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Yao Yang on China's ideology, economy, & policymaking after the 20th Party Congress
The Dean of the National School of Development at the prestigious Peking University repeats his blunt argument that a pillar of the official Chinese ideology is out of date & must be changed.
After the report of the 20th Party Congress of the Communist Party of China (CPC) was approved on Oct. 26, 2022, 中国企业家 China Entrepreneur, a magazine-based news outlet, interviewed Professor Yao Yang, Dean of Peking University’s National School of Development and published a report on Oct. 31.
Yao made a number of interesting points in the interview:
He says the statement that development remains China’s top priority was what impressed him most. In Chinese politics, that statement is typically used to signal that the CPC would focus on the economy rather than something else.
He says the buzzword in China 新型举国体制 new system for mobilizing the resources nationwide to achieve breakthroughs in core technologies in key fields should take lessons from Chinese experience in the command economy era; that it should NOT be used to exclude the sectors, projects, or companies in core technologies or key fields; that it should NOT lead to a chess game with just one player (the state) in which case there would be an enormous waste; and that he thinks the best way for such a new system is for the government to raise money, put the money in a sort of fund of funds, and let the market take care of the rest.
On discussing Common Prosperity, another Chinese buzzword in the past several years, Yao, a high-profile economist and Dean of the National School of Development at the prestigious Peking University, repeated his blunt argument that Marxist Political Economy, a pillar of the standing official Chinese ideology, is 过时 out of date and 必须得改 must be changed.
Some terms, such as “capital exploits workers” and “the state must be a proletariat state,” are scary for the owners of capital. Our theory is flawed, and it must be changed.
Yao cites a recent ideological shift in the CPC, which now says the CPC shall integrate the basic tenets of Marxism with China’s specific realities and fine traditional culture and reasoned that China traditionally favors awarding the hard-working and talented people, so doing away with Marxist Political Economy is NOT a rebellion but rather a return to Chinese roots.
In a more understandable example, Yao says China had a market economy in the Song dynasty nearly a thousand years ago, so China’s recent embrace of the market economy is a return to its fine traditional culture, thus solving the potential, delicate tension between China’s market economy and the prevailing Marxist doctrines, now that the CPC has legitimized fine traditional culture in its standing official ideology.
If this still sounds confusing to you, here is a Twitter thread from meMost people have no idea what PKU's Yao Yang has been doing on ideology, so let me explain. Yao apparently thinks that some of China's prevailing ideology needs to be changed, or, shall we say, improved/perfect/go with the times. But it's *not feasible* to just
(Disclosure: I haven’t consulted with Yao but that would be my learned observation.)
Yao notes while being asked about the real economy, sectors such as finance that aren’t typically considered part of the real economy remain important. Entreprenurs take huge risks, so reaping the rewards from taking their companies public is not abnormal and shouldn’t be discouraged.
On Big Tech, Yao says the mainstream narrative in China and the U.S. that big equals monopolistic is problematic. However, on the other hand, given the mainstream narrative, it’s in their own interests for Big Tech to keep two rivals alive rather than wiping them out.
Yao says China’s preferred term, “high-quality development,” shouldn’t prejudice sectors and companies that aren’t involved in the most sophisticated and advanced technologies.
Yao is very optimistic about China’s economy and its transition in the past decade, which he says can grow at around 5.5% as long as policymakers do not repeat their mistakes in producing ill-considered interventions.
Below is a translation of the interview.
China Entrepreneur：What impressed you the most in the 20th Party Congress report?
Yao: First of all, that development is the first priority has been emphasized again, and I think this will be our future direction for sure. It is the most significant task of the CPC and the country to realize the great rejuvenation of the Chinese nation and to fulfill the task, the economy has to keep growing at a necessary speed. A simple calculation: if we want to double the income per capita in 2020 by 2035, the growth rate of the income per capita must not be lower than 4.8%, which is not easy to reach. Thus, development is still very important.
There are new things in other aspects. I would like to focus mainly on two aspects: first, the report says that our economic development should be fairer and shared by all. This includes the theme of “Common Prosperity” and 规范财富积累机制 regulating wealth accumulation mechanisms. Second, economic security is emphasized, which is correlated with the changing international situation. These two aspects have been mentioned in past reports, but this time they are expressed more clearly.
