Yao Yang on the resilience of China's economy
and pins the upcoming 3rd plenum's theme as high-level socialism prioritizing technological development, wealth redistribution, and wider opening up.
Yao Yang is a Professor and Director of the China Center for Economic Research at Peking University. On June 23, he delivered a speech at an event hosted by Zhenghe Island, a network platform for elites.
As my colleague Zichen Wang already covered in Pekingnology, Yao, in the last part of his speech, played down the expectations for major reforms at the upcoming Third Plenary Session of the 20th Central Committee of the Communist Party of China scheduled for July 15-18.
Yao also looked back at globalization, China’s development path, and even the state of economics. Below is a full translation.
—Yuxuan Jia
中国经济的韧劲
Resilience of the Chinese Economy
Good morning, everyone! Today, I'll share two aspects: the international situation and domestic trends.
China will not be isolated on the global stage
This session previously mentioned the phrase "profound changes unseen in a century". How should it be interpreted? I think this suggests the end of the previous era of globalization. Understanding this is crucial as many still perceive the world through the lens of past globalization waves. For instance, those born in the 1960s tend to contextualize the world in terms of the 1980s, which marked the beginning of the previous wave of globalization.
The previous wave of globalization was characterized by integration and convergence. Integration means the entire world becoming interconnected, led by the United States. The U.S. stood at the top of the global hierarchy during this period, creating and maintaining its own order. As the strongest country, the U.S. was able to approach global integration with a calm and peaceful mindset.
In the 1990s, Chinese students like myself studying in the United States were taught that free trade was sacred and inviolable, a principle inscribed on the victors' flags. The United States, having emerged victorious from World War II and the Cold War, sought to embed free trade into its national ethos. Consequently, it aimed for global convergence towards the United States—not only economically, but also socially and politically.
At that time, China seemed to be in a transitional period. It was widely believed that eventually, everyone would move from this shore to the other shore, represented by the United States. This was a common notion among many Chinese during that period.
However, after the 2008 financial crisis and increasingly after 2010, the world changed. The biggest change was that China realized it had its own path to follow: the socialist path led by the Communist Party of China (CPC). This was an "is" [as in David Hume’s Is-Ought].
This led to America's so-called disappointment with China. Over the past 50 to 60 years, the U.S. has tried to integrate China into the U.S.-led global order, hoping for convergence, but they failed. In fact, after the Korean War (1950-1953), there was introspection in the U.S. about who was responsible for "losing" China.
In the past decade, the United States has revisited the question of "the loss of China," grappling with a sense of remorse. In April, we visited the State Department and met with Deputy Secretary of State Kurt Campbell. He said, "Remember, in the past 40 years, no country has helped China as much as the United States." Campbell, who was once friendlier towards China, now seemed disappointed.
In the China-U.S. competition, much of the economic rivalry is superficial because rationality prevails, and irrationality leads to failure in economics. Just as a company driven by emotion is destined to fail, so is an economy.
At the core of U.S.-China competition, emotions play a dominant role. Contrary to popular belief, international interactions are not purely rational. History shows that emotions wield the most significant influence on relations between countries.
What is this emotion? The United States does not want China to lead in global affairs, including regional matters, hence the geopolitical competition. Is this rational? No, it is driven by emotion. It's akin to animal territorial instincts—you try to push me away, but I won’t budge. This has little to do with human rationality.
The fundamental competition between China and the United States is ideological. Each nation crafts its own narratives. Why? To give our lives meaning: why are we alive? How do we live as a group? We need meaning to address these questions.
Westerners are more rigorous and persistent in their storytelling. Following relatively exclusive monotheistic religions, they view their story and God as superior, while seeing others as objects to be conquered. As the self-proclaimed pinnacle nation, Americans consider their path the only valid one, intolerant of China's alternative route.
What I want to emphasize is that the socialist path led by the CPC is the unchangeable path for China. In this context, the China-U.S. competition may span generations.
Some still hold illusions, expecting an eased China-U.S. relationship or hoping the world will return to its previous state.
Economically, rationality shall still prevail. The predicted decoupling of the global economy from China has not occurred. Basic economic logic still dominates.
The so-called restructuring of the global value chain is essentially a global reorganization of Chinese companies. Despite the U.S. trade war and attempts at technological decoupling, these efforts have not succeeded.
Direct trade between China and the U.S. has been declining, decreasing by 17% last year alone. China has fallen from being the largest to the third-largest exporter to the U.S. Many are starting to claim that China has peaked.
A while ago, I said that exports are the same, whether to Africa or the United States. I genuinely believe this, though not everyone on social platforms agrees. As a matter of fact, a computer sold in Africa holds more value than one sold in the United States. In the U.S., where computer coverage per capita is already high, selling one more is insignificant. Conversely, in Africa, lower coverage means each computer sale is more impactful.
