.
That means figuring it out at the local level, implementing these good policies at the local level. There's a lot of leeway given because local governments are really on the ground. They're sensitive to the developments of the local economy. They give a lot of space, a lot of air to, and a lot of resources, frankly, to the local companies.
When we talk about a heavy state, yes, you can say that on the positive side, there were 4 million EV charging stations built in a very short period of time, new digital infrastructure built, so on and so forth. On the negative, you can say that there were too many interventions, manipulations of prices or interest rates or exchange rates, or whatever it is, too many state interventions.
But if you look at the businesses, they're the most innovative and dynamic and competitive in the world. Why? Because at the local level, there was a lot of room to develop. In fact, the local governments actually helped the private enterprises, right? Because it was good for them. It was a win-win situation. You have good promising entrepreneurs, you get more tax revenues, greater GDP, you climb up the political ladder, your real estate is worth more, you have things to brag about to your neighboring cities and provinces. You need to rely on the good businesses.
So they're bending over backwards to help these private entrepreneurs. Even today, as the economy goes into a major slump, they're knocking on the doors of entrepreneurs all the time saying, "How can we help?" Often, it's not the money they give. There's a limited amount of money that they can give to businesses, but just coordination, talking to the banks, coordinating the different businesses, supply chains, coordinating the lenders versus the borrowers. That is an enormous amount of help that goes way beyond what markets can give you.
So it's a mistake to think that China is just a state-heavy, dominant economy. Otherwise, how did 20, 30 million private companies spring from nowhere?
Keith Yap 00:19:03
Yep, and I think in your book, you talk about it through the lens of the mayor. The mayor is the entrepreneur, or in that sense, the mayor economy. That's something I think in Singapore we're quite familiar with in the sense of a state serving a certain entrepreneurial function, be it through investment attraction or even in some cases, job training.
I think what you're alluding to is actually your discussion of the mayor economy, where mayors actively serve as a form of political entrepreneur to attract investment. That's a model I think we're quite familiar with, even in Singapore, where we've seen public servants really play that role of making Singapore conducive for foreign direct investment or investments from local companies.
There's another question that I had relating to the mayor economy, which is that there are certain upsides as we see, but what about the perils of having a mayor economy?
Keyu Jin 00:20:29
First of all, yes, there's a lot of similarity with the entrepreneur state in Singapore and some others. But I'd say that because China's so big, there was an additional challenge, which is how can you get all the cities and provinces to do the same and still not have chaos?
In fact, that mechanism, that competition, the yardstick competition among the mayors, among the provincial governors, was absolutely essential as an apparatus of competition and checks and balances. Because if you are a company and you're in a place with a heavy-handed local government that is not supportive or even extracts your values, then you can just simply flock to another province.
That was really, really, really important, essential as a check and balance. That, I think, differs a lot from the more state-dominant places in other countries, centralized places in other countries where the government is very extractive. You do that, and then all the good companies will flock away. So that provides a level of check.
Competition among the provincial governors also means that to some degree, there is restraint, there is constraint. China obviously is not a Western-style democracy, but there are very important competitive mechanisms and accountability mechanisms within the system that I think the outside world fails to appreciate.
But the mayor economy, I think, really only works for a period of time, and that is in the early stages of development where a lot of macro legal rule of law framework has not been set up, and the financial system is not yet mature. The market is eventually supposed to work on its own. You know, obviously, it has disequilibrium times and crises and fluctuations, but before you get there, there's a long way to go before you can make this a mature system.
Along the way, if you don't have the state enabling the private sector and labeling the private entrepreneurs, it will take a very, very long time. Or a lot of these benefits will go to a very disproportionate few, just like in the case of Russia and some Eastern European countries where you have a radical shift to a market-driven economy. That wasn't China's path. China chose gradualism.
But that also meant that the state had to play a bigger role. Now, the mayor economy had its downsides, and we're seeing some of that now. The vast accumulation of debt, local government debt in particular, a lot of which is actually still hidden, gradually brought to the fore, potentially a lot of waste because, you know, does the government really know how to efficiently allocate its resources? Does it really know how to pick winners?
There was a lot of learning along the way. I do have to say that the learning curve is pretty steep, and the local government, in the new round of supporting technology, high-tech companies, according to many experts in the field, have said they have also become experts. They're very cautious about how to allocate resources, how to engage, and they actually pick the fund managers to help them choose which companies they should invest in.
So it's obviously a learning curve, but debt, this massive, very obsessive pursuit of GDP growth to the point of hurting the environment, causing dislocations, buildings one after another, think about the real estate obviously. That was definitely partly a consequence of the mayor economy.
