Does China need to deregulate its economy?

For years, economists and political scientists studied the relationship between government institutions and economic growth – mainly the association between democratic institutions and economic development within a state. The general consensus was that although democracy does not directly lead to economic development, higher human capital accumulation, lower inflation, lower political instability, and higher economic freedom usually were prerequisites for development. Furthermore, economic sources of growth, like education levels and lifespan, through improvement of academic institutions as well as healthcare were all present in democracies. However, in recent years, China has challenged these conventional political norms greatly. Ever since Deng Xiaoping’s policies of economic growth, entrepreneurship, and subtle suppression of dissent, China’s GDP levels have risen tenfold. The increase in total factor productivity (TFP) was the most significant, with productivity accounting for 40.1% of the GDP increase, compared with a decline of 13.2% for the period 1957 to 1978—at the height of Maoist policies. 

According to the International Monetary Fund (IMF), China has the world’s fastest-growing major economy, with growth rates averaging 10% over 30 years. Furthermore, it has four of the world’s top ten most competitive financial centers (Shanghai, Hong Kong, Beijing, and Shenzhen), and three of the world’s ten largest stock exchanges (Shanghai, Hong Kong and Shenzhen), both by market capitalization and by trade volume. However, over the past few months, China’s economy only grew 4.9%, the slowest pace in a year and worse than analysts had predicted. This severe slowdown in economic growth is due to many factors: the property sector facing increasing pressure to rein in its debt and financial liabilities causing companies to find themselves on the brink of default. However, the most significant development in Chinese economic policy has been companies facing policy curbs aimed at social transformation.  In my opinion, this is the most significant hindrance to contemporary economic growth.

From big tech to gaming services, a number of Chinese companies have been facing increased regulation crackdown by the government. In 2021, at the National People’s Congress, the government revealed outlining tighter regulation of much of its economy. New rules, such as tightened regulation of monopolistic firms, were aimed to increase gross national industrial and agricultural output by 38% within five years, or by an average annual rate of 6.7%, gross agricultural output by 4% a year, and gross industrial output by 7.5%. However, instead of helping companies, these new policies have hindered potential for the companies to grow. In November of 2020, ahead of Alibaba subsidiary company Ant Group’s biggest IPO, Ma addressed an assembly of high-profile figures with a controversial speech that criticized the Chinese financial system. He was not seen in public again until late January. In the interim, there were rumors that he might have been placed under house arrest or otherwise detained. Once the Chinese government found out that he had accused Chinese banks of operating with a “pawn-shop mentality”, and that authorities were trying to “use the way to manage a railway station to manage an airport”, they disrupted his business interests. Him and his close colleagues were summoned for a meeting with the regulators, and Ant Group’s flotation was halted in its tracks. This not only hurt Ant Group’s IPO, but Alibaba’s share price fell significantly. Regulators slapped a $2.8 bn fine after a probe determined that it had abused its market position for years, and the company was fined an amount equal to  4% of the company’s domestic revenues. 

Jack Ma’s disappearance, and the fall in China’s e-commerce sector calls for questions on whether the Chinese government should transition away from a regulated approach, and instead allow businesses to thrive under a free market. 

This article was written by: Dhruv Mathur, currently a student at the London School of Economics, pursuing BSc Economic History.

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