Why wouldn't the domestic discourse in China accept this? Many Chinese still admire the United States and believe that selling products only to developed countries is beneficial. Selling to less developed countries? No, that is unacceptable. The Chinese mindset needs to change. As President Xi said, China is already at the center of the world stage, and the Chinese people can view themselves as the equals of any other in the world. However, this mentality has not yet fully shifted.
Although direct trade between China and the United States is declining, America’s dependence on Chinese products is rising. By rules of origin, China’s share of U.S. imports has increased from about 20% in 2018 to 25%. This is because Chinese companies have adopted a global strategy, with many exports shipped from other countries instead of directly from China.
In response, the U.S. is planning an anti-dumping investigation against Southeast Asia. Can it succeed? Let’s wait and see, but it will be very difficult. The underlying economic reason behind China's success is its comprehensive cost advantage, which is increasing rather than decreasing.
Europe plans to impose a 21% anti-subsidy tariff on China's new energy vehicles. Will this affect China's new energy vehicle market? I estimate the impact will be next to zero. That's because China's cost advantage is huge, ranging from 50% to 100% compared to Europe. The price of Chinese new energy vehicles sold in Europe is twice their domestic price. Even with a 21% tax, European consumers will hardly notice the difference, which is a substantial advantage for China.
The United States has raised tariffs on China. Donald Trump said that if elected, he would increase tariffs on China to 60% and impose a 10% tariff on the rest of the world. It is likely that Europe would follow suit, leading to a decrease in the total volume of world trade.
The world in this scenario may actually benefit China due to its significant cost advantage. After tariffs are imposed, less efficient companies from other countries will likely fail first. Consequently, China's share of the global market will rise, not fall, according to economic principles. I am convinced that efficiency and cost advantages will prevail over irrational predictions. My judgments over the past few years have been essentially correct.
Economically, rationality comes first. In this sense, there's no need to worry about China being isolated on the global stage or excluded from the world's industrial chain. China's progress will not be halted.
Understanding political logic is essential for comprehending China’s economy
Understanding the political logic behind the Chinese government's decisions is essential to understanding the economic situation in China. As a socialist country led by the CPC, understanding the CPC system and its goals is crucial. Without this knowledge, the Chinese economy remains incomprehensible, and discussing it without this context leads to speculation rather than reality.
History is not linear. Much of China's wealth has been created over the past 40 years of reform and opening up, especially in the last 20 years. The Chinese people have grown accustomed to this era and wish to continue along that path. However, history does not follow a linear trajectory.
Reflecting on the 75 years since the founding of the People's Republic of China, I divide it into four distinct periods.
I. Mao Zedong era, also known as the planned economy era.
It was a collectivist era where Chinese predecessors tightened their belts and laid a solid foundation. I fully agree with Xi Jinping's statement on the 30th anniversary of China's reform and opening up, that "We cannot use the historical period after the reform and opening up to negate the historical period before it, nor can we use the historical period before the reform and opening up to negate the period after it." It's like an analogy where we have had our fill from three pieces of cake; we cannot say we should not have eaten the first two and just eat the last one. That would be foolish. How could you get full without eating the first two cakes?
In the first 30 years of the People's Republic, China made many mistakes that require reflection. However, equating these years solely with the Cultural Revolution is a disservice to history. The first 30 years also had many positive aspects, particularly the completion of a social revolution, which laid a solid economic foundation for the country.
II. The first 20 years of reform and opening up.
Reform and opening up essentially reversed the policies of the first 30 years, shifting towards individualism. The core of this policy is to open up to the outside world and revitalize on the inside.
Opening up to the outside world means absorbing knowledge and technology from other countries. For people of my generation, the 1980s was undoubtedly our best era—vibrant and studious. We eagerly learned everything we could from abroad.
Revitalizing on the inside means fostering a burst of individualism, where everything is possible. In the first 30 years of the People's Republic of China, the nation was undergoing a social revolution, which dismantled class differences and interest groups.
In my field of development economics, I often conduct international comparisons. A major reason behind the stagnant development of many developing countries is the manipulation of politics by interest groups, which hijack the government. This problem did not exist in the first 20 years of reform and opening up, allowing China to implement significant reforms. Other developing countries cannot implement similar reforms due to the influence of interest groups.
Today, it is not imperative for China to pursue new reforms, rather it is to consolidate the achievements of the 1990s. However, every achievement has its dark side. In the first 20 years of the reform and opening up, China opened up to the outside world and revitalized internally. In the following 20 years, significant problems emerged, which China must now address in the new era.
III. The second 20 years of reform and opening up.
For me, the reform and opening up period spans only 40 years (1978-2018). Post-2018 is called "the new era," with its main task being to address the problems that arose during the second 20 years of reform and opening up.
The 40 years of reform and opening up were marked by a surge of individualism, which eventually swung too far to the extreme right. The new era aims to recalibrate this balance. In the first 40 years, especially the latter 20, China veered to the extreme right. It is now essential to shift back towards the left, enhancing collectivism, which is the current focus.
