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China Cracks Down On Tech – Its People Benefit
Back when Stephen S. Roach was Morgan Stanley's chief economist Moon of Alabama often quoted from his columns. Fifteen years ago Roach spoke out against globalization and emphasized the need of labor power. His takes stood in stark contrast to the conventional wisdom of that time. Roach retired from Morgan Stanley around 2011 and has since been a senior lecturer at the Yale School of Management.
While I had not read Roach for some time I today stumbled over a column of his which I find astonishingly wrong and badly argued.
Roach writes about China's recent clamp down on fin-tech, internet monopolies and private education companies:
China’s regulation of its spirited tech sector could be a tipping point for the economy
The subtitle is a good summary of the column:
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
China has recently cracked down and financial consumer services, hail services and private education companies. Alibaba's fintech spin off Ant was prohibited from going public. Didi, the Uber of China, went public in U.S. capital markets even though it been warned not to do so. Its apps were taken down and it will have to pay a severe fine. Other tech companies are also under pressure says Roach:
Moreover, there are signs of a clampdown on many other leading Chinese tech companies, including Tencent (internet conglomerate), Meituan (food delivery), Pinduoduo (e-commerce), Full Truck Alliance (truck-hailing apps Huochebang and Yunmanman), Kanzhun’s Boss Zhipin (recruitment), and online private tutoring companies like TAL Education Group and Gaotu Group. And all of this follows China’s high-profile crackdown on cryptocurrencies.
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.
This is understandable in one sense, considering the high value the Chinese leadership places on its proprietary claims over big data, the high-octane fuel of its push into artificial intelligence. But it also smacks of hypocrisy in that much of the data has been gathered from the surreptitious gaze of the surveillance state.
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.
Stephen Roach thinks, wrongly, that it is bad to restrict certain business models and financing through public offerings. But from China's point of view it makes perfect sense. Why should it care how much money foreign investors lose by that:
Beijing is pursuing other goals: reining in the power of its tech titans and boosting startups; protecting social equality; and making sure the cost of living in cities isn’t so high that families aren’t willing to have children. And Beijing is suspicious of companies that are skilled at raising capital overseas—beyond its watchful eye.
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Sometimes, China might feel it’s being hijacked by hot foreign money. For example, Beijing wanted to scale down investment in for-profit education as early as 2018, but venture capital kept pouring in. Now the lucrative bet has been called to a halt.
Or consider geopolitical risks. Because of the [variable interest rate corporate] structure, in theory, DiDi, which is incorporated in the Cayman Islands, didn’t need Beijing’s approval to list in New York. But China’s cybersecurity office was concerned enough about DiDi’s data security—such as possible exposures to sensitive government locations—that it suggested the company postpone its IPO. DiDi ignored the warning, and we all know how it’s turning out.
The companies Roach listed are largely monopolies. They often buy up competitors and thereby, like Microsoft does in the U.S., prevent innovation. Moreover Alibaba's Ant tried to be a bank without being regulated as one. It promoted consumer credit and pulled people into debt. The delivery services and hauling services abused their workers. The tutoring companies took extremely high prices and distorted the otherwise equal chances between pupils, the basis of China's meritocracy.
All that is enough reason to strongly regulate them. But what was probably even worse is that the greedy owners of those companies planned to go public in western capital markets. They would thereby fall under foreign regulators and foreign laws. Other countries would probably gain access to the data they collect and use that against China. On top of that foreigners would gain the profits the companies make in China. At a time of a longer conflict between the U.S. and China it is better for Chinese companies to stay at home. If these companies really need more capital to grow they can find enough in China and do not need to go abroad.
Socialism with Chinese characteristics simply does not prioritize speculative capitalism over other values.
Stephen Roach knows that but he dislikes it. He argues that the regulation crack down on those companies diminishes the confidence in China. That is correct with regards to the confidence of 'western' speculators. But Roach argues, without evidence, that the clamp down will also hit the confidence of Chinese consumers who will thereby spend less:
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.
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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.
