The New China Playbook

The Case for Future Growth: Excerpt from Dr. Keyu Jin's new book

Dr. Keyu Jin is an associate professor (with tenure) of Economics at the London School of Economics. She is from Beijing, China, and holds a B.A., M.A., and Ph.D. from Harvard University.

Her research is on international economics--- such as why capital flows from poor to rich countries, how the global implications of U.S. monetary and fiscal policies have changed; as well as how the rise of China impacts the global economy, from several perspectives ---trade, capital flows, global interest rates and saving, demographics, productivity and technology.

As you may have heard, Dr. Jin recently published The New China Playbook: Beyond Socialism and Capitalism.

From its UK Publisher, Swift Press

Although China’s economy is one of the largest in the world, Western understanding of it is often based on dated assumptions and incomplete information. In The New China Playbook, Keyu Jin burrows deep into the mechanisms of a unique system, taking a nuanced, clear-eyed, and data-based look inside. From the far-reaching and unexpected consequences of China’s one-child policy to the government’s complex relationship with entrepreneurs, from its boisterous financial system to its latest push for technological innovation, Jin reveals the frequently misunderstood dynamics at play.

China is entering a new era, soon to be shaped by a radically different younger generation. As it strives to move beyond the confines of conventional socialism stained by shortages and capitalism hindered by inequality, the world is about to witness the emergence of a completely new dynamic between two diametrically opposite systems. The thorough understanding of China’s playbook that Jin provides will be essential for anyone hoping to interpret the nation’s future economic and political strategy. While China’s rise on the world stage has stirred a wide range of emotions, one thing is certain: a deep understanding is essential for successfully navigating the global economy in the twenty-first century.

The Wall Street Journal and Time have run essays adapted from the book, and today I’m excited to share another excerpt, thanks to Dr. Jin, her publicist Paul Sliker, and her publisher.

And you can click the links to purchase the book in the UK (Swift Press), the U.S. (Penguin Random House), or elsewhere (Amazon).

The Case for Future Growth

Decades ago, if you had to predict China’s economic fortunes based on established economic principles, you would never have dreamed that China would land where it is today. Whether measured in terms of rule of law, ease of doing business, or corporate governance—factors deemed essential for economic growth—China has fared poorly, consistently hovering around or below average world rankings.23 China placed 82 out of 126 countries for rule of law; in 2018 China was ranked 78 in terms of ease of doing business, behind Azerbaijan and Rwanda; in corporate governance, it is ranked 72 out of 141 countries surveyed. In addition, China is Communist—and fervently red; after all, no Communist country except China has yet escaped the fate of either outright collapse or economic destitution.

So, given the obvious difficulty of prognosticating for China, what can we expect with regard to future growth? In the decade that followed the global financial crisis in 2009, things took a different turn. Total factor productivity dropped following a large fiscal stimulus aimed at saving the economy from a deep plunge, which resulted in a substantial misdirection of resources. As we will see in chapter 6, resources flowed to large SOEs, to shadow banking, and to countless numbers of infrastructure projects. The three steps forward taken in the first three decades following 1978 were followed by one step back. Growth maintained its pace not by improving efficiency, but through large amounts of credit and state-led investment; in the decade since 2009, the economy experienced low, or even negative, TFP growth, relying on investment to sustain overall expansion.

As we’ve seen, Latin American countries such as Mexico and Peru, and Asian economies such as Malaysia, Indonesia, and Thailand, have all experienced rapid growth, but as of this moment none of these developing nations has graduated into the ranks of high-income countries.

Data shows that the main reason is that they suffered from a significant slowdown in productivity. Of course, the numbers don’t show why that productivity slowdown occurred; it could have been due to corruption, political instability, poor infrastructure, or inadequate investment in research and development, among other things. This phenomenon is what economists call “the middle-income trap.” Since 1960, only 13 out of 101 middle-income economies have managed to escape it. South Korea and Israel made it, but can a gargantuan country like China do it? This is perhaps the single biggest question concerning its economic future. 

If China gets stuck in the middle-income trap, it may follow in the footsteps of Japan, which experienced a lost decade of no growth in the 1990s. If, however, China can keep growing at 5 percent on average, and assuming that the US continues to grow at a 1.5 percent annual rate, then the Chinese economy will overtake the US economy by about 2030. China would not be as rich as the US for several more decades, but by then more than a billion Chinese would enjoy the same living standards as the average American. However, in order to follow the trajectory of its East Asian neighbors, rather than those of Brazil and Mexico, China will need a new model of growth.

Prolonged economic downturns make it difficult to see China’s considerable untapped potential going forward. But the truth is that there are still around 870 million people with a monthly income below RMB 2000 (about US$300). They have yet to join the four hundred million in the middle-income group, which by Chinese standards have a qualifying monthly income of RMB 2000–5000— far below the advanced-economy average. Having an enlarged middle-income group, which has the highest marginal propensity to consume, is the only way to truly bolster China’s consumption engine.

There is also room for convergence. China’s productivity level is currently only a fraction of the US level; China’s share of labor force with a college degree is even smaller than that in South Africa and Brazil, and way below rich countries. New government reforms could further free up the economy. Despite more open policies in general, the floodgates have yet to be flung open for private enterprise to compete in the service sector, including entertainment, education, and health. Currently, this service segment of the economy accounts for about 50 percent of China’s GDP, a level far below the 70–80 percent found in other industrialized countries. Because services are more labor intensive than manufacturing, expanding them will offer more opportunities for employment. The prospect of private insurance companies, hospitals, schools, and cultural agencies is not only a boon for society, but also fertile ground for domestic and foreign enterprise to participate and invest.