That was the fastest way to get GDP and to get investment, and a lot of inefficiencies. But at the same time, look at China's results, right? Yes, there are side effects, are disequilibrium, but it grew very rapidly. It became the most innovative, one of the most innovative superpowers, and especially on the technology front, the same thing.
You couldn't have done it without the local government's support for these private entrepreneurs. The kind of companies that you were talking about, Xiaomi and Alibaba, Pinduoduo, all of that, nobody was too far from the local government's observation, but also they needed to manage these relationships. Of course, they did it on their own, but it would have been impossible in a country without a clear set of rules and regulations and very mature financing to have achieved all that.
Keith Yap 00:25:47
You used this analogy, which is like a child wearing oversized clothes. The child is young and cannot fit into the clothes right now because it's still immature. As it grows, the child will eventually fit into those clothes. My follow-on question would then be, what would a mature China look like in about 30 years' time?
Keyu Jin 00:26:07
It's also a preference, right? Does it want to be more like Europe, over-regulated, but kind of safe, if you will, if not suffocating? Or does it want to look like the US, very decentralized, very little state governance, some proper regulations in place, but probably not enough, and extreme wealth accumulated in the hands of a few, with frequent eruptions of major consumer protection issues or social inequity issues? Can it tolerate that?
So it's not just a matter of going somewhere, it's a matter of where you exactly want to go. I think as where China stands now, at least from where I'm seeing now, it is trying to balance economic and social issues rather than just putting economic efficiency, financial wealth accumulation as the most important objective. China seems to care a lot more about consumer protection, data protection, driving out the unequal parts of, or unfair parts of inequality, and making sure that the citizens are well looked after.
That is the ultimate goal, whether it will be delivered or not, I believe still depends on how good the economy fares because that's where the resources are. You want the pie to be big enough to divide the pie. So where would it look like? I'd say that it would look somewhere in between. I think that the kind of explosive growth of the last 15 years is going to be increasingly more difficult.
It's going to be more difficult for major companies with major valuations in a very short period of time to grow without restraint. Growth without restraint is going to be tougher. But China's not going to look like Europe because the people still are driven. They want to work hard. It's a big market. We've got to fix the financial system so that good innovative companies can raise money.
That's essential, and China has to stay open. So the institutions would look like, really, I call it beyond socialism and capitalism. It's going to be a combination of a lot of regulations, but having the basic infrastructure and institutions in place to unleash that potential. Of course, better rule of law, of course, better intellectual property protection. Of course, China needs a much more robust bankruptcy law.
China needs to broaden and deepen its financial system with the right rating agencies, credit agencies, insurance companies, the whole gamut of the proper institutions to work together and coordinate. But that's going to take a long time. So again, we saw explosive growth when a lot of things were pretty gray.
Now part of it is more regulation, more rules, and less of that really rapid growth, but probably more inclusive growth, hopefully.
Keith Yap 00:29:37
One of the statistics that you cite is that there is zero correlation between China's financial market performance and its economic growth rate. So in a certain sense, it points us towards the fact that the fundamentals of the company are not reflected in the financial performance on the stock market.
You have this paradox where China is one of the best performing economies in the world, but at the same time, is one of the worst performing financial markets in the world.
Keyu Jin 00:30:07
Some researchers found that the correlation in most advanced economies was generally above 50%. Economic growth was correlated with stock returns, and in China, the same bucket as in India or Iran was close to zero. That means that the stock market didn't reflect the fundamentals of the Chinese economy. I went into great length in explaining why, based on other people's scholarship and research.
Part of the reason, I think, is that the stringent criterion to list on the Chinese market means that a lot of companies will choose less than optimal strategies just to list. Actually, the companies that preferred to list abroad were fine. Their performance was very highly correlated with fundamentals, but the ones that were listed domestically were not.
Often they would forego long-term strategic objectives to pursue short-term goals in order to be listed. But also another thing is that, again, coming back to our view that the stock market is not a very mature system, the financial system is not yet mature. Chinese companies were doing a lot of very bizarre things once they get listed or in preparation to get listed.
They start acquiring lots of companies that have nothing to do with their core business. They start to invest in real estate, even as a non-real estate related company. Pharma companies acquiring golf clubs and soccer clubs, or whatever it is. So it was just a mess really, a huge chaotic playground where lots of people come together to exploit the system. No wonder, without the proper rating agencies and accounting firms that are actually held accountable, there were a huge amount of corporate governance issues in China.
China, being so entrepreneurial, Chinese people being so entrepreneurial, are able to find these small loopholes to do a bunch of very bizarre things. So I think that just comes back to our previous notion that the system is not yet mature with the proper regulations and framework in place.
