Zheng Yongnian breaks down China's path to economic revival (Part I)
Rule of law, fiscal & financial power, and a deregulation push to transform China's economy
China’s resolve to jumpstart its economy is crystal clear. Just one month after unveiling a package of incremental policies, Premier Li Qiang chaired State Council's Executive Meeting on October 25, as reported by China’s official news agency. The purpose? To dissect the economic landscape and gauge the impact of those policies.
For a quick primer: China’s State Council operates under a dual-meeting system: the State Council’s Full Meeting and the State Council’s Executive Meeting. The Full Meeting includes all Council members, while the Executive Meeting - typically consisting of fewer than ten members, including the Premier, Vice Premiers, and a handful of senior officials - meets regularly to make pivotal decisions, draft laws, and issue policies in the name of the State Council, according to the 2023 edition of the Rules of Procedure for the State Council. And since 2023, the meeting’s rhythm has changed from a once-a-week cadence to two to three times per month, with flexibility for ad-hoc sessions as needed.
Today’s newsletter features a piece by Professor Zheng Yongnian, published on the WeChat Account 大湾区评论 GBA Review on October 18. As a globally recognized public intellectual, Zheng is the Founding Director of the Advanced Institute of The Institute for International Affairs, the Chinese University of Hong Kong, Shenzhen.
He summarizes the recent economic push as the "One Framework, Three Policies." The framework hinges on a rule-of-law-centered legal system, with policies promoting accommodative financial measures, active fiscal support, and robust deregulation.
Zheng doesn’t mince words, pointing out that the "Tacitus Trap" between academics and the public has deepened significantly. The public has little faith that scholars can offer any certainty about the nation's economy. To address China’s economic issues, he argues, solutions must be tailored to China’s unique circumstances rather than copy Western methods blindly.
According to Zheng, a rule-of-law-centered system would, in the long run, protect and enhance the wealth generated since "Reform and Opening Up." In the short term, it could also boost entrepreneurs' confidence.
As for the "Three Policies," Zheng believes that deregulation is often overlooked. So far, financial policies have mostly energized individual investors, while fiscal policies haven’t yet lightened the load for local governments. But crucially, deregulation for businesses and local authorities - two key economic players - has yet to begin, meaning we’re not seeing the ripple effects necessary to spur real economic growth. In Zheng’s view, the key to solving China’s challenges lies in opening up new avenues for growth.
Following is the translation of his article. Given the length, I’ll publish it over two issues. All bolded text below reflects the original emphasis.
振兴经济的“一制三策”
“One Framework, Three Policies” for revitalizing the economy
Recently, the Chinese government unveiled a package of incremental policies to support its economy, drawing considerable attention both at home and abroad. Since the start of its reform and opening-up in 1978, China’s economy has become deeply integrated with the global market, playing a key role in driving global economic growth for many years. Today, the state of China’s economy directly impacts the global economic landscape. Domestically, however, challenges such as the challenges posed by the COVID-19, international geopolitical tensions, and internal efforts towards economic transformation and upgrading have placed significant pressure on the country's growth, leaving uncertainty over how to address the downturn and stimulate recovery. Therefore, it's fair to say that the stimulus measures this time have been eagerly anticipated.
Although opinions differ across sectors regarding the plan and its potential impact, the overall reception has been highly positive. Ray Dalio, founder of Bridgewater Associates and a renowned expert on China’s economy, remarked that this move will "go down in the market-economic history books." He believes the policy has rekindled the "animal spirits" of the Chinese market. Dalio further noted that if Chinese policymakers deliver on measures "exceeding their promises," the current economic stimulus could become a historic turning point, much like former European Central Bank President Mario Draghi's 2012 pledge to do "whatever it takes" to save the euro, which ultimately succeeded.
I. The “Tacitus Trap” between academia and the public
A rather awkward situation exists within the economics community. Before the government rolled out its package of policies, several sensitive economists had already put forward suggestions for revitalizing the economy. Some advocated for a Chinese-style quantitative easing approach, such as injecting 10 trillion yuan or even more into the market to stimulate the economy. Others recommended fiscal solutions, such as using central government fund to address the worsening local debt problems. However, some economists questioned the efficacy of these approaches. Some believed that China no longer needed to prioritize GDP growth at this stage of its development. Others worried that this might be another round of a "deluge of stimulus policies" which, instead of solving underlying issues, could lead to long-term negative consequences.
The differing views within the economics community are less of a debate and more of a reflection of how scholars interpret policies through their own ideological lenses or personal interests. The "Tacitus Trap" between academia and the public has already deepened significantly. The public no longer believes that scholars can provide any certainty regarding the country's economic situation. In fact, the more discussions take place, the greater the public’s sense of uncertainty seems to grow.