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Confidence among businesses and consumers alike is a critical underpinning of any economy.
But why should a crackdown on abusive conglomerates diminish Chinese consumer confidence. Might it not do the opposite?
Roach does not think so:
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.
I have frequently raised concerns about the excesses of fear-driven precautionary saving as a major impediment to consumer-led Chinese rebalancing. But the authorities’ recent moves against the tech sector could be a tipping point. Without entrepreneurial energy, the creative juices of China’s New Economy will be sapped, along with hopes for a long-promised surge of indigenous innovation.
Why should people not save for their old age and consume on 'trappings' instead? Why should they take up credit? Why should they accept abusive monopolies and financial speculation?
Roach's argument is disingenuous as he answers none of the above questions.
Others, like Berkshire Hathaway's vice chairman Charlie Munger, are much wiser:
Berkshire Hathaway vice chairman Charlie Munger praised the Chinese government for silencing Alibaba's Jack Ma in a recent interview, adding that he wishes US financial regulators were more like those in China. "Communists did the right thing," Munger, the 97-year-old longtime friend of Warren Buffett, said about the handling of Ma, who criticized officials in Beijing last year for stifling innovation.
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Although he would not want "all of the Chinese system" in the US, Munger did say "I certainly would like to have the financial part of it in my own country."
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Munger also told CNBC's Becky Quick that while "our own wonderful free enterprise economy is letting all these crazy people go to this gross excess," the Chinese "step in preemptively to stop speculation."
China has decided to live by producing stuff instead of by betting on financial speculation. It does not favor the finance, insurance and real estate (FIRE) sectors which dominate the U.S. economy. Unlike the U.S. China puts socialism before shareholders which in the end increases consumer confidence:
The Hang Seng Tech index, launched with fanfare last July and comprising internet darlings-turned-gargantuan blue chips such as Tencent and Alibaba, has cratered 40% since February to record lows.
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Investors have so far responded with alarm that tipped on Tuesday towards panic. They dumped health stocks in anticipation the sector will be next in the firing line, even as the property and education sectors reel.
Housing, medical and education costs were the “three big mountains” suffocating Chinese families and crowding out their consumption, said Yuan Yuwei, a fund manager at Olympus Hedge Fund Investments, who had shorted developers and education firms.
“This is the most forceful reform I’ve seen over many years, and the most populist one,” Yuan said. ”It benefits the masses at the cost of the richest and the elite groups.”
With the crackdown on the big tech companies smaller ones will have a chance to grow. Workers will get better wages. Consumers will no longer have to spend on much too expensive services.
Now what are the real reasons why you think that is bad, Mr. Roach?
@guidoamm #68, 73
I can’t say that I agree with almost anything you write.
Let’s start with the first set of assertions:
A centralized monetary system that is managed behind closed doors, (thus falls outside the democratic process) that is predicated on debt and is imposed under penalty of law, can only result in the concentration of wealth thus the concentration of power.
Yes and so? There is no system where the demos can vote on every single political and/or financial policy. That is idiotic and disfunctional.
Our money and credit originate from a point zero and radiate towards the periphery. The prevailing interest rate at every stage of this journey guarantees a progressive loss of purchasing power.
Utterly wrong. How much interest was charged when the US government sent stimulus checks to hundreds of millions of Americas? How much interest was charged when the US government added $600, now $300 to unemployment checks in every state that accepted them?
You focus entirely on the path money takes from Fed to bank to borrower, but that is far from the only path by which money goes from creation to circulation.
Because of interest, profit migrates from the periphery towards the centre.
As your understanding above is wrong, therefore this conclusion is equally wrong. Profit is not a function of interest rate – profit is a function of cost vs. revenue on a per unit basis. You can have 15% interest rates but lose purchasing power if inflation is 20%. Similarly, banks charge a significant amount of additional interest above what they pay for their capital, because of long term risk due to inflation.
The asymmetry in purchasing power between the entities that are closer to the point of origin of money & credit and the entities that make use of same at the periphery, guarantees that the majority can never accumulate wealth.