China Entrepreneur: How to understand the term "improving the 新型举国体制 new system for mobilizing the resources nationwide to achieve breakthroughs in core technologies in key fields” in the report?
Yao: It is related to the second point I’ve just mentioned, which is, economic security. But what does economic security mean exactly?
A comprehensive plan for constructing a new development paradigm was made by the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China. The Sixth Plenary Session emphasized 构建以国内大循环为主体、国内国际双循环相互促进的新发展格局 building the new development paradigm featuring dual circulation, in which domestic and overseas markets reinforce each other, with the domestic market as the mainstay.
How can we build a system that ensures China’s economy runs normally and the society is stable when the situation becomes extreme? The new system for mobilizing the resources nationwide to achieve breakthroughs in core technologies in key fields is part of the answer. Its main direction is to make breakthroughs in “chokehold” technologies.
How to do that? It is a “great subject” that requires a great amount of study and research.
We should learn from past failures. The 三线建设 “Third Front Movement” (the massive program of investment that China carried out in the remote regions of south-western and western China between 1964 and 1971) was one sort of a whole-nation system, and it was also a response to external threats. At that time, the pressure came from the Soviet Union and the U.S. It is unfair to say the movement didn’t achieve anything. Still, it would have had better effects on our economy if the funds were invested in coastal areas and key inland cities instead of the remote parts of China.
We economists always ask the question: how much is the opportunity cost? A lesson taught by the “Third Front Movement” is that there should be a limit in trying to prevent risks, and it is inappropriate to do too much: risk prevention is only Plan B, and you should not make it Plan A. In other words, you can’t think that the new system for mobilizing the resources nationwide to achieve breakthroughs in core technologies in key fields means directing everyone to accomplish only one thing. That would be wrong.
In fact, I think it would be fine to just call it “a new-type industrial policy,” which can avoid unnecessary misunderstandings.
It is, again, a great subject to learn how to implement such an industrial policy. We have been successful in making electric vehicles, yet we didn’t win as big a victory in constructing photovoltaic production bases. We have indeed made the biggest photovoltaic production base in the world, but the waste during the process was enormous, and some corrupt people took advantage of it [stealing subsidies], these are the problems that need to be reflected on. I think that the new system for mobilizing the resources nationwide to achieve breakthroughs in core technologies in key fields suits the industries where the direction of the technology is known clearly, and whose development is affordable for the state, such as semiconductors.
In addition, it is important that the companies not in the new system don’t miss out. It shouldn’t be that the new system selects certain items and then the private companies not in it are shut out, or that the private companies are only allowed to make very small efforts.
The new system shouldn’t be exclusive or a 全国一盘棋 chess game with just one player, which is only the state. That would be wrong and cause enormous waste.
In my opinion, the best way for a new system is for the state to raise money and let the companies do the job themselves. The funds don’t necessarily have to be invested by the government: they can be dispersed through a market entity, such as venture capital funds or PE (private equity) funds. That would be tantamount to the state setting up a fund of funds (FOF) to invest in various funds and then letting those funds make investments.
But the funds need to be strictly oriented toward certain areas and not other areas. I think if there’s a third party between the government and the enterprises, it would be very different. Such a combination of the government and the market enables the government to play its role and, at the same time, 不下场踢球 “stay out of the football pitch” (not involved directly in business), which can guarantee efficiency.
If everyone sees the new system as 一块肥肉 a fat piece of juicy meat, then many people will want to take a bite. If the government is involved directly, there’s no way that officials are profit-oriented, and different officials might have very different ideas on what to invest in. Then it would be impossible to make it market-oriented.
China Entrepreneur：What do you think about the content concerning the “Common Prosperity” in the report?
Yao: Regarding “Common Prosperity,” I think it is worth more discussion as it involves broader fields.
First of all, it concerns the question of our basic economic system, that is, whether we should insist on 按要素分配 distribution of income based on factors [distribution according to how much contribution has been made by one’s factors of production, such as land, human labor, technology, information, etc. Another concept is 按劳分配 distribution solely based on labor.]
