Why Austrian China?
The subtleties of reality are far more interesting than cartoonish characterizations.
View from China with an Austrian School of Economics Perspective
True Story: Once upon a time, back in the days while Hu Jintao was the President of China, one of the Shanghai tax bureaus conducted an audit of a foreign-owned company there. Targets are very popular in China; not only do companies set targets for their salespeople, government agencies also set them for their tax auditors. Frustratingly, the auditor could not identify any obvious misdeeds. So… he made one up. And set a fine of 100,000 yuan, equivalent to approximately $15,000 at the time. The questionable nature of his justification was obvious, but in good Chinese tradition, the management of the targeted company decided not to rock the boat. They agreed to pay the fine. The “settlement” was then submitted to the head of the tax office to approve.
Did he sign off on it?
Nope. He said that the targeted company was a good stable taxpayer and that he felt the fine was excessive. He reduced it to 3,000 yuan.
This is the kind of pro-business climate which attracted hundreds of billions of dollars in foreign direct investment. To be clear, China was not and is not monolithic. Government behavior varies from district to district, city to city and province to province. But all in all the numbers speak for themselves. On the whole, for decades China offered one of the most attractive business climates on the planet. And no, one cannot simply explain this with “low wages” or “slave labor”. If you’re just looking for low wages, the list of options around the world is long. If you want slave labor and low wages, you can get that in the US with its massive prison population working for pennies per hour. Interest in China seems to have been consistently far stronger.
Fast forward to the summer of 2021 under the new government of Xi Jinping. The government had finally gotten rid of the one-child policy imposed on it by the West in 1979. However, lifting the limits did not lead to very many more births. When the central government in Beijing finally realized this, they put their thinking caps on and realized that a big reason for the low birth rate was the high cost of raising children.
For one thing, thanks to the government’s affection for Keynesian monetary policy (also known as running the printing presses), the cost of living space in major Chinese cities had exploded after 2008. A second factor they noted was the enormous cost of tutoring for children to enable them to keep up in government schools.
What did they decide to do to fix these self-made problems? Of course, they did what every good interventionist government does in such situations: They imposed yet another set of new rules. In this case their solution was basically to pull the rug from under the entire private education / cram school industry. Millions lost their jobs. Hundreds of millions of dollars in market capitalization were wiped out overnight.
Did any of this concern the government? Apparently not.
A second example of destructive regulation: This past month, China’s top website for second hand book sales, Confucius Second-Hand Book Network (孔夫子二手书网) was ordered to demand that starting in March 2022 all sellers provide official “published matter resale licenses” (出版物经营许可证). Possible to get? Perhaps, but at the price of more bureaucracy and likely more ‘supervision’. At this point, the company anticipates that many of the smaller online booksellers will have to close up shop.
One final example: The Chinese government’s treatment of its cryptocurrency exchanges. Until September 2017 China had the most relaxed regulatory framework for the cryptocurrency industry in the world. No license was required and no-one was restricted from participating. Unlike in the United States and some European countries, no-one risked jail by trading or offering trading services. No taxes were levied. In terms of volumes, Chinese exchanges quickly grew to dominate trading worldwide, creating within only a few years sophisticated platforms supporting both spot and highly leveraged futures trading. Despite the lack of regulation, no users ever lost funds due to default or fraud. China’s leading platform, Huobi, even offered commission-free trading on its spot market, thus creating unprecedented levels of liquidity. All in all an incredible accomplishment in such a short period of time.
This changed in January 2017, when the Chinese central bank asked the heads of the 3 top exchanges to come for a visit. Among other things, at that point they demanded Huobi cease offering commission-fee trading. Domestic trading continued with some restrictions until September 2017, when the central bank demanded that all domestic trading in yuan stop. Though this demand was of questionable legal standing, the exchanges for the most part complied. While no offices were closed down, trading denominated in yuan ceased. However, trading against US dollar-based stablecoins, principally USDT, continued. Escrow services were created to enable Chinese users wanting to convert domestic funds into and out of USDT.
Unlike most countries, China maintains a policy of keeping its currency zone isolated from the Western financial system. Trade-related transactions are allowed, but movements of capital require permission. This limits Western influence inside China, prevents Western manipulation of Chinese capital markets, and prevents freshly printed Fed dollars from flooding in and buying up assets. Given that trade in cryptocurrencies effectively opened a back door to circumvent these restrictions, the government’s lack of enthusiasm for cryptocurrencies is easy to understand. However, it had a problem. As we will discuss in a later post, China maintains very strict respect for property rights, and this includes cryptocurrencies. Because of this, it was not possible to actually prohibit their sale on a private 1:1 basis. That is still true today, though this does not stop banks from cancelling accounts which they deem to have been used for cryptocurrency trading.
