Financial development with Chinese characteristics
A speech by Xi Jinping was recently published along with a commentary piece. The speech has been widely quoted in Western media these past few days because it includes a clear call for the renminbi to “attain global reserve currency status.” As is often the case Western media are ignoring the thrust of the speech and reducing it to a crude challenge to the dollar. What is presented is actually an entire vision for the construction of a global financial power organized around socialist principles and unfettered by greed or the subordination of all economic activity to the short-term imperatives of finance.
The speech represents an ideological line in the sand. A close look at it with an eye for real-world conditions shows that the Communist Party of China is attempting to resolve a deep contradiction that has plagued every emerging power of recent times. They are trying to determine how to tap the immense utility of financial capital without permitting its metastasis into a vampiric and economy-eating speculative finance. The text clearly lays out a path of financial development that is in direct opposition to the Western neoliberal model. It is a fundamental statement that the economic foundation of socialism with Chinese characteristics requires a system in which finance is the servant rather than the master.
The historical perspective of the document emphasizes a clear progression from the commercial perils of the Dutch Republic in the seventeenth century to the British Empire in the nineteenth and to American predominance in the twentieth. It acknowledges that every world power has been undergirded by a thriving financial system but rejects the capitalist logic that accompanied those systems. In the West finance capital eventually becomes an end in itself where the logic of fictitious capital captures the imagination and value is seen to be extracted by placing wagers on markets and their derivatives. This creates a self-referential feedback loop that severs entirely its connection with the production of real goods.
A distinct pattern can be seen in the way that the Western financial model is applied in practice. It creates a predatory rhythm where a market crash acts as a mechanism for the violent accumulation of capital. The bursting of the bubble causes wealth to vanish from the real economy while working people and small business owners lose their liquid savings and their credit lines. To survive they are forced to sell off real assets like homes and farms and businesses at distress prices. The moment of systemic instability is an opportunity for the large financial capitalists who still have access to deep pools of institutional credit to acquire homes and land and enterprises for a song. The subsequent recovery never returns to the previous status quo because the owning class has consolidated its new holdings irrevocably. Most people reenter the market with significantly thinner margins and depleted savings. The effect of such structural damage is that the society becomes increasingly fragile and less able to bear the shock of the next downturn. This forces the state to intervene to provide larger and larger bailouts to prop up the system. With each cycle the resilience of the system as a whole diminishes. The Party correctly argues that the slow accumulation of financial power divorced from the real economy is a historical dead end.
We can see the inversion of values in how the sector is described when its ultimate purpose is stated to be serving the real economy. The high-quality development model is understood not as peak quarterly profits or transactions for their own sake but as a navigation of capital toward tangible material ends. Resources are funnelled via state guidance to build strategic autonomy and break the chains of technological dependence by funding the big push in sectors such as semiconductors and aerospace. The risk to the social base is diminished by deflating the property bubble without triggering a systemic collapse with investment redirected toward public housing. Internal contradictions are likewise addressed by deploying financial instruments for rural renewal and common prosperity to diffuse dangerous social inequalities generated during the breakneck growth years. The immense investment in the green transition and electric vehicles is recognized as both an ecological necessity and an industrial imperative.
The mechanism of enforcing this discipline as the document describes it is called the Eight Upholds. It operates something like a system-wide immune response designed to short-circuit the particular feedback loop of capitalist crisis and consolidation that was just outlined. Placing the Party at the helm empowers the state to dictate terms to capital, rather than the other way around, in times of crisis. In this way it supports the people-centric value system which acts like an ideological circuit breaker requiring that financial institutions subordinate the efficiency of the balance sheet to social stability. While the Western model is adept at dealing with fictitious capital, the third uphold puts severe restraints on the growth of speculative instruments by tying finance strictly to the real economy. The system views risk not as a product to be sold, but as a threat to national security, treating the prevention and resolution of financial crises as a continuing priority. This is aided by the deepening of supply-side structural reform which calls for a multi-tiered banking system and gives smaller regional banks a specifically chartered mission to serve small and medium enterprises. The strategy also includes managed international cooperation so China can tap global capital without giving up sovereignty to the erratic flows of hot money. Finally there is capacity-building for forging a loyal financial team aimed at fixing the agency problem in which financial oligarchs put their personal enrichment ahead of the public interest.
A real-time stress test of these precepts is now playing out in the unfolding property crisis which is being managed with great care to avoid a Lehman moment. In a Western context the failure of a corporate titan like Evergrande would be followed by a massive bailout for creditors and then a wave of foreclosures that transferred housing equity to private equity firms and hedge funds as happened in the American subprime meltdown. The Chinese approach is rather different because the risk is quarantined. Shareholders and bondholders take the hit while state-owned enterprises and local governments are mobilized to make sure that unfinished homes are completed. This application of the people-oriented philosophy insulates society from corporate miscalculation. The Three Red Lines policy that precipitated the crisis was itself a deliberate application of the risk-prevention philosophy intended to deflate the bubble before systemic collapse could occur. There is no bailout for developers by the state while homeowners are protected. Here, we can directly observe how the hand of the state forestalls a cycle in which the wealthy pick up assets on the cheap and society eventually foots the bill.
The reconciliation of market forces and socialist planning uses Chen Yun’s birdcage economic theory. In this dialectical synthesis the market acts as a bird which brings vitality and productive efficiency while the state constructs the cage to set strict limits to these activities. The Communist Party retains decisive control of the commanding heights of the economy through its control of the golden shares in major enterprises and its direct ownership of the banking system. This ownership structure allows the state to use the market as an efficient allocator while avoiding boom and bust cycles and circumventing the propensity of the market to generate monopolies. When private enterprises put profit before social utility the state does not hesitate to intervene with decisive corrective action as was seen in the reorganization of the Alibaba Group where the government used its controlling interest to prevent a predatory monopoly in a sector of the economy of central public concern. The stock market is permitted to exist, but rather than being an instrument for reckless speculation, it becomes a tool for allocating capital towards productive purposes. Placing severe constraints on activities such as margin trading and short selling strips the market of its fictitious quality and forces it to align with long-term substantive value.
China’s financial strategy poses a direct ideological challenge to the Western model and shatters the idea that free market liberalism is the only possible avenue for human organization. The material evidence for the viability of this alternative is plain. China has risen from the absolute devastation of the post-war era to surpass the United States in becoming the world’s largest economy in terms of purchasing power precisely because the Chinese system has generated a rate of economic growth consistently higher than that of the West. The success of the Chinese model is rooted in central planning being applied to the development of nation’s labor and resources. Beijing’s leadership in manufacturing and science and in most key technologies is evidence of its model’s efficacy through concrete real-world results. The Chinese system has proven itself beyond a shadow of a doubt, showing convincingly that a socialist command economy is a superior tool for rapid modernization and societal development.