That the market plays a decisive role in the Chinese economy can’t be just a slogan. What does it mean when it’s in implementation? Distribution is based on factors. Capital should also participate in the distribution. Labour’s participation in distribution, in my opinion, is part of the distribution based on factors. How was capital accumulated? Labour, including intellectual labor and manual labor. It’s just that we don’t get to see the process.
Some might say that it is unjust to make profits with profits, but capital is accumulated only because someone has worked in the past, isn’t it? Suppose it is unjust to make profits with profits. Isn’t it also wrong to get a higher salary when you graduate college, since studying in a university and getting a diploma raises your capital in human resources? Furthermore, capital has to take risks that laborers don’t.
China Entrepreneur：There were some misunderstandings about the concept of “Common Prosperity” when it was proposed. Is it because this concept hasn’t been made clear theoretically? That is, there hasn’t been a clear standard to estimate whether we have reached “Common Prosperity”?
Yao: Our theory does not accord with our practice. The theory we apply is still the traditional Marxist Political Economy. But if we apply such a theory to our country without adapting it, what we have been doing in this country would have all been wrong. In one of my articles published in 《文化纵横》Beijing Cultural Review on July 2, 2021 (“The Adaptation of Marxism into Chinese Characteristics and the Construction of Modern Chinese Civilization” 《马克思主义中国化与现代中华文明的建构》CN), I said bluntly that the basis of our Marxist actions, that is, the theories of Marxist Political Economy, is out of date.
(In-text note by China Entrepreneur: In “The Adaptation of Marxism into Chinese Characteristics and the Construction of Modern Chinese Civilization” 《马克思主义中国化与现代中华文明的建构》CN, Yao said that it has been a typical characteristic in Chinese historical movements in the 20th century to combine western theories and practices and Chinese reality and traditions. The problem for contemporary Chinese scholars is how to theorize such a practice, absorb and digest Western culture under the framework of Chinese culture, and create a new Chinese Civilization.
Yao also said that one of the biggest challenges for today’s Communist Party of China is the tension between theory and practice. It is a practical solution to build a political philosophy with Chinese characteristics based on traditional Chinese Confucianism. To form a self-consistent political and philosophical theory, China should fully understand the fine elements of Chinese tradition, such as pragmatism, the balance between the individuals and the order, meritocracy, and 德治 governance by virtue, and combine these elements with Marxism and other preferable elements in the Western culture. To complete the Communist Party of China’s sinicization, it is inevitable to reconstruct the Communist Party of China’s theoretical system with Marxist philosophy as a guide and Confucian politics as the main elements, which is also a key step for Chinese culture to absorb the Western culture.)
Some terms, such as “capital exploits workers” and “the state must be a proletariat state,” are scary for the owners of capital. Our theory is flawed, and it must be changed.
There is a very important point made in the report at the 20th Party Congress, which is beyond the realm of economics: to 马克思主义中国化时代化 adapt Marxism to China’s condition and to the requirements of our time, we should 把马克思主义基本原理同中国具体实际、同中国优秀传统文化结合起来 integrate the basic tenets of Marxism with China’s specific realities and fine traditional culture.
Whether it’s a political system or any other thing, it must adapt itself to the underlying psychological structure of the ordinary people in the country. In other words, it has to be accepted by the Chinese people. A very important part of Chinese traditional culture is 贤能主义 meritocracy. If you want something, you have to earn it. It is normal to accumulate wealth on such a basis, so when we say we should regulate the mechanism of accumulating wealth, it doesn’t mean that we inhibit people from accumulating wealth. As long as it comes from personal effort, it is totally acceptable, but you can’t do it with dishonest practices or 钻空子 exploit loopholes. If you work honestly in industries, it’s totally fine if you multiply your earnings by ten times.
The accumulation of wealth should be understood in such a way, but for now, our understanding is chaotic. Somebody brought up the concept of “people’s economy” which 搅浑水 muddies the water. The report at the 20th Party Congress didn’t bring up such a concept either. What does “people’s economy” mean? Isn’t what we are doing now benefit the people? Of course, it is. You need to respect the laws of economy. The concept of “people’s economy” indicates that the capital owners have to 靠边站 step aside. If that’s the case, nobody would want to work hard in an industry anymore, isn’t it? We must encourage everyone to participate, or else how can we realize “common prosperity?”