This highlights the complexity of China’s current "economic problem." At a theoretical level, when addressing national economic issues, it's essential to distinguish between two interconnected but distinct challenges: the actual "economic problem" and the "economics problem" - the latter being the issue of how people understand the economy.
The economic problems perceived by the public are real, as they are directly linked to everyday life. The state of the economy affects many aspects of their lives. However, the academic economics community, particularly those in the more theoretical or "academic" branch, often lacks this direct connection - they are frequently detached from the real economy, sometimes entirely disconnected. There appears to be no consensus on whether problems exist, what they are, or how to solve them. While the economy may have its own challenges, the economics community seems to have even more. Furthermore, the issues within the economics community, in turn, affect real economic issues. Historically, debates among economists tend to worsen the public's understanding of the actual economy. Two particularly prominent problems stand out in this regard.
First, people need to confront the existing issues and acknowledge them as problems. In today's China, the question of whether to admit that economic problems exist has itself become a problem.
Not everyone acknowledges that there are economic problems, largely due to differing economic mindsets: what one person views as a problem, another may not; what one sees as positive, another may perceive as negative; and while some may believe that economic growth is essential, others might argue that growth is no longer a priority. Particularly when economic phenomena are viewed from different perspectives and influenced by vested interests, these disagreements can become endless. In such a situation, any form of consensus becomes impossible. Naturally, without consensus, there can be no widely recognized "economic problems," let alone economic policies or solutions based on that consensus.
Second, there is the issue of economic thinking, or economics itself.
Economic thinking is a tool for understanding and solving economic problems. China's economic community has long struggled with the lack of an economic theory that can explain China’s unique economic phenomena. Often, foreign economic theories are imported to interpret and diagnose China’s economy, leading to misdiagnoses and flawed "prescriptions" that not only fail to resolve the underlying issues but exacerbate them. At times, the use of these foreign tools has been implemented through so-called "reforms," leading to a paradox where the more reforms were introduced, the more problems arose, and the more severe they became. This has led society to question reforms, trapping it to a significant extent in the "Tacitus Trap." Therefore, it is crucial to clarify two points: first, these are "China’s" economic problems, not the problems of the U.S., Europe, or Japan; second, solving them requires Chinese solutions. It is ineffective to parade around using American, European, or Japanese methods designed to solve their own economic issues as if they could fix China’s.
II. The “One Framework, Three Policies” economic revitalization plan
The recent economic revitalization plan can be summarized as the "One Framework, Three Policies." The “One Framework” refers to a legal system centered around the rule of law, while the "Three Policies" include accommodative monetary and financial policies, proactive fiscal policies, and significant deregulation policies. The legal framework serves as both the foundation and the objective, while the policies are the tools and methods. The implementation of these policies must be supported by the legal system, and the outcomes they produce must also be safeguarded within this legal framework.
From the perspective of global economic history, the "One Framework, Three Policies" approach embodies both international principles and uniquely Chinese characteristics. The development of a rule-of-law system is central to the success of all developed economies. The impact of a institution on economic behavior is widely acknowledged, not only by scholars but also by the general public. In today's world, the importance of a rule-of-law system for a country’s development is undisputed - not just in the economic sphere, but across all sectors. Since the reform and opening-up, China has consistently pursued the establishment of a legal system, which remains essential to improving the business environment for enterprises.
While the "Three Policies" are commonly used tools for advancing economic growth globally, their application in China has been particularly rich. The concept of monetarism or quantitative easing, can be traced back to Guanzi《管子》, a classic Chinese text. Guan Zhong, one of its proponents, is credited with the earliest form of quantitative easing economic thought. Throughout Chinese history, various dynasties occasionally employed quantitative easing policies to regulate economic activities. Proactive fiscal policy has been the most effective tool for driving economic growth since the founding of the People's Republic of China. For a long time, the state relied solely on fiscal policies, with no distinct monetary or financial policies. Even today, China remains in a state of "strong fiscal, weak finance," where fiscal policy predominates, while financial policy plays a supplementary role. Moreover, the practice of deregulation to unleash economic potential has long been a hallmark of China’s effective economic strategies. During the early Han Dynasty, the Huang-Lao school’s philosophy of "non-interventionist governance 无为而治" and "nurturing life through rest and recuperation休养生息" led to a foundation of economic prosperity. This approach was continually adopted by later leaders. Much of China's economic policies, during the long period after the reform and opening-up, reflects similar characteristics.