Although there is still plenty of room for catching up to wealthy nations, delivering incremental prosperity also depends on the political ability to fully implement unfinished reforms. In that regard, the recent growth slowdown is more a symptom of a reform stalemate than it is of diminished potential. As we’ve seen, reform has served as a powerful economic impetus, and there are still many areas that can reduce distortions and raise efficiency: improving the financial sector would improve the allocation of capital and provide stable and long-term financing critical for innovation. Reforming the hukou system (the household registration system), which tethers a person’s labor to their birthplace, would allow the flow of talent across regions and improve the allocation of labor as well as reduce regional disparities.26 Fiscal reforms can help resolve the local government’s high levels of debt, as we will discuss further in chapter 6. Reform is an important ingredient in the mix for China, yet as time goes on, this model of reform-driven growth is losing momentum and potency. Many items in the comprehensive reform package ambitiously laid out by the Eighteenth Party Congress in 2012, when Xi Jinping became president, are still in process.

China has made the first quantum leap—going from US$380 to US$10,000 dollars of per capita income over a span of four decades. The second quantum leap is to go from US$10,000 dollars to US$30,000 dollars of income. Only then can the economic miracle be fully realized. To this point, much of the speed of China’s achievement can be ascribed to catching up. But unqualified success for China will be achieved when a country with 1.4 billion people reaches high-income status, particularly when this occurs in a political environment completely antithetical to the Western conventional wisdom. If that happens, half of the most prosperous people in the world may be living under Communist rule—not a situation anyone would have predicted in 1989 when the Berlin Wall fell.

The new generation that would be responsible for a wave of new technology is more likely to shift the economy in this direction than away from it. China’s young people do not share the appetite for industrialization of previous generations, a perspective that so far has shaped the nation’s economic identity and steered the process of its economic growth. But the new generation is proud of the nation’s growing innovative capacity and confident in its ability to contribute to it. This generation is market savvy, innovative, and entrepreneurial. Its dreams include a higher living standard, a more sustainable environment, more balance between work and leisure, a broader space for creation and innovation, and citizenship in a country leading the world in sustainable, intentional economic growth.

If I had to pick one theme from Confucianism that runs most prominently through the veins of the Chinese people, it would be this: “To be a credit to one’s ancestors.” The achievements in a career should serve as a way to honor one’s ancestry. The new generation stepping into leadership roles in China can make their families proud through a wide range of endeavors, but trailblazing innovation has now become one of the highest forms of such glory. And it is only through innovation that China has a hope of becoming the foremost economic power of the twenty-first century.

Dr. Jin also gave a Ted talk on What the World Can Learn From China’s Innovation Playbook

In the last few decades, China has gone from technological scarcity to abundance. What sparked this shift? Economist Keyu Jin explores how China has fostered a model of innovation unlike any other and shows why understanding its competitive, collaborative approach could benefit the world -- and perhaps demystify some contradictions.

PRAISE

“Jin doesn’t ignore China’s faults and failings . . . she tells a nuanced story that deserves attention at a time of extreme tension between China and the United States.” —Peter Coy, The New York Times

“Jin avoids ideology and instead frames basic economic agents in the same manner as any other country. As a result, English-language readers will come away with a more informed and empathetic picture of this still-developing country.” —Asian Review of Books

The New China Playbook offers a different perspective than many Western policymakers do about China. —NPR

“The biggest geo-political change of the 21st century will be the end of exclusive Western political and economic dominance. The rise of China is at the core of this change and Keyu Jin is a brilliant thinker to take us through its implications from the perspective of someone who understands both China and the West. It is this combination of insider and outsider insight which makes The New China Playbook essential reading.” —Tony Blair, former Prime Minster of The United Kingdom

“China is running on a new playbook for innovation and technology.  As a bicultural economics expert, Professor Keyu Jin understands this playbook, and demystifies it for the global audience.  This book is an invaluable lens to understand the modern anatomy of China.” —Kai-Fu Lee, Chairman & CEO, Sinovation Ventures and New York Times bestselling author of AI Superpowers
 
“During the 20 years of my Presidency, through the many meetings with Xi Jinping and other Chinese leaders, I tried to understand China. Now Keyu Jin provides a brilliant guidebook, a must read for everyone in business and politics engaged in the global economy.” –Olafur Ragnar Grimsson, former President of Iceland and Chair of the Artic Circle

“A revelatory exposition of China’s juggernaut economy and the rise of its entrepreneurs. Keyu Jin provides the roadmap to understanding the Chinese economy and places it within a global context. This is a must-read for anyone doing business in or with China today.” —William Ding, founder and chairman of NetEase

“The most important  book on China in many years, written with stunning eloquence and clarity.  Jin does not cover the warts, but insists on a holistic view.  Anyone who want to understand China, and how to engage with it economically and politically, will greatly benefit from this deeply original book.” —Kenneth Rogoff, Maurits C. Boas Chair of International Economics, Harvard University

“Much has been written about China, but it is rare to read an author such as Keyu Jin, who can so naturally and seamlessly blend two perspectives. If you are interested in a true conversation, this is the book worth reading.” –Charles Li, former Chief Executive of Hong Kong Exchanges and Clearing Limited

“China’s economic evolution may well determine the future of the world economy, the global environment and geopolitics.  Keyu Jin offers a bold, sound, and profoundly important view of where the Chinese economy is going. Her view needs to be carefully considered by all who will be affected by China, and that means almost everyone.” —Lawrence H. Summers, former United States Secretary of the Treasury and President Emeritus of Harvard University

Buy The New China Playbook: Beyond Socialism and Capitalism in the UK (Swift Press), the U.S. (Penguin Random House), or elsewhere (Amazon).