I have written an academic article (possibly indicating “the Differentness of Human Nature and the Political Structure in Confucian Theory”《人性的差异性与儒家政治结构》CN） that discusses how Confucious’ saying 不患寡而患不均 “do not worry about scarcity, but rather about uneven distribution” accords with his other sayings.
I think there are contradictions in his sayings. The saying “do not worry about scarcity, but rather about uneven distribution” represents Confucious’ macroscopic ideal, that is, in an ideal society, the distribution should be rather even; but on a microscopic level, we need to 奖励贤能 award the hard-working and talented people. Confucious said, 富而可求也，虽执鞭之士，吾亦为之。如不可求，从吾所好 "If the search for riches is sure to be successful, though I should become a groom with whip in hand to get them, I will do so. As the search may not be successful, I will follow after that which I love." (The Analects of Confucius 7:11) It indicates that Confucious approves of people working hard to make a fortune. The problem might lie in the uneven distribution. How do we deal with such a problem in our time? For me, the method would be to invest in ordinary people, promote the capability of every individual to make money, which is 授人以渔 “giving one the tools to fish, instead of fish itself,” and let everybody know how to fish (in this case, the proverb means teaching the people the method to make a fortune, instead of giving them money directly).
Such accords with the saying “the emancipation of individuals is the precondition of the emancipation of the entire human race” in the Communist Manifesto (EN). We have to make everybody an independent actor 独立的行为人 who can develop comprehensively. How to do it? The only way is to invest in ordinary people, invest in every individual. What will derive from it will be, first of all, the fairness of education, which is the basis of common prosperity. Everyone knows now that you are very unlikely to become one of the middle class if you don’t have a college degree. Now that access to university has been vastly expanded, why don’t we allow more students to enter high school and get a chance? [In China’s educational system, only about 50% of junior high school students can enter high school, the other 50% will have to go to professional schools. Meanwhile, the rate of high school students entering university reaches 70~80%. ] We have a lot to improve.
I think it is in no way exaggerated to say that “As soon as we have realized educational fairness, we will have accomplished 70% of the goal of common prosperity.” We haven’t managed to distribute the educational resources evenly. The gap is too big between cities and rural areas, between downtowns and suburbs, and between “super high schools” and ordinary high schools [super high schools indicate those that have the highest enrollment score in their city, who often occupy the best students and best resources]. The elimination of these gaps calls for our efforts. We should not pay too much attention to some people being too rich. Instead, we should focus on how to promote the ability of the poor to earn money.
If it is confusing, here is a Twitter thread
China Entrepreneur：How to understand the term “Chinese path to Modernization”? [The CPC says it’s a key result of of the 20th Party Congress.]
Yao: Recently, I published an article called “China’s Path to Modernization and its Significance in the World,” (《中国现代化道路及其世界意义》CN) in which I talked about the “Chinese path to Modernization.” What does it mean? The report of the 20th Party Congress provides us with a framework and a direction, and it is the responsibility of us scholars to do the concrete job.
We will have to accept the development and the efforts towards the great rejuvenation of the Chinese nation rises like they are on waves [meaning not constantly rising]. China has its own characteristics, but at the same time, its process of modernization is connected with that of the whole world.
We should return to our fine traditional cultures, such as meritocracy and pragmatism. In fact, we have long had markets. China has had a market economy since the Song dynasty, hundreds of years earlier than that of Western Europe. Thus, we are not importing the market economy from the West but recovering our own traditions.
We should pick up the fine traditional culture again, then we will have a theme in the Chinese path to modernization, which has Chinese characteristics that are different from the West. But it still connects with the whole world, which is the way we say we contribute to the world.
China Entrepreneur： When the 20th Party Congress report came out, we contacted and interviewed more than ten enterprises. Most of them had deep impressions on “adhering to focusing economic development on the real economy.” In your opinion, where does such a saying lead to?
Yao: I think that in the past decade, we kept encouraging people to dedicate themselves to the real economy, and we have seen great results. During the economic readjustments in the past decade, the entrepreneurial class has realized that investments in the real economy are greatly supported by the government, and it is the future direction of China’s development. There’s no problem with this.