Wrong yet again. The United States has had the same Federal Reserve banking system since 1913. The United States saw enormous swings in private financial prosperity – up in the years before 1929, down in the Great Depression, up during WW2 and dramatically up in the 1950s through late 1960s. Enormous wealth was accumulated in the up periods.
Interest guarantees that the sums owed are greater than what was originally borrowed. Eventually therefore, collateral will be transferred towards the centre of the system. Hence the concentration of wealth.
This is both simplistic and wrong. You completely misunderstand the dynamic which Hudson speaks toward. Interest compensates for risk; default is the crystallization of said risk.
The concentration of wealth we are seeing today is not primarily because of interest – it is primarily because of monopoly. Monopoly has nothing to do with interest rates.
This is an arithmetical identity. The only variable is time. It is inexorable.
No, it isn’t. Donald Trump has filed for commercial bankruptcy 3 or 4 times. Individuals can do the same. Only when societies limit both income potential and debt discharge potential, is what you say theoretically possible.
Individuals and companies can postpone their fate by engaging in lateral transactions like buying property, creating a business or merging with a business. But these are palliative measures.
Nonsensical. Business failures are endemic, and property prices increase only if government allows asset price inflation. The problem is that individuals doing so exacerbate the problem for overall society.
As an entity, a government cannot contemplate to deliberately restrain itself. Electoral politics too is arithmetically skewed towards guaranteeing a progressive increase in outlays.
A centralized monetary system guarantees that the needs of the state will always supersede the needs of society. Hence the manipulation of interest rates lower and the devastation of the concept of savings.
Idiotic. If this was true, the United States would not have 3 branches of government. Similarly, the Magna Carta would never have been signed.
It helps here to understand the difference between savings and investment. Todays geniuses will say that savings are investments. But that is not entirely correct.
Savings are not supposed to contemplate risk. But in an environment where purchasing power is compromised from the get go, savings will inevitably make their way into the financial markets where they do not belong.
Also worthy of note is the shift that occurred in the late 60s whereby government decreed mandatory contributions to pensions at source. This money was placed in the hands of finance of course. So, in effect, labour ended up subsidizing capital.
Today we are living the repercussions of these policies whereby pension and insurance schemes are underfunded in large part due to aberrant interest rate policies.
You clearly do not understand anything of what you’re trying to lecture about. Among the enormous failures of understanding clearly demonstrated:
1) Government = capability to regulate. You make no mention of this whatsoever.
2) Interest rates in and of themselves clearly do not do what you think they do. We are living today in an unprecedentedly low interest rate environment. Under the simplistic and wrong understanding you have demonstrated above, we should all be living wonderful lives. In contrast, interest rates in the 1950s and 1960s were enormously higher as were income tax rates, etc.
The problems pension schemes and insurance companies are having are exactly because interest rates are too low, not too high – and even then, the problems are primarily short term because the obligations said financial entities took on were in a higher interest rate era. 30 years from now, when the boomers are all dead and assuming pension funds still exist (which they largely won’t), the insurance and pension funds will be making enormous sums of money as their obligations were taken on in a low interest rate era even as they operate in a high interest rate environment.
Thus the problems occurring are not due to the interest rate level per se, but due to the change from high (for obligations taken on) to low (for present operating environment).
Nor do savings matter. The US has created $19 trillion of national debt since 2007. This was not taken from anyone’s savings, except perhaps some from all those savers of US dollars outside the US itself. Try to understand what “sovereign power to coin money” means.
So, consumers do not really have a choice if not an ephemeral one but always a losing choice.
More idiocy. Consumers of what? When? and how? There is always a choice – even if that choice is nothing more than leaving the country.
I won’t even bother going into your 2nd post – it is in the same vein of misunderstanding and confusion as the above.
Posted by: c1ue | Jul 30 2021 10:57 utc | 82
@ Posted by: Gravel Rash | Jul 30 2021 11:45 utc | 83
Your argument may work for people living in First World countries, but not for people living in Third World countries. China already is an objectively better country to live than many darlings of the “emerging economies” such as Brazil by all consecrated bourgeois metrics (GDP, per capita GDP, hourly wages etc. etc.).
