Odd Lots - Isabella Weber on China’s Vision for Making Markets Work

Episode Date: September 30, 2021

For years, people have talked about China's ongoing process of opening up, or liberalizing its economy. And yet lately it's taken strong moves that seem to indicate a change in direction. It's cracked down on some of its largest tech companies while also allowing its real estate sector to cool off considerably, as we've seen with the stress on Evergrande. On this Odd Lots, we speak with UMass Amherst professor Isabella Weber, the author of the new book How China Escaped Shock Therapy: The Market Reform Debate. She explores China's big vision for making markets work in the pursuit of its ideas on socialism, and how the recent moves fit into a much broader, ongoing strategy.See omnystudio.com/listener for privacy information.

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Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, radio. and wherever you get your podcasts. Hello and welcome to another episode of the Oddlots podcast. I'm Joe Wisenthal.

And I'm Tracy Allaway. So Tracy, we've been talking about China a fair amount lately. We had that recent episode with Dan Wong about some of the specific industries that China's cracking down on, like online education and video games and so forth. And we talked to Travis Lundy, specifically. about the stress, to say the least, at the real estate developer Evergrand. But really, it feels like we can't get enough of the China story. And I, every time we do one of these episodes, my head is just like filled with like 100 more questions. All China all the time. I mean, both of those stories provoke some pretty big sort of existential questions about China and its economy. I mean, specifically, the crackdowns, you know, we saw a lot of people sort of scratching their heads and basically going, well, China built up, you know, this market economy. It built up its stock market,

its technology sector. It's all supposed to be kind of capitalist in style. And now it seems to be cracking down in a very centrally ordered way. And what does that mean for China's market reforms? And then on the other hand, we saw a lot of people going, well, you know, it was was never that free market. It's always been a centrally ordered economy. And this is everyone just sort of waking up to that fact. But I think there is a big question mark over where exactly the Chinese model is going right now. Yeah. And it kind of occurred to me. Like there is this tension. So one of these things, one of the things that Dan Wong points out is, okay, China is like very keen to remain an industrial powerhouse, to be good at manufacturing. And of course,

that's been a theme of all the conversations that we've had with Dan is like, you know, wants to be good at like hard tech and building, uh, wide body airplanes and semiconductors, etc. But on the other hand, you know, an ever grand is sort of a perhaps a symptom of this. And I think that you coined the term the giant ball of money that just sloshes around China, which is like from at least from my outside perspective, the Chinese economy is whether it's real estate or people at home trading like iron or futures. It's an economy that's like it's riven with speculation. Right.

Hugely financialized, I think is the right word. So like on the one hand, yes, they want to make things. Dan spoke about this idea of the German model and getting closer to, you know, high quality manufacturing. But on the other hand, it seems like there is a lot going on in sectors such as real estate, construction, even banking, finance, fintech, some of the biggest companies in China. of course, have financial payments arms as well. So it just feels very financialized and sort of abstract at the same time. Yeah. And I guess the last thing I would say about this is putting it all together what we've talked about so far. Like, and this is going to sound sort of like trite maybe, it feels very real. Like, you know, it's always, you know, I feel like over the last several years,

news out of China is like, okay, you know, they're going to, they want to tamp down on real estate speculation, or it's like, are going to like make it harder to buy a fifth home or whatever it is. Something about this moment feels extremely real as in let's take a turn in a different direction. And I don't know if that's true, but the combination of things, the letting Evergrand get to where it is, the effect that that is likely to have on the real estate sector, it feels like this is a pretty big moment. Well, I think also when you wipe out billions of dollars worth of market, at value on some of your biggest companies through the crackdowns. That tends to focus people's attention quite a bit as well.

Exactly right. So I want to understand further where China is going, what its goals are, how it understands the sort of how it sees economic management. So I'm very excited about our guest today. She is the author of a new book. We're going to be speaking with Isabella Weber. She is an assistant professor of economics at the University of Massachusetts Amherst. And the author of the book, How China Escapeed Shock Therapy, The Market Reform Debate,

This book is getting a lot of praise, taking a big sweep at the big historical look at China's approach to liberalization or how it thinks about capitalism and markets. So maybe the perfect person to contextualize this moment right now. Isabella, thank you so much for joining us. Thank you so much for having me on the show, Joe and Tracy. It's a great privilege and honor to join you today. Very kind of you to say, you know, let's just start like, okay, the title of your book, How China Escape Shock Therapy. What does that mean? I mean, I guess I have some sense of shock therapy in the development context, the idea of like, we're going to rip the band-aids off, denationalize all the industries, free trade. Obviously, China hasn't done that.