Keith Yap 00:32:41
Yeah, I asked my mom from China to explain this phenomenon, why it was, for example, I think like in your book you said that whatever grand was going into cars, soccer clubs, and even pig farms. She said that if profit maximizing was your goal, then you don't really care about what your core business is. You just try to find whatever can give you the most profit, and maybe that is what kind of drives this behavior.
Keyu Jin 00:33:08
If you think about why the West now is so focused on business values, sustainability, long-termism, inclusiveness, well, they've had that period of recklessness, they've had that period of chaos and lack of restraint, and it has impinged on society and ultimately the businesses themselves, but China's still starting that cycle.
It's not as if countries really learn from each other and companies really learn from each other's past mistakes. We have to admit that people just don't study history or they don't internalize the historical experiences and lessons of others to do better. They just don't. This is why countries will always repeat that cycle. Chaos, lack of governance, lack of proper values.
Eventually, they realize actually these are really important for the long term. China is still in the short, flat, fast attitude. Although in the last few years, things are starting to change. But look at the West, they're still trying to figure that out despite having many, many more decades of experience, right?
Keith Yap 00:34:17
One of the Rorschach tests that I've been paying attention to is this response to the Chinese government's crackdown on tech companies like Alibaba and also to a smaller extent, the tuition agencies. A lot of commentators from the West tend to see this as government overreach, but I think you probably have a different take.
Keyu Jin 00:34:42
Well, think about why Donald Trump became so popular, even in the tech sector in the US, because probably the tech sector was substantially affected by Biden's regulations and outlook on the technology sector. This is not a new thing, right? Regulating big tech, protecting consumers.
the issue of data. It's a global thing and it's especially espoused by the Western countries except they keep on talking about it rather than doing something and China decided to do something although one can argue that there were technocratic errors and it wasn't well formulated so that impinged on the economy as a whole.
But the intentions or the initiative- the root causes of these things is really very much a global issue.
I think that one deserves, one needs to think about these issues given that big tech is becoming more dominant and will be even more dominant with the greater adoption of AI.
Now, I think that the easy answer or the most straightforward answer to your question is for a long period of time, China was absolutely engrossed by economic objectives and that had caused that has caused a huge amount of wealth inequality but also inequity in society again the typical story.
Then there are new areas that really defies regulation or doesn't even have proper regulation like fintech right. Is Ant Financial Technology Company or is it really a financial firm and is subject to the same regulations and parameters as a bank as it was doing ongoing banking activities.
objectives, and that has caused a huge amount of wealth inequality, but also inequity in society. Again, the typical story. Then there are new areas that really defy regulation or don't even have proper regulation, like fintech, right? Is Ant Financial a technology company, or is it really a financial firm and subject to the same regulations and parameters as a bank, as it was doing ongoing banking activities?
So I believe that these unanswered questions deserve to be raised, although maybe what exactly was done could have been much better, much smoother, and have protected a number of shareholders and been beneficial for the broader economy. But these are uncharted territories.
My more subtle answer to your question is that it was an exploration of how to balance the great powers of technology and technological firms with delivering benefits to society as a whole, but also ensuring that consumers get properly protected. If we look at China's case, there were so many cases of fraud, of exploitation, as we all know, on the internet level. People died because of the lack of consumer data protection and manipulation. Again, not a universal issue.
The government, which was focused on social issues, sometimes even more than economic issues, decided to crack down on these things. If you wanted to be a bit more cynical about politics, you could also say that China is a place where capital does not rise above politics like in the US. It's the other way around, right? Politicians like to control capital rather than the capitalists controlling politicians. It wants to be the opposite of the US. It wants an olive-shaped society in terms of income distribution, fat in the middle and narrow on the top. It's a bunch of choices.
I am empathetic to certain kinds of concerns, including gaming and how much you allow your children to be on the internet and social media. There's a huge amount of work done now on how social media has harmed teenagers and young people, maybe to the point of no return. These issues were addressed faster than in other countries in China. Was it done in the right way? There's doubt about that. Did it impinge on the economy? I think so. Could it have been much better done? Absolutely.
But it's not as if it's just some hand falling down without the right kind of goals. Coming back to the companies, I think entrepreneurship is absolutely essential for China. There's no doubt about it. The private sector drives the whole country's innovation and supports the majority of the country's jobs. The state needs the private sector to thrive.
Now, how do you balance these social issues while not forsaking growth and productivity and efficiency is an extremely hard problem that no country, with the exception of a handful of smaller economies in Northern Europe, has figured out. So I think we need to be more clear-minded about that.