Specifically, China needs to address these problems that arose in the second 20 years of reform and opening up:
The biggest problem is corruption, which has existed since the Han Dynasty (206 BCE–220 CE) and is driven by economic logic—whenever there is a principal-agent relationship, corruption arises. Officials, acting as agents of the emperor, inevitably become corrupt. However, this must change in the new era. It is essential to remember President Xi’s words: "Anti-corruption is an unceasing endeavor."
Corruption also involves collusion and alliances between government officials and business owners. In 2014 [sic], President Xi Jinping emphasized the need for "a cordial and clean relationship between government and business." Many entrepreneurs fail to grasp this concept. While the vast majority of entrepreneurs are diligent and ethical, some have a "Hu Xueyan complex"—yearning for political influence after attaining wealth. [Hu Xueyan (1823–1885) was a very wealthy businessman and banker who later became a high-ranking official deeply involved in Chinese politics.] This is universally detrimental and must not be allowed.
Additionally, some sectors have become excessively commercialized. Over 20 years ago, there was advocacy for the commercialization of education. At that time, I felt it was inappropriate, but my voice was insignificant. No country commercializes compulsory education. Compulsory education is inherently public—this is the norm worldwide.
Education can be industrialized only in certain aspects. Non-research-oriented universities may be industrialized, but not the research-oriented universities. Attempting to industrialize such universities would destroy them. When individualism runs rampant, over-commercialization often ensues.
There is also excessive financialization. There was a period when P2P lending proliferated, plundering the wealth of ordinary people.
Real estate has grown so large that it's absorbing all of China's resources. Contemporary decision-makers have learned a lesson from the U.S. experience: excessive financialization hollows out real industries.
To compete with the U.S., China must prioritize manufacturing and high-tech industries. Consequently, finance and real estate must be constrained. The tightened regulations in these sectors all stem from this imperative.
Furthermore, there is concern about excessive Westernization in economics, humanities, and social sciences. President Xi Jinping proposed constructing an independent knowledge system, which I fully support. I am dissatisfied with the state of economics research in China. If this path continues, Chinese economics will become a colony of American economics because China has lost the ability to set its own research agenda. China will be left following behind Americans, scrambling to conduct minor research on what they have overlooked.
China must possess the confidence and capability to develop its own knowledge system. American expectations for China surpass China's own self-expectations. Yesterday, at a Princeton University Press conference during the Beijing Book Fair, I learned that they aim to organize scholars like myself to conduct globally significant research based on Chinese experiences.
Many Chinese scholars fail to recognize this and lack the vision to produce globally impactful work and contribute ideas to the world. Rushing to publish articles for the sake of showing off is not true scholarship and holds little value for China or the advancement of economics.
Finding the right approach is as important as finding the right direction, though. China's current economic problems actually stem from the implementation of the above goals. Central documents repeatedly stress the need to deeply understand President Xi Jinping's thoughts. However, many mid-level officials have not fully grasped his ideas and lack a clear sense of direction. In fact, they are still living in the 1980s.
IV. The New Era.
The goal of the new era is high-level socialism. What is the ultimate goal of the New Era? All eyes are on the third plenary session of the 20th CPC Central Committee. What will be accomplished at this session?
Many people have high expectations for the Third Plenum, anticipating another wave of reforms and major initiatives. However, I want to emphasize that these are merely wishful assumptions. The significant reforms in China were largely completed in the 1990s. Now, China's priority is not to initiate more reforms but to consolidate the achievements of those from the 1990s.
The Third Plenum will announce the goals for 2035, detailing the objectives to be achieved through the adjustments made in the New Era. These goals have already been disclosed, but many have not closely examined the government documents.
The Third Plenary Session aims to build a high-level socialist market economy. I repeat, "high-level" socialism.
What is high-level socialism? Firstly, it involves comprehensive modernization, which ties to China's goal of doubling its income per capita by 2035. A crucial aspect of comprehensive modernization, in my understanding, is technological competition with the United States. As I mentioned earlier, the ultimate competition between the two countries is ideological. China will have to win this ideological competition through technology.
Next is adjusting the income distribution structure, improving the social security system, and promoting integrated urban and rural development. These three goals boil down to one thing: pursuing common prosperity. Deng Xiaoping said in the 1980s that China must encourage some people to become well-off first. The New Era is different; the goal is to achieve common prosperity.
Thirdly, high-level openness to the outside world. This current openness is led by China itself. China is the victor, and free trade has been inscribed on China's flag.
So, what is high-level socialism? It means socialism with common prosperity. In a certain sense, high-level socialism means fulfilling the original goal of the CPC when it founded the People's Republic—completing the construction of Chinese socialism.
This is the story of us Chinese, the story of the Chinese era. This is the "is" that Chinese entrepreneurs must recognize. By understanding this "is" and the grand goal of building high-level socialism, I believe Chinese entrepreneurs can make the best adjustments and continue to grow their enterprises larger and stronger, especially in global competition.