But why is this the lens that you've decided to take to sort of like understand Chinese capitalism? Yeah, thank you. That's a great question. To go back to the 1980s, to understand what's going on with China today is a somewhat unorthodox decision. But at the same time, in the context of the increasing talk around the new Cold War and so on, I think it makes sense to go back to the end of the previous Cold War and to go back to the initial decade of market reforms in which I think to some extent China's approach to marketization and its basic state market relations, were shaped. Now, why to focus on shock therapy? In the 80s, shock therapy was a policy doctrine that really swept the word. In some sense, even the Fulker shock can be thought about as one form of shock therapy. But more concretely, in the context of the transitions from socialist or communist or whatever you want to call it economies to market economies, that kind of was the policy choice of the day. This was technically speaking a policy package that was composed of four elements, that is price liberalization and macroeconomic austerity as the first two elements,

which taken together is considered the Big Bang, where the idea is that liberalizing all prices helps you to get prices right, and then imposing macroeconomic restraint helps you to keep the general price level under control. Then this was meant to be complemented with trade liberalization to integrate the economies into the global market and with privatization to basically lay the institutional foundations for a functioning market economy. Now, even the most diehard shock therapists thought that privatization was a slow and complicated process of rebuilding institutions so that the most shocking element of shock therapy was really price liberalization and macroeconomic austerity. So much on the technical composition of these

policies, but I think in a more broader sense, the idea of shock therapy encompasses the idea that you have to create markets by having the state withdraw from the economy and basically by destroying the plan to make space for markets to emerge spontaneously. Now, we think of China's state as very powerful and as the recent episodes have showed, continuing to be incredibly powerful in the economy, right? So we tend to think that gradualism, experimentalism, pragmatism, are just inherent in China's approach, and therefore this is just like somehow what China does, which to some extent is true, but by going back to the 1980s and to the struggle overmarket reforms, I'm kind of complicating this story by suggesting that in fact, in the first decade and to some

extent throughout the reform period, there were alternative ways of thinking about marketization and the idea of shock therapy or the basic idea of needing to have the state withdraw from the economy in order to create a functioning market economy was very much present in China and in many ways has been a position that has been advanced throughout the last decade. Could you maybe talk a little bit more about how what you just described, you know, the market reforms of the 1980s under Deng Xiaoping, how those actually stacked up against the socialist philosophy that was prevalent at the time? Because again, I think this is, I believe Joe mentioned this in the intro,

but this is sort of one of the tensions that people struggle to understand in China. On the one hand, it's a self-professed communist state that's trying to take care of everyone and wants to centrally direct resources. But on the other hand, certainly in the 1980s, they were talking about price liberalization. and other types of things that one wouldn't necessarily associate with that kind of socialism. Yeah, great question. So I think to understand what was going on, one kind of has to go back to the late 1970s and ask oneself, where was Chinese economy and society at at the dawn of reform?

And I mean, this is a moment a couple of years after Mao's death in 1976, the culture revolution is clearly over, people who have been leading the Cultural Revolution are arrested. But in addition to the failure of the idea of continuous revolution and ever more communist forms of political organization and mass mobilization during the Cultural Revolution, there's also a failure under Mao's dedicated hair, Huo Fuang, which is a failure of a renewed attempt at big push industrialization. Now, big push industrialization in some sense was a Stalinist kind of idea of planned industrialization. In that case, there was a big 10-year plan, and the idea was that China's catch-up ambition could finally be realized in this 10-year plan. That 10-year plan

failed quite dramatically. Basically, because of reasons that in some sense are quite timely, which in the 70s, China was finding quite substantial petroleum resources, and the basic plan had been to export petroleum and then import international technology know-how and capital goods, and then basically achieve rapid plant industrialization, but fueled with foreign knowledge and technology. Now, the projected petroleum findings were not forthcoming, so that by the late 70s, this model had very quickly run out of steam.