However, I think we can’t say that because we encourage the real economy, we don’t develop other sectors, such as finance. That would be terribly wrong, isn’t it? The report of the 20th National Congress also said that we should increase the ratio of direct financing because to develop a real economy and innovate, an active capital market is needed. The risk of financing is very big, and the rate of failure is very high. Only when investors can reap returns from the capital markets would they sustain innovating because the cost of innovation is high. Otherwise, nobody would innovate.
To put it simply, when only one project out of ten could succeed, the enterprise that successfully goes public with this project must get a reward that is ten times higher than usual. Only in this way can we say that the cost of innovation has been compensated.
I think we must clarify that the capital market creates the super-riches. They have made money in place of others, and when you make the calculations, you have to consider the ones that have suffered losses. Even if it’s only one individual, when he invests in 10 projects but only succeeds in one, he can make up for the losses with the successful one.
From another perspective, developing the real economy doesn’t mean that we don’t make efforts in the “unreal” things, such as the real estate market. It is still true that 衣食住行还是百姓的必需品 ordinary people need to wear, eat, have a place to live in, and travel. Some people raised money in the name of real estate but chose to use the money in other sectors and suffered losses, but that would be another matter.
Many of our policies have been influenced by the situation of a few big enterprises and big events, but we should not do that. It is important to see the whole picture, where entrepreneurs generally are making innovations as a whole. I have visited many enterprises, and many entrepreneurs are making innovations without getting known by people, and they spend their own money on innovations. Some spent tens of millions and some spent hundreds of millions. These people need to be rewarded if they succeed in the future and their companies go public. That is the right kind of reward the market should give.
China Entrepreneur： When it comes to the real economy, many people will compare it with the virtual economy and the digital economy. Indeed in the past period of time, the platform economy with the Internet as its core has declined. Would you worry about hypercorrection or overemphasizing one thing and neglecting the other?
Yao: The platform economy is large, but that alone isn’t problematic. There is a school of thought in the U.S. that being large in itself means being monopolistic, which is also wrong. I think every country in today’s world tends to worry that these platforms and enterprises will take control of society and politics, which happens in both China and the U.S.
Worrying about the platform economy is global. What if these platforms become too big and too powerful? I think these Internet giants have to think clearly by themselves and develop some self-restraint. For example, they shouldn’t wipe out all the competitors but keep at least two rivals alive and survive together, to sustain an ecosystem that works. When their target is too big, the companies will become the target.
China Entrepreneur： There’s the phrase “high-quality development” in the report, which is the right direction without a doubt. But how to do it?
Yao: The term “high-quality development” has been in use for many years. It isn’t new. What I worry about is that such a term might give rise to misleading effects. I believe it would be better if we say “innovate the technologies and upgrade the industries,” instead of saying “high-quality development,” because with this phrase, those companies not involved in the most advanced technologies risk being tagged as not pursuing “high-quality development.” Is real estate not high quality? Internet platforms, not high quality? The food industry and clothing industry could use upgrades and that would be good enough.
China Entrepreneur：What are your expectations and prospects for the economy in the coming period?
Yao: I think there is no problem with the foundation of China’s economy. I observe that the readjustments of China’s economy have been relatively successful in the past decade. Although there were some errors in the policies, it has been a success as a whole.
What are the successful aspects? In the first decade of this century, the development pattern has transformed from focusing on the scale to focusing on quality. To put it bluntly, innovation is at least the main topic that everyone is discussing. Industrial upgrading has become the most important thing for every industry and every enterprise. That means that our transformation has been successful.
I think that our potential growth rate would still be at around 5.5%, at least in the near future, because we have a savings rate of 45%. But what are the risks? They lie in the policies. The policies keep fluctuating, and many of them are published without in-depth research. For example, the policies on deleveraging and asset management showed exactly the problems. They were an overdose 用药过猛 (too radical for the problems that they wanted to solve), which shocked the market and caused market turmoils.
We have to avoid such “overdoses.” As long as we keep the policies stable, precise, and effective, our economy will be fine.
Interview conducted by Zhou Chunlin for China Entrepreneur