This compromise continued until September 2021, when Huobi announced that it had agreed with the government to stop trading for all of its domestic account holders starting on December 15th. Escrow-based OTC services were to end at year-end. Lacking a legal basis for this, the government accomplished this by essentially threatening the management with reprisals against them personally. The other two remaining major Chinese platforms, Binance and OKEx, had already physically left China. Result: Huobi, one of China’s most innovative and successful companies, will end up losing most of its customers to foreign rivals. Will this stop Chinese users from trading in cryptocurrencies? Unlikely. It will just hurt Huobi.
A word comes to mind to describe such behavior. Callous. Callousness to an extreme, especially in the case of the restrictions on private education. And yet, careful readers will note that in both the second and third cases described above, the government did not impose its new rules with immediate effect, but rather left several months for the market to find a new equilibrium. And in the third case, negotiations between Huobi and the government went on literally for years. So not all is black and white.
Moreover, in terms of respect for individual financial freedom, China still offers a level of freedom unimaginable in the West. How many countries in the West don’t require working residents to submit annual tax returns? In which countries can you walk into a bank with the equivalent of $1 million in cash and deposit those bills with no questions asked? Not many.
Yet while respect for property rights and individual financial freedom remains for the most part unchanged, the trends towards more regulation of business, less entrepreneurial freedom, and more government spending are clear.
As we will discuss later on in a more extensive post on money and the economy, in 1995 aggregate government spending was approximately 11% of GDP. The total government deficit amounted to 1% of GDP. 25 years later, total government spending reached approximately 35.8% of GDP– a 5251% explosion in nominal terms – while the deficit hit 7.5%. In 2021 all provinces except for Shanghai are running fiscal deficits. And while it’s true that much of this government spending went into somewhat productive investments – mostly roads, bridges, tunnels, high-speed train lines and subways – this does not detract from the long list of problems created by heavy government spending, chief among these being its insidious nature. Which is preferable? An economy where privately owned companies compete for consumers? Or an economy where companies focus on sucking up to government bureaucrats? The answer is obvious.
As for regulation, starting in the 1990s, China was a paradise for entrepreneurs. Both taxation and government interference were minimal. What was in short supply was venture capital. The privatization of the residential housing market in the late 1990s ultimately resolved that issue, as rapidly rising real estate values led to broad based accumulation of surplus capital. The years between 2003 and 2008 were boom years, with low taxation, low levels of government interference, and easier access to capital. In 2008 the global financial crisis led to a brief downturn and a sharp uptick in government spending. Levels of government influence over the economy grew in tandem with its increased spending, and heavier regulation followed, as well, though with some delay.
So what has changed? Here are a few examples:
In 2012 anyone with a hose could wash a car. Now many cities require a car wash license. Result: Lots of dirty cars.
Want to open a restaurant? In Shanghai you will have to prove to the health department that you have 7 sinks!! Even if you are just planning to sell take out.
In 2012, a bottle of thyroid extract with 100 40mg tablets could be bought online for 8 yuan. No prescription required. Now that exact same bottle requires a prescription and costs 45.3 yuan (= approx. US$7.10). Of course, there is also a teledoc workaround for the prescription, but this is for the most part bureaucratic overhead which does not create any real added value for society. It’s pure waste.
The inevitable results: Less real value created, more bureaucratic overhead, sluggish growth and a stifling of entrepreneurial drive. The laws of economics are the same everywhere.
Just to put this into perspective, one should not forget that in much of the United States and Western Europe a license is required to cut people’s hair. In many American states getting the license requires 1000 hours of training. To cut hair. Some states even have a special license for hair braiding. And it’s not just services which are affected by the obsession with comprehensive control: Just to cite one example, the US government puts out a 100-page manual detailing how lawnmowers are to be built. The depth of destructive silliness sometimes seems limitless. The Chinese regulatory regime is still decades away from this suffocating level of interference in the economy.
Yet that is nothing compared to the fact that since April 2020 large parts of the United States as well as Australia, New Zealand, Canada and most Western European countries have been busy running practically ALL of their small businesses into the ground. Businesses such as restaurants and boutiques were declared to be “non-essential”. Big business was mostly exempt from the restrictions. At the beginning, some compensation was paid out, but even in cases where compensation was paid at all, it did not last. Many businesses closed their doors forever. Nothing comparable to this happened in China.
