China: the dangers of the “dual bottleneck”
This column was previously published in Les Echos on 21st september 2021
China’s economic situation is delicate and has seen a crackdown on Tech companies. The West should look out for signs of re-balancing and ensure that China does not close itself off.
The Chinese government had promised “dual circulation”, but for the moment it seems to have created a “dual bottleneck”. Firstly, the recovery of the domestic consumer market is still lackluster — only 3–4% per year compared to the 2019 level — being penalized by the poor increase in productivity, the fear of new lockdowns, and now the stock market crash of Tech companies. Secondly, exports, which rose strongly in 2020, have, since May, suffered from the resurgence of Covid variants that, without there being effective vaccines, cause sudden closures, particularly in ports such as Shenzhen and Ningbo. Supply chains worldwide therefore have no choice but to seek out alternative future sources, notably in South-East Asia.
Middle income trap. This slowdown comes at a time when China, with its $10,000 per capita GDP, is coming up against the famous “middle income trap”. Korean and Taiwanese precedents show that the solution is to go from an economy based on the export of manufactured goods to a service-based economy, which now accounts for 60% and 70% respectively of Korean and Taiwanese GDP, as compared to only around 50% in China. But whilst the Covid crisis encouraged the speeding-up of digitization in the service sector, making services accessible to people on lower incomes; the Chinese government has just chosen to do the very opposite by increasing regulation of tech companies. Beijing justified its previous interventions by saying their objectives were data protection and to combat monopolies. However, this new legislative turn of the screw is ideological as well, as can be seen in the way education has been nationalized and control has been extended over entertainment.
Although the Covid crisis boosted the speed-up of digitization in the service sector, China has chosen to do the reverse by increasing the regulation of tech companies.
The die is not yet cast. The question is to know if the way these measures are put into effect at a local level will reflect a more balanced position. The coming months will be crucial in determining just how far this recentralization of control over the internet will affect the vigor of Chinese tech companies, who are keen to maintain their competitiveness with their American rivals. The last time the government attacked private entrepreneurs in the second quarter of 2018, it had to backtrack and reopen vital credit facilities in early 2019.
Counter-balances. It is a hard task for the West to understand the various Chinese counter-balances at work and pick out the potential signs of any new “Public-Private Partnership”. In contrast to American laissez-faire, this would make it possible to get out of the “double bottleneck”, by reconciling increased control by the Communist Party with a new acceleration in the digitization of the service sector. By squaring this circle, a new “Chinese-style” governance of the internet would come about and would contradict the Korean and Taiwanese precedents which saw democracy emerge when the tertiary sector developed.
Failing this, one must ask the question whether China, after a long phase of openness from 2001 to 2017 — stimulated by membership of the WTO and the first ever appearance of public opinion by means of social media — is now entering a new era of closure, nourished by ideology and the return to frontiers. In which case, our Western ways of thinking over the last two decades would soon become obsolete.