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@ Posted by: guidoamm | Jul 30 2021 11:48 utc | 84
The reason for perpetual low interest rates (even negative interest rates, as in the case of countries like Japan) is very simple: the capitalist world never really recovered from 2008. All that pile of rotten debt from the private sector was simply transferred to the public sector (i.e. the Treasury and the Fed bought them at their full, precrisis prices). The process then started all over again, and now the mountain of private debt is even bigger than before 2008.
The USA is the richest country in the world – but it is also the most indebted country in the world. And the problem is not the public sector, but the private sector: if the USG rises its interest rate, its private sector will break. That’s why Powell has been talking about “no end in sight” for what is essentially a zero interest rate.
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@ Posted by: ArthurDent | Jul 30 2021 5:15 utc | 63
The USA still is by far the richest country in the world, even if you compare with other First World countries like Japan, Germany, UK etc. etc. There’s a reason global companies still focus on the American consumer market for mass consumption.
From the outside, the impression is that the USA is not what it was during the 1990s, but still is the indisputable richest country in the world. It still has “fuel in its tank”.
Now, for the more informed, it seems the USA is going through a process of “Third-worldization”, which means skyrocketing inequality etc. etc. etc.
One of the moments I suddenly realized the USA was gaining some aspects of a Third World country was when I saw some news about poor mothers working three jobs in three different cities in order to raise their kids in Northern California. I read it and immediately thought: that’s my country! (I live in a Third World country).
Another case was when I read that, in the UK, parents were protesting against the closing of the public schools during the pandemic because, otherwise, their kids would not have what to eat for breakfast and lunch. That struck home even more to me. This is a textbook Third World problem.
The main characteristic of a Third World country to me is the fact that the right to live is not guaranteed. In First World countries, even if you’re absolutely poor, you’re never going hungry. You may die of cold depending on the region, but food will never be a problem in your life. People with jobs in First World countries will never have to plan their budget for food, no matter how crappy the job is – yes, the food will not be very nutritious, but you’ll still eat. That’s not what happens in the Third World. In the Third World, you have to plan your budget to buy your food; it is not guaranteed – even if you’re “middle class” – that the food you ate last month will be the same food you’re going to eat next month. In the Third World, you quite poetically have to cut your flesh to make ends meet. There’s no such a thing as gathering some coins from your pocket and your sofa and going to McDonalds in a random Tuesday in the Third World – this is a societal phenomenon that only exists in the First World.
Another very peculiar First World cultural habit I’ve noticed and that perplexes me is that many adults sorta keep their infancy trait of not eating some specific food because he/she “hates it”, e.g. don’t eat food with onions or garlic. Some kids in the Third World are like that (specially middle class kids), but, by adulthood
An even more bizarre habit is that, even lower middle class people in the First World apparently has some very specific food they like so much they eat it every day or at least every week in some restaurant or shop, and the fact that they realistically expect to eat it for the rest of their lives (e.g. person x loves to eat the cheesecake from the local café y and do so every day or at least every week). That is definitely not a thing in the Third World, where any kind of different/special food you eat will probably be your last time. In the Third World, the closest thing to guaranteed food you have is the base cereal from your country (generally, rice) and one or two vegetables; even meat (whatever kind it is) is far from guaranteed. That an average person consumes a specific food from a specific services provider and expects to do so consistently for the rest of their lives in the First World completely blows my mind.
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@ Posted by: Kukulkan | Jul 30 2021 9:44 utc | 76
Russia is definitely Third World (and so is China).
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@ Posted by: guidoamm | Jul 30 2021 9:26 utc | 75
What China is doing is completely different from a Marshall Plan. The Marshall Plan was just a big bag of money that poured over Western Europe so that they could rebuild what they already had built before the War – of course, this time, with American manufactures.
By 1960, Western Europe already was completely dependent on the American economy.