The last thing I would say is that I think it's a learning curve. It's a lesson for the Chinese government. I think that they will be more careful about coming out with regulations and new rules going forward. I think communication is absolutely essential. Transparency is essential. Helping the companies, the private sector, transition more smoothly is absolutely essential.
I'd say that right now, the current focus is back on the economy rather than the wider debate about social issues. Hopefully, they can find a balance between the two, but as we've seen, it's very difficult.
Keith Yap 00:39:32
You mentioned the one-child policy. One of the interesting statistics I gleaned from your book was that Chinese households spent up to 25% of their income on their kids, which is five times what Americans spent. This was apparently an unintended consequence of the one-child policy.
Keyu Jin 00:40:00
The one-child policy is one of the most controversial, radical social programs that China has ever had. Although the population was spiraling out of control, and of course, the environmental, economic, and political implications of that were going to be real, I mostly discuss the unintended consequences of the one-child policy.
On the one hand, it was sad that families could not have more than one child despite the fact that they desired to have more than one child. Because of this one-child policy, parents were much more focused on investing in this one child's education. In economics, we call this the quantity-quality trade-off: reduce quantity, raise quality. Okay, that makes children seem like a commodity, but that's how we think about these issues.
Is a child a consumer good or an investment good? The Chinese parents, if I can put it in very unemotional, unhuman terms, treated a child almost like an investment good, because you had only one of them, and you wanted to bet on its success. So I think that it led to a huge number of education companies exploiting that parental anxiety. It led to a huge amount of national angst over competition for schools and competitions for academic excellence.
Who bore that response, or who bore the pain? Part of it was the children who had many extracurricular activities, including tutorials. It was also borne by the parents, many of whom emptied their bank accounts to educate this one child. That national angst eventually led to some of the discussions we had before on the issues of cracking down on educational companies because when the nation is filled with anxiety and suffering because of the competitive educational backgrounds, the government was going to do something about it.
On the brighter side, I do think that it led to much more accelerated excellence and benefit for women because daughters used to be educated only after the sons. Now, there's only one child, so you put everything on that one child, be it a girl or a boy. All the statistics have shown that girls have excelled. The gender gap for higher school education attainment closed. In fact, girls are doing better than boys.
Even if you look at the outcomes, including the gender gap for, let's say, running businesses and CEOs, girls who were born after the one-child policy had a much greater likelihood of becoming a leader than previous generations. So I think all of this is true and really raised the status of women.
Ironically, as the one-child policy has now drastically turned around to becoming a "have as many children as you possibly can" kind of strategy, it's actually been less good for women. Much of the workplace has worried about women in the workforce because now they have more than one child. This comes back to the issue of values, right? Not enough emphasis on social, business, core sustainability issues, and values in businesses. That's become a reverse effect for women.
More broadly, on a societal level, the one-child policy was absolutely momentous because it changed the family fabric. On the one hand, it did give more equality between the generations. It was so hierarchical before, with parents and grandparents dominating the children. Now, parents are looking up to their children. It broke that hierarchy, but I think it also changed the value of having a bigger family and what family means.
As we study some of the economic aspects of this, there were some really important social consequences that also interact with economics. This is one of the most fascinating subjects to study.
And of course, the psychological impact on the children and so forth, and why China is having such a low fertility level currently has a lot to do with the policy that was implemented many decades ago.
Keith Yap 00:46:23
On a side note, I have to add that in Singapore, we have Chinese students that come over to study from the secondary school level all the way to our university, and they are highly competitive. I remember in secondary school when a lot of these Chinese students started coming, and they didn't speak English. By the time they finished their time in school and finished their O levels, they already got an A1 for English. So I think there is a certain strength in the Chinese education system.
With so much investment in education in China, do you think China has the human capital to become one of the world's leading, if not the most innovative, economies?
Keyu Jin 00:47:10
I'm trying to grapple with some of these issues. There's tension here, right? If you have an education system that is focused too much on just academic excellence, exam taking, and discipline, that leads to very robotic thinking, and it often suppresses a lot of the natural creativity and drive and initiative that these very talented Chinese students have.
They do become great engineers and problem solvers, but can they identify the problem themselves or create new problems to challenge and make breakthroughs? What I call in my book, zero to one innovations, rather than one to N applications-driven innovation.
On the other hand, if you look at a place like the US, I think a lot of the talent is also wasted because there was not enough training and skilling up and discipline in the early years. Coming back to my view, the combination of both would be the more perfect model.the combination of both would be the more perfect model.