But China was still a very poor country. Yes, it had achieved basic industrialization, advancement in public health, infrastructure, and so on during the Maoist period. Nevertheless, just to give you a sense, the GDP per capita in China in 1980 was still less than that of Sudan or Haiti. So we are really talking pretty severe poverty for large part. of the country. So there's a sense of we need to redo the economic system in order to move forward, in order to realize the ambition of the revolution that was not only about creating a non-alienated

society and all of that, these big political ambitions, but it was also about making China escape from backwardness and poverty. So in that context, there's basically reorientation. in the understanding of communism and socialism, where the idea is that under Mao, China had tried to achieve two revolutionary forms of organization without having the material foundations in place. So if one goes back to kind of orthodox historical materialism or an orthodox reading of Marx understanding of the development of history, then there is a sense that,

the social relations or the social organization of society should to some extent at least correspond with the material foundations of society. In other words, you cannot leap from a medieval agricultural society straight into full communism or something like that. So in the late 70s, there is basically this huge ideological shift where the idea is that in order to lay the foundations for socialism in the future, China had to backtrack on socialist organization in the present and had to, quote-unquote, make up lessons from capitalism in order to lay the foundations, the material foundations, the economic development foundations, that would be necessary in order to achieve higher forms of socialist organization, or maybe even in the very long

run eventually some form of communism in the distant future. So as such, the socialist ambition has been, in some sense, postponed to some future date, which then raises a question whether this implies that it has actually been given up. So this actually, no, this is great because this sort of gets at where I was going to go with the next question. And I think if you like talk to people about China, there is this assumption. of a linear trajectory, and I don't mean experts, I mean just sort of like general commenters, people in business, et cetera, that there is this assumption of a linear but perhaps slow trajectory towards something that looks like a fully liberalized economy, a liberalized capital account,

an economy in which their understanding, the Chinese understanding of IP laws are roughly similar to what they are in other developed economies. an economy in which foreign companies can more or less do business at the same level, the same playing field as local companies. And obviously, China's not there, but it's a substitute of like, okay, this ongoing process of liberalizing step by step and so forth, and one day, maybe that's where China will get to. But, you know, it seems like both like what you're saying and also what we've seen with some of lately is maybe this assumption of a straight line liberalization on a slow, it's definitely not

shock therapy, but a straight line liberalization, however slow, may just be the wrong premise to begin with. Yeah. So the subtitle of the book is the market reform debate, right? And it's really about two competing understandings of how market economies work. And one understanding of a market economy, is that basically there's one model of market economies, which is pretty much what we think of as Western market economies or a form of market economy that we can more or less capture with one economic model, so that marketization basically means moving towards one kind of fully liberalized type of market economy, right? Which is basically in line with what you just said,

and which is in some sense the underpinning assumptions of the most extreme case that is shock therapy. On the other hand, the idea of experimentalist gradualism that ultimately prevails in China sees markets not as the goal in itself, but sees markets as a tool in China's own process of transformation, where there are bigger political, developmental, economic, social goals in which the market can be used to serve China,

to move towards the implementation of these goals, but marketization is not a goal in itself. Now, that, of course, always bears the potential that if you, I mean, if you pursue the second approach and you have intense marketization, it always leaves open the first approach, because as you get more markets, markets take on their own dynamic.

the powerful interests are created and so on. So in essence, I think that China did try to pursue the second approach in the 1980s, but the challenge from the first approach kind of has been there all along. And the understanding of commentators of what China is doing has also often been primarily guided by the first idea of marketization being basically the same as for liberal, being the same as vestingization. So using maybe the second framework and the idea that you touched on earlier of China, sort of having to postpone some of its socialist goals in order to get the market reforms

underway, when you see what China is doing now, when you look at the various crackdowns and things going on, I mean, there have been so many headlines over the past few weeks, but there have certainly been a lot of statements about creating a more equal society, making sure that, you know, education is a priority and parents don't have to necessarily spend a ton of money in order to secure their kids' education. There are a lot of socialist principles that are running through some of these crackdowns. So I'm curious how you're viewing that in the context of your historical framework and whether or not it is maybe like the long-awaited,

