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On Thursday, May 26, Chang-Tai Hsieh joined Markus’ Academy for a lecture on Two Strong Hands: China’s Vision for the Private Sector. Chang-Tai Hsieh is a Professor of Economics at the University of Chicago.

Background reading: Two Strong Hands

Watch the livestream below. You can also watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.

[0:00] Introductory Remarks
[8:48] Overarching question
[22:45] Contradiction in Chinese Policy Direction?
[25:05] Recent Chinese growth
[38:48] First Strong Hand
[54:16] Second Strong Hand
[58:30] Implications going forward

Executive Summary

A few highlights from the discussion:

  • [0:00] Introductory Remarks: Adam Smith’s Invisible Hand is a conveyor of information on scarcity and future cash flows, but would China’s Strong Hands destroy the Invisible Hand? With an interventionist hand prices might be signaling future governmental action rather than fundamental value. Governments can keep control if they focus on commanding heights (strategically important sectors). China has to overcome the middle income trap that arises when a country has to shift gears from copying advanced technologies to investing in R&D to push the frontier. Some perspectives, like German Ordoliberalism, promote competition among mid sized companies to avoid concentration of power; the same setup for mid sized companies in China could be occurring.
  • [8:48] Overarching question: what is the political foundation for China’s support of the private sector? Right now, headlines suggest an end to free markets and private enterprise. However, there have been improved conditions for private firms, including simplified business regulation, better financial institutions, and new institutions to adjudicate business disputes. The World Bank Doing Business Indicators show that China has improved in its business infrastructure.
  • [22:45] Contradiction in Chinese Policy Direction? On one side of things, market capitalization of publicly traded firms has fallen by over 1 trillion USD, suggesting that there is limited support. At the same time, conditions for private SMEs are good: the number of firms has nearly tripled in the last decade, and there is a strong startup and VC industry.
  • [25:05] Recent Chinese growth. In many cities, all sorts of different branches of government have been instructed to actively look for quality business prospects, discuss possibilities with investors, figure out what sort of investment would be needed, and then enter agreements. Vice-Mayors are assigned strategic projects, for which they are the point-person for private companies– these local cadres use the power of the Communist Party to compete with other localities to draw in the best private companies. These local governments have had access to capital since 2010, part of the draw for these companies. One example of this was Ping-An Insurance, which was owned by different banks and local governments, but also a holding shell called Taihong Holdings. A NYT reporter found that this holding shell was owned by relatives of higher ups in the Chinese government; this corporate structure started becoming the norm, because communist party officials could help the companies and reap the benefits themselves.
  • [38:48] Campaign to Restore Party Control (First Strong Hand). The influence of the wealthy was viewed as an existential threat to the party, leading to the first strong hand: a crackdown on forces posing threats to party control, including large, wealthy, private firms. This also included an anti-corruption campaign against local cadres, a crackdown on independent political power, there are Party cells in private companies, increased authority of Party committees in State entities, increased importance of loyalty in party promotion, and more. This is not a crackdown on large companies per se; state owned monopolies and large foreign firms have been able to continue to operate. This is because these companies are unable or unwilling to politically challenge the government.
  • [54:16] Campaign to support “desirable” private firms (Second Strong Hand). Reigning in successful Chinese firms hurts growth, thus necessitating the second strong hand: supporting SMEs that do not threaten the party. Small firms do not pose a serious threat, so the government aims to have a dynamic market economy under the control of the Communist Party. The aggregate growth effect depends on the net effect of these two “strong hands.”
  • [58:30] Implications going forward. The party would also likely crack down on any individuals who have power or ownership in many small companies, because they would hold the outsized influence that was supposed to be repressed by the first strong hand. Larger firms do not export as much as the small and medium sized firms, because these smaller firms are seeking a market that hasn’t been taken by the firms already in another city in China