Capitalism with Chinese characteristics: interesting analysis and viewpoint from Eurizon SLJ

legal & General

In little more than a decade, the tables have turned from China hoping to emulate the West, to the West becoming seemingly envious of China, say Stephen Jen and Joana Freire from Eurizon SLJ.

An increasing number of policy makers and pundits in the developed West may have what we call ‘China Envy’: they admire how Beijing managed to contain the spread of the virus, how it has dictated the development of the private sector over the years, and how it has, through regulations, tightly managed the behaviours of market participants, including its recent restrictions on a particular tech conglomerate.

While the pandemic may have persuaded some governments to contemplate fiscal stimulus to deal directly with the impact of the pandemic on economies, this movement toward a ‘big government’ had already begun well before the pandemic, we would argue, and the ultimate aim of its proponents is a permanent regime shift rather than a countercyclical economic measure.

By ‘big government’, we don’t just mean a bigger government budget, but also a preference for more regulations, more market interventions, and less confidence in leaving it to the market to make the right decisions for society.

Unconventional becomes conventional

Central banks in the West long ago adopted a highly intrusive and interventionist stance. The pandemic merely galvanised Western central banks’ beliefs and determination. Setting aside the experience of the Bank of Japan, the turning point, in our view, occurred in 2010, when then Fed Chair Bernanke decided to persist with the Fed’s unconventional policies with QE (quantitative easing) 2 to deal with what was a conventional policy objective (i.e., inflation targeting).

Prior to that, unconventional monetary tools were justified because of the unconventional objective – fighting the acute credit crunch in 2008 – an emergency. The Fed’s decision  to continue to use quantitative easing to boost inflation (not an emergency) marked a watershed in global finance.

Stakeholder capitalism’ rather than shareholder capitalism

Traditional features of capitalism are also being challenged. Since shareholders of companies may not properly take into consideration negative externalities from their actions, all ‘stakeholders’ (which include all who might be affected by corporate decisions) should have a say in how corporations make their decisions, so the increasingly popular argument goes.

In other words, the owners of capital (the shareholders) should no longer be allowed to have as much say as they enjoyed in the past. Further, since the markets in general can no longer be entrusted to discipline corporate behaviours, there is a role for the government to enforce, through more regulations, what is considered good behaviour.

This line of thinking is a form of a bigger government in synch with what has already been common practice in China.

Centralisation of power

There is a second dimension to the idea of a bigger government. By ‘China Envy,’ we suggest there is an inclination to not only accept a big government but also grant the central/federal government more power, just like China.

China has an all-powerful central government and subservient provincial governments. Europe, on the other end of the spectrum, has powerful national governments and a relatively weak ‘federal’ government in Brussels. The US is somewhere in between, with a balance of power between the federal and the state governments, well-honed over the past 244 years.

In Europe, there has been a move in favour of greater power given to Brussels. While the pandemic has been an important factor for many policies in Europe, the more important factor, in our view, was Brexit.

Recoiling from Brexit, the EU member countries felt the need to take exceptional actions to embolden the structural integrity of the EU. We see that Germany, after having insisted for decades on not crossing the red line of allowing fiscal transfers between the wealthy member countries, decided to support the Recovery Fund (or the Next Generation EU Fund) because it wanted to ensure that the pandemic shock did not lead to further fractures in the EU after Brexit. In other words, Brussels was given more fiscal power and allowed to issue bonds on its own as an indirect result of Brexit.

Without Brexit, there might not have been a Recovery Fund.

Why is this happening?

First, unchecked trade globalisation has hollowed out the middle class in the developed West, particularly in the US. Incomes diverged between the owners of capital and the owners of labour.

Second, what started out as favourable structural restraints on inflation – globalisation and technology – have led to very dangerous monetary policies that fuelled an explosive surge in financial inflation. We believe history will not be kind to inflation targeting. What started out as a narrow academic concept has been effectively hijacked to justify open-ended financial repression and market interventions.

Third, policy short-termism in the US and Europe, with the focus being exclusively on the current cycle rather than multiple cycles, has brought the economies to the positions in which they find themselves.

The bottom line

President Reagan famously said, at his first inaugural address in 1981, ‘Government is not the solution to our problem; government is the problem.’ Forty years later, the popular view in the world is precisely the opposite: central banks have perfected financial repression; governments are enthusiastic about subsidizing, regulating, and taxing more.

We suggest that there is a ‘China Envy’ – the belief that an all-powerful government such as the one in China may be the solution to many of our problems. China has promoted the idea of ‘socialism with Chinese characteristics;’ the West seems to be embracing ‘capitalism with Chinese characteristics.’ This shift in paradigm is tectonic.


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