return to Chinese socialism. Yeah, well, I'm not sure if I can decide whether it's the big return to socialism. That's fair enough. But I can't try to provide some historical perspective. So part of that second approach to marketization was also to start from the non-essential parts of the system and basically create a market dynamic in ways that allowed the state to keep control over, the core parts of the system. So keep control over the essential strategic industries. Keep control over, if you want so, the commanding heights of the economy. So there is a sense that you unleash

market dynamics at the margins of the system, but then eventually if these margins actually become core of the system, then there might be a recalibration of the relationship between the state and the market in these areas. So if you take, for example, private tutoring, as long as private tutoring is just something that a few elites are relying on in order to make sure that their kids get into the right schools, then this is maybe not socialist, but it's a marginal phenomenon. When it comes to a point that private tutoring becomes so important that basically all middle class families fear that without private tutoring, their children have no chance of passing the university entrance exams and basically have no future,

then suddenly private tutoring becomes part of a very essential element of the economy and society. It becomes an essential part of the education system. So I think that to some extent what we see with these crackdowns is a redefinition of the relationship between the state and the market as some of these sectors that used to be much have crossed the line towards becoming really essential. This is, I think, similar with a lot of the e-commerce platforms where as long as this is just like a bookshop for some secondhand books, then it's a kind of really secondary, right? But once this becomes the main form of retail, as the pandemic has illustrated quite dramatically, then suddenly this is a platform that is basically

running the retail economy of the country, right? So from that perspective, I think we can, I mean, maybe make sense of why in certain sectors there is such a regaining of control that, of course, does not explain the timing and why it's happening now. This is more like saying, okay, it kind of fits in a more general pattern,

but it's not predictive in the sense that we could have said, okay, therefore it would have happened in 2021. On April 4th, 24th, 2023, around two in the morning. A man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App.

From Bloomberg podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. So the big thing, you know, you mentioned the tutor. tutoring and so forth. But the sort of the big elephant in the room, at least from my perspective, seems to be this sort of extreme level of financialization and speculation. I mentioned this in the intro, but I've followed Tracy's writing on China for years and, you know, people in the U.S. like to trade stocks and cryptocurrencies, but it seems like even like more extreme in China and you have like people at home trading iron ore futures from their computers and trading oil futures. in a way that I don't think very many people in the U.S. do. And then, of course, you have housing, which, okay, on the one hand, is probably sort of like a core basic and necessity, but it's obviously a highly financialized speculative world.

And we see this sort of coming to a head with Evergrand. How much has that financialization essentially been? I mean, is that a failure? The fact that so much of the economy has been so much speculation. so much financialization. Do Chinese elites perceive that as having been a failure to let that become so rampant? Yeah, that's a great question. Certainly, I think there is a sense that speculation has gotten out of hand, hence the crackdown, right? At the same time, I think that this massively rapid marketization that we have observed throughout the last decades is part of the

dynamic that the party itself has created and that has led also to this massive marketization of the behavior of individuals who have become market-oriented in ways I fully agree with what you say are really unusual, now beyond what I have seen in the US or I'm from Germany clearly beyond what people in Germany are doing. I think that kind of goes back to another point that you made in the intro, which is this idea that we either see China as being told capitalized and market or as the centrally ordered or planned economy. So then either we see the financialization simply as the result of this massive capitalist economy or we see it as a totally abnormal phenomenon in relation to what is supposed to be

a centrally ordered economy, right? I'm kind of proposing a third perspective, which is that it's a state-constituted market economy where the state has been the driving force behind marketization has unleashed markets and financialization across the economy and across sectors in the hope of unleashing a massive growth dynamic which they have achieved but always at the danger of kind of like dancing with the tiger where this can take on a dynamic of its own that is so so powerful that things get out of control. As regards financial stability and real estate, there is the sense of being at the brink of things getting out of control, hence the crackdown. This is actually what I wanted to ask you

next, which is, you know, again, using that sort of framework that you just describe this sort of middle path, how should we be looking at Evergrand? So it does feel like China is in a tight spot here in a difficult situation because on the one hand, it has said repeatedly that it wants to introduce moral hazard into the system. It wants more fiscal discipline from its real estate developers precisely because they've built up so much debt. But on the other hand, as you mentioned, a lot of that financialization was basically driving China's economic growth. So the authorities, presumably, also want to avoid a really big destabilizing shock of a big failure of that that then cascades through the property market.