III. "Rule of law" as the strongest foundation for development
A legal system is important for economic entities as it safeguards their objectives and the purpose of their economic activities.
As economic entities, whether organizations or individuals, the primary goal in engaging in economic activities is the pursuit of wealth. Thus, the first issue that needs to be addressed is the protection of wealth. Pursuing wealth to achieve a better life seems to be inherent in human nature. However, under different cultural and institutional contexts, this pursuit can yield to different outcomes. If wealth creation is viewed as "honorable" (as in the 1980s slogan "It is glorious to get rich 致富光荣"), people will seek wealth openly and confidently. But if the pursuit of wealth is subject to punishment, the desire to accumulate wealth will be constrained, either through internal restraint or external pressure.
How can we incentivize people to pursue wealth? The answer to this question has long been clear in economic thought: the most important factors are the protection of both the economic actors' wealth and their personal safety. These two "safeties" are fundamental. Without them, no organization or individual would pursue wealth or seek economic development.
From this perspective, the development of the nation's rule-of-law system is still in progress and has substantial room for improvement. While "reform and opening-up" can be seen as a mechanism for wealth creation, further "reform and opening-up" is required to create mechanisms for wealth protection and wealth appreciation. In this regard, it is essential to thoroughly review past experiences and lessons. Since the reform and opening-up, China has discovered ways to create wealth, but it has yet to develop effective mechanisms to protect and grow that wealth. As a result, much of the wealth generated has flowed overseas. In East Asia, Japan and the "Four Asian Tigers" (South Korea, Singapore, Taiwan, and Hong Kong) not only surpassed the "middle-income trap" within 30 years of their economic takeoff but also saw their middle class grow from over 50% to 60% or more. A large middle class forms the social foundation for these economies to become consumer-driven societies. By comparison, despite over 40 years of reform and opening-up in China, and even faster economic growth than these economies, both our per capita national income and the size of our middle class lag behind theirs. One of the reasons is the loss of wealth, and another is the lack of effective wealth protection and appreciation mechanisms.
In the short term, restoring entrepreneurs' confidence requires addressing malpractices that violate the rule of law. The recent economic downturn has placed financial pressure on some local governments, prompting them to seek various means of generating revenue - often resulting in non-tax revenues surpassing tax revenues. For example, in the first half of this year, national general public budget revenue decreased by 2.8% year-on-year; tax revenue fell by 5.6%, while non-tax revenue grew by 11.7%. Among the non-tax revenues, some local governments have resorted to "selling off everything they can," while others have been "taking advantage of" society - imposing additional financial burdens on businesses and individuals to boost revenue. Although there are no official policies such as "20-year retrospective audits on corporate behavior" or "30-year tax audits," such practices do exist, negatively impacting the business environment, particularly for private enterprises. Some regions, even affluent ones, have gone as far as to use so-called "distant fishing" 远洋捕捞 tactics - enforcing laws across jurisdictions to investigate what they perceive as "illicit gains" of businesses, leaving entrepreneurs on edge. While these actions may provide short-term revenue boosts for local governments, in the long run, they will inevitably undermine entrepreneurs' confidence in local economies, resulting in stagnation. Moreover, if such practices continue, they risk fostering the rise of local protectionism across different regions.
Some local governments have attempted to cut costs by downsizing government departments and employees, but these cuts often target public service sectors, leading to inadequate public services and growing public dissatisfaction. At the societal level, the economic downturn has exacerbated problems such as insufficient employment, financial difficulties for families, and downgraded consumption. In some regions, the challenges faced by employees due to layoffs or business closures are even impacting overall social stability.
In traditional Chinese culture, the saying "One shall have his peace of mind when he possesses a piece of land"有恒产者有恒心 is regarded as a universal truth. However, possessing "a piece of land" requires an entire support system, which is precisely the institutional issue that sustainable economic development must address. In this sense, the "rule of law" stands as the strongest safeguard for development.
Both theoretically and in terms of policy, there is already consensus on the importance of developing a rule-of-law system. This commitment is reflected in legal provisions such as the Constitution, the Property Law, and the Civil Code. Recently, the Ministry of Justice and the National Development and Reform Commission officially invited public feedback on the Draft of Private Economy Promotion Law of the People's Republic of China. This law is specifically designed to support the growth of private enterprises and is expected to further advance “the rule of law.”
(To be continued)
The newsletter is written by Yuzhe He, the founder of Gen-Z Glimpse. The personal newsletter solely reflects his perspectives, NOT those of others.
If you spot any errors or have feedback, please don’t hesitate to respond or send your comments to Yuzhehere # hotmail DOT com.
great piece