But we have to ask the question of how much education is really necessary, academic education, and is it going to be suitable for the new age of technology and AI? These are very different tools. With the arrival of things like ChatGPT, it's more important to know what questions to ask and how to ask them, rather than knowing the answers through memorization or these kind of more traditional methods of learning.
A lot of the over-education, being overworked potentially, can suppress a lot of the eventual drive and initiative that children or young people have much later on. They might be burned out earlier. It is very difficult to answer. At the same time, you have a nation full of highly skilled engineers and data scientists and technical engineers that can tackle some of the high-tech industries. You need both. You need children to be able to unleash their real potential. While they are more intimidated in schools, does that translate into radically different outcomes later in life? I think it is still subject to debate.
Keith Yap 00:49:49
As we talk about China taking the next great leap, going from not just an industrial and manufacturing powerhouse but into becoming a more innovative economy, we can't escape the topic of trade. One of the big issues that we see in the coming 4-5 years is the US-China Trade Tensions.
we just saw the re-election of President Donald Trump. He won with a clear mandate this time, and we see his priority for America in the coming four years is focused on reshoring, putting America first, putting tariffs on other economies. So in the short term, it seems that he is going to be putting a lot of damage or lot of pressure on the Chinese export economy.
And I know that the Chinese government has already been paying attention to this and they've already started the dual circulation efforts where they focus on both exporting to the world but also strengthening its consumer economy within China.
Does Donald Trump's election accelerate the dual-track circulation efforts, or will it be status quo for China? And what would the impact be on the global economy of the coming US-China trade tensions?
Keyu Jin 00:51:02
Donald Trump's isolationist, anti-multilateralist, anti-globalist, desynitization kind of policies will push China to do two things.
One is to seek more partners, other partners, hence kind of diversifying their trading partners, investment partners in Southeast Asia and Europe and so forth, and also to accelerate the reduction in exposure to the US economy because there's really no choice.
And China has already done both since the first trade war and will really accelerate that trend. If we look at what Chinese companies are doing, they are radically increasing the pace of outward expansion to other geographies and going global. And if we look at China's internal economy. Obviously, there has been a lot more emphasis on internal absorption. But also we got to understand that there's a lot of trade rerouting going on. It's not going directly to the US, but indirectly through Mexico and Europe and Vietnam and so forth. And what this has done, this US-China trade war, is to hurt the US and Chinese economies, but to benefit a number of other economies, including not just the Vietnam and Mexico, as we all know, but also Thailand, France, and many others, South Korea, who were able to utilize this additional export platform to do more exporting, not just to the U.S. and China, but to the rest of the world.
And that is something we see in the data. Now, is this a good thing? Is this a good strategy? No, I think that if I were a U.S. president or a Chinese president, I want the other country to rely more on my country. So there's more levers, right?
But what Donald Trump is doing is to push China to rely less on the U.S. and to rely more on other countries. So there will be fewer levers in the future. This is a dynamic problem, right? And so what we have seen, again, also in the data is that China has seamlessly, at least with evidence suggests, shifted away their exports to the U.S. to other countries, right?
It wasn't that Chinese exports were substantially eroded and competitors eroded, actually just so to more to other countries and cheaper cheaper levels that the US would have been what what are now receiving because the American consumers are actually having to pay higher prices so this is not a good strategy but we all know that it's not economic it's politics
Keith Yap 01:14:05
Yeah I agree with you completely. On a side note, I've been seeing lot more Chinese brands enter into third markets.
So for example in Singapore, we start to see a lot of the Chinese EV brands setting up shop in Singapore. I saw Xpeng open up their showroom recently in Singapore.
When I went to Japan, I saw the Chinese electronics brand Hai-er doing a lot of advertising there as well. indeed we do start to see a lot more trade diversion or trade expansion away from just to the US but into a lot more third markets and so naturally even just from a consumer's perspective you can see a lot of these trade flows coming into these other areas.
My final question for you is going to be a lot more lighthearted. It's not going to be about trade wars and trade tensions. It's going to be about a career advice. What career advice would you give to someone who is starting out?
Keyu Jin 01:16:43
This is going to make me very unpopular, but first of all, please don't start with the sentence, my parents think that I should do this, this, and that. Okay, I'm probably going to offend both the parents and the students, but this is a classic line that I often hear.
Look, go after your passion and make sure that you're doing something you're really interested in. And no matter what you do, as long as you love it and you do well, you're going to succeed. And whether it's making more money or achieving more recognition, you're going to get it. You're not defined by one kind of profession. And it will make life more fulfilling at a deeper level for a longer period of time if one chooses to do so.