So it seems like they're in a really difficult position. Yeah. I've actually been surprised how little reference there is to the 1997 Asian financial crisis and the Guangdong housing market turmoil in that context. I'm by no means an expert of that. I can just really talk off the cuff on this topic. But my sense is that in the late 90s, there was this slogan of basically the force being about to catch fire.

And there were also big companies that were basically let go, even state on companies, companies that were also active in the real estate sector. So I think that to some degree we see something very similar happening where there is a sense that the situation in the real estate sector has become exceedingly dangerous, as you point out, unless many people have been saying for a long time. So that there's an attempt of basically letting go of Evergrand before the whole forest catches fire. So it's kind of like preparing for a big storm to come.

So you kind of get rid of the weakest parts in order to make sure that if the storm actually comes, you are prepared. So in that sense, this might be more targeted than it looks at the surface. And that seems to also be an important difference with the Lehman Brother moment. I mean, there was this whole buildup to this situation with the three lead reins and the increased capitalization requirements and all of that, that from the perspective of the Chinese government clearly must have led to turmoil in the real estate sector. So as such, I think this is preparing, I mean, basically cutting parts.

that are clearly very unstable in order to kind of secure the larger market. So kind of preventing the contagion before it even happens. But whether this will work or not, it's an open question. And this is obviously a speculative interpretation. Right. I mean, it's very interesting, this sort of like prairie fire idea. It's like you try to have some, you have a burn, but you sort of hope that it can be a controlled burn, and then the ecosystem becomes healthier.

Are there other times, I mean, if you look at the sort of like the long scope of Chinese, I guess Chinese usage or Chinese taming of markets, where we can think of similar approaches of having done some sort of like let someone go or let some pain persisted in some parts of the economy in the hope that in the grand scheme of things it makes the system more resilient and robust? I've already mentioned the Asian financial crisis. I think the privatizations of the late 90s actually might be another one where there was this whole slogan of grasping the big and letting go of the small, where basically the idea was to let go of small, unprofitable state-owned enterprises with largely outdated capital stocks in order to consolidate the state-on enterprise sector. and thereby basically strengthen the Bible parts of the state-on-enterprice system. So in some sense, this is also to preserve the filet pieces and getting rid of the bones if you want so. Obviously, this is a very different kind of scenario compared to the real estate sector now.

And in some sense, it's a reverse logic in that it is letting go, in the sense of letting go to the market of the small, enterprises. But nevertheless, I think this this underpinning logic of preserving the essential viable strategically most significant parts of the system by sacrificing some other parts might be to some extent a parallel. So one of the things that stands out from talking to you now is this idea of, you know, I think Joe mentioned this as well, but the idea of, but the idea of, China's economic development not necessarily being a straight line in terms of ideology. So, you know, you can have tradeoffs and interactions between free market reforms and socialist goals.

And there's an argument that's been made, and I think we're hearing it more and more, that the West is sort of growing more similar to China's economic model than perhaps the opposite case, the idea of China actually growing more capitalist and Western in style. Some of our previous odd thoughts guests like Victor Schwetz over at McCory has made this argument, the idea that because of COVID, because of the pandemic and economic crisis after that, a lot of people feel that governments should have more of an active role in how the market works and how the economy works. A lot of people have received unemployment benefits. A lot of people, are in favor of infrastructure spending or maybe some type of a green deal, that sort of thing.

So I guess my question is, what lessons can the West learn from China's economic development? Yeah, great question. Thank you. If you don't mind, I would like to make a quick comment on the idea of not a straight line. So one of the things that I actually found in my research on the 1980s that a lot of the first-generation revolutionary leaders repeatedly were arguing that China had to go back to the strategies of the civil war and the immediate post-liberation era. When the communists were fighting an economic warfare

against the nationalists in the context of rampant hyperinflation, in that context, the communists as revolutionaries, as guerrilla fighters, as people who were dedicating their life to the project of a communist revolution, we're actually playing the market and we're building up commerce structures and we're recreating market links

in the so-called liberated base area. So in that sense, at the very beginning of the communist revolution, in the decades of revolutionary struggle towards the revolution, the use of the market as a tool in pursuit of socialist goals was an essential element.