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@ Posted by: HelenB | Jul 30 2021 8:30 utc | 72
I think the case of tutoring is a specific accident of history in China (the Chinese culture traditionally puts a lot of importance of the education of their children) that could have degenerated into a structural problem (private education dominating everything and sucking all the air in the room) and the CPC is solving right now, while it is still relatively incipient. Going public was evidently a big signal flashing to the whole Party it was growing too dangerous.
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@ Posted by: guidoamm | Jul 30 2021 8:47 utc | 73
There’s nothing “modern” about private property. In fact, private property is the oldest form of division of human societies into classes, and can be detected since the oldest stages of civilization.
You could claim private property is foundational to every civilization based on the self-evident fact that, so far, every civilization has been based on private property. But you can’t mathematically prove that will always be the case; after all, human civilization is still very young (some 100,000 years old max), we still live in very primitive times.
Marx explained the question in a very simple and elegant way: humans have a limited imagination. Humans are animals, they’re living beings with a given ecological role, like any other species. Therefore, humans only put to themselves problems which are humanly possible. For example: a marathon runner will never put to himself the challenge of finishing a marathon in five seconds, but will put to him the challenge to finish it under two hours. The same thing applies socially (historically): if there are humans contesting private property, then private property is not socially eternal.
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@ Posted by: c1ue | Jul 30 2021 3:06 utc | 56
The Russian nobility was rich because they exploited the peasantry, not because they produced it.
Exploitation is not thievery in Marxist theory. Thievery can only happen in the sphere of circulation. The logic is that not thief will kill the goose that lays the golden eggs (i.e. the productive sphere) – that would defeat the purpose of thievery to begin with.
The reason why capitalists get richer while the working class gets poorer is not thievery, but because of exploitation. The difference here is the ontology of the process itself: the worker works for the capitalist and receives an equivalent wage from said capitalist, for the hours worked. This is a simple exchange process: the worker gives the capitalist hours of work, the capitalist gives the worker a given quantity of money (it has to be money, this is extremely important) to the worker.
What put worker and capitalist in worlds apart is after the process: the worker will expend his wage on his societal reproduction (i.e. to sustain himself and his family), while the capitalist will expend his profits on amplification of production. One lives in a regime of simple reproduction (the worker), while the other lives in a regime of amplified reproduction (the capitalist). The reason the capitalist can and the worker can’t is also very simple: human labor has the utility of producing more than what it gives when consumed. The worker gave and received his “fair share”, but the capitalist received more than what he paid for, precisely for the fact that the use value of human labor is giving its consumer more than what he paid for. This is called “surplus value” in Marxist theory. Profit is merely surplus value relatively (to total capital expended).
The concept of human labor giving more than what it receives is not witchcraft on Marx’s part. It is very logical and very simple, actually: Mother Nature (materially objective world, natural world for short) is cruel. As such, it will not give the homo sapiens a good life. If humans delegated to the natural world to regulate themselves, we would still be at some hundred thousands total living up to 38 years on average. Humans need to work the natural world so that the natural world becomes more amenable to them. Human labor then interacts with Nature in way that the result must be a humanly useful thing (could be anything, either for mental or physical welfare, or both). Therefore, the natural tendency of the homo sapiens is that it will work in the direction of the welfare of the species, even though certain individuals may be mentally ill and self-destructive.
So, when Marx states human labor gives you more than what it is worth, he’s not violating the laws of Physics. He’s talking specifically about the social (historical) world. From the point of view of human society, a super nova exploding millions of light years away is a non-factor, it is completely useless. The same is true for an isolated mountain in some uninhabited corner of the world. Human labor picks something socially useless and transforms it into something socially useful – that’s what he meant by creating more value that what it’s worth.
And yes, Marx’s theory unifies humanities with biological sciences; it is the only theory to do so. That’s why Engels once said that Marx did to Humanities what Darwin did to Biology (Darwin unified Biology with Physics).
Posted by: vk | Jul 30 2021 15:39 utc | 96
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