Just to be clear, the fact that the regulatory fever and callous actions of the Chinese government may not be on par with those of its Western counterparts does not make them any better. Nonetheless, it must be said that there is a huge reporting gap between the overwhelmingly black and white reporting on China in the West, and the nuanced reality on the ground inside China. The gap was already large in 2019, but since travel came to a halt in 2020, the gap has become a chasm. In the English-speaking world, the narrative presented on China is overwhelmingly negative, to the point where it often seems to drown out all other voices. This extends from the media to social media and even semi-academic publications, such as the Heritage Foundation’s Economic Freedom Index, which currently ranks China at position 107, comparable to Uganda. To say this is laughable is an understatement. Outside of the English-speaking zone and especially in Western Europe it often seems like there is no counter narrative whatsoever. The “China dystopia” seems to have a 100% monopoly. The image delivered – often in extremely fuzzy form – is that China is a ‘slave state’ full of concentration camps and slave labor, where a monolithic government decides everything, where the food is toxic, the air unbreathable, and the population is cowering in fear.
Yet if that were true, how could China have built up the world’s largest economywhile quintupling average per capita income in 20 years? To believe this cartoonish image, you also have to believe that slave labor and central planning are great economic models. To put it mildly, economic history does not support this notion. You also have to ignore the fact that the Chinese government has consistently ranked as the most trusted government in the world throughout the past decade. In reality, China is the only major country in the world which does not tax its residents on their general capital gains. It’s probably the only major country which does not tax small business on profits or turnover. It’s also the only major country which does not demand its residents fork over detailed financial records every year. And it’s on a very short list of industrialized countries which do not discriminate against residents who declined the Covid-19 vaccination. If someone insists on seeing things in terms of black and white, it seems only fair to ask the question, who are the real slaves?
The primary goal of this blog is not to debunk the dark stories and random video clips propagated by the Falun Gong, Guo Wengui, Steve Bannon, various ‘agencies’ and their countless unwitting helpers. Though Western reporting on China is full of unsubstantiated claims, subtle insinuations and outright lies, real crimes and outrages do take place in China, just like they do in every country. Some of these are committed by government officials, again just like in every country. Yet the real China with its mix of strengths, weaknesses, freedoms and absurdities is a far more interesting topic, especially for a Western audience living in its own homebrew version of dystopia. To address this reality however, for better or worse for a Western audience it is unavoidable to first deal with the some of the false narratives they have been fed.
In the English-speaking world it is true that counter narratives exist, for example made by a number of YouTube bloggers in China, some US libertarian commentators like Scott Horton, Peter Lee, Pete Quiñones and Kyle Anzalone and a few left wing commentators like Nathan Gardels in Noema. However, many of the “pro-China” narratives presented on YouTube don’t come across as particularly balanced either. In many cases it seems the basic attitude is “all good” or “all bad”. The “CCP” - which often seems to be the sole topic of interest among the “all bad” crowd - is presented as either the devil incarnate or an angelic figure. Of those hawking the “angelic” label, many are left-wing authors and podcasters whose primary perspective seems to be that China proves that socialism works. We do not share this perspective.
This blog aims to provide a platform to portray a reality which is not black and white but rather full of grey tones. Specifically, it aims to do so from the perspective of the Austrian School of Economics. Western authors and sites with an Austrian background presenting more balanced narratives on China do exist. Several authors and podcasters from the US Libertarian Institute mentioned above come to mind. However, they are rare, and while praiseworthy, they aren’t focused primarily on China. So…. there is a gap to be filled, not only in English and other Western languages, but in Chinese, as well.
24.59 trillion yuan regular budget spending plus 11.8 trillion yuan from dedicated funds, total 36.39 trillion, against a GDP of 101.6 trillion. 1995: 0.68 trillion yuan. Source: https://view.inews.qq.com/a/20210128A0ECY400. Comparative figures for 1995 can be found here: http://www.npc.gov.cn/wxzl/wxzl/2000-12/06/content_3511.htm. While exploring the breakdown of government spending would exceed the scope of this post, it is worth keeping in mind that in terms of long-term effects, not all spending is equal. It makes a big difference whether those funds are going into potentially productive investments such as new high-speed trains, subways and roads, or into unproductive consumption such as wars and welfare.
The current cost for an equivalent product in the US would be about $25.
An apt example is a recent Guardian article accusing China of aiming for “world dominion,” along with the usual passing references to genocide, torture and concentration camps. In it, the article claims that US imperialism is now no longer a threat, despite its 750 military bases in foreign countries around the world and endless wars. Instead, the imperialist threat is from China, which has one foreign military base and hasn’t fought a war in decades. See https://archive.md/VDh8B.
As measured in purchasing power parity terms. See https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP). While there are arguably many problems with both the concept and measurement of GDP, it nonetheless can still be used as a crude proxy for generating comparisons between different times and places. More objective measurements such as the number of vehicles produced or the amount of electricity generated can be used as supporting evidence.
A prominent example of the above is Jeff Brown’s China Rising blog and series of books.
I am an American working and living in China for over ten years, and cannot agree more with this post. Thank you for giving an avenue for balanced reporting with context.
What do you mean by the "one-child policy imposed on it by the West in 1979", i've never heard the West being involved in this.