So as such, yes, there's no straight line because then there is, of course, the whole Maoist period and the treacherous search for an economic model in that context. Nevertheless, this theme of using the market is one that is really quite deeply ingrained in Chinese history. To the question of how this links to the West and whether the West can learn from China, in the book I actually also have a chapter on the World War II economy and the immediate post-war economy in the United States. And that is for a reason in the sense that in the 80s, when China was starting to create a new kind of economic model,

it was also looking to the experience of the United States with planning price controls and pretty direct guidance of the state over the economy in the war and its aftermath. So in that sense, we are seeing a increasing, appreciation of industrial policy and a certain rethinking of the state market relationship in the West that is inspired by China. But I think it is not simply following China's example, but in fact it is also quite deeply rooted in the postal history of the United States itself. So what I'm trying to get here is that I think it is a good idea to not simply think in terms

of China and the United States is these totally... opposite models that always have been different and that inherently are somehow completely not alike, but rather to see that there are historical constellations that are in the US that have inspired China. And then there are also elements now in China that are inspiring the biodynamics and the redoing of public investments in the US. But in some sense, this is part of a history of mutual inspiration rather than two economic models that have developed in silos and that now suddenly are looking at one another. I'm June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the

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On the East Coast, listen as you start your day. and on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grasso. Subscribe today wherever you get your podcast. I want to bring up another sort of like, I guess, complicating aspect of the story in China. And we talked about real estate. And this is something that, you know, Matt Klein and Michael Pettis

discussed a lot in their book, Trade Wars, or Class Wars, which is that there is this class done. obviously in China. And part of the reason, for example, that we may, or that there has been so much real estate speculation or so much investment in housing is because many people have been deprived of savings opportunities, investment opportunities, so-called financial repression, that there are basically policies designed to minimize the incomes of workers and to maximize the wealth of the leads, that the social safety net is not particularly robust in China, and therefore that requires people to save a lot for themselves, and that deprives domestic demand and so forth.

I'm curious from your perspective, you know, you talk about these, like, different tracks, these different models for thinking about Chinese economic development. But how much of a problem or how much will the rubber hit the road in your view if China continues to sort of go down a path in which there really are this sort of deprivation of safety net and income opportunities for the typical working class. One of the outcomes of marketization was the dismantling of the social safety net that was there under the planned economy, right? So whereas in the European context, at least, we often think of the social safety net as part of the economy that is basically protected from marketization

and that is organized based on principles of state provisioning rather than some profit-driven individual incentives of private or state firms. In China, a large part of what we would consider as part of social welfare has been very deeply marketized. So in that sense, to go back to your entry question of whether it's a capitalist or a plant economy. In that sense, China's economy, even though the state plays such an important role in the market, actually in some sense, it's more capitalist than some of the European countries. Now, to go back to your question of class relations and how viable that is in the medium run, I think that the tensions within China are of course considerable as regards inequality and so on.

But my sense is that the pandemic has actually created pretty widespread sense of proud within the Chinese people and a sense that the system is actually, I mean, it has its flaws and all of that, but as regards public safety and so on, it is actually working quite well for them, which was quite unexpected when we look back to early, 2020. Now, from a more macroeconomic perspective, I think there can be little doubt that an increase in domestic demand is absolutely important. So in that sense, I agree with the analysis of Klein and Pattis, even though as regards trade, I wouldn't see the class tension only in China, but I would see this as being linked also to class tensions in the rest of the world.

But on this social safety net question, like there has been, at least that's one of the questions I've had in my mind is like, is that going to get built in a more robust way? Is there going to be a significant investment in, say, public health or something resembling social security such that, I mean, as you mentioned, are ways of China is maybe even more capitalist than Europe. Do you expect that to be part of part of this new path? I think so, yes. I think that as Stan Wang was also saying, the dual circulation and common prosperity are two big slogans that are still pretty wake, but that are kind of complementary in the sense that dual circulation means strengthening of domestic demand. And common prosperity means the goal, whether this will be achieved or not, of moving towards that kind of olive-shaped income distribution and also improve. provisioning of public services for large parts of China's population, which these two things go hand in hand in the sense that if there is an improved social safety net, then households have to save less privately, can spend more, therefore can enhance domestic demand,

and therefore this is, I think, quite consistent with the idea of dual circulation. I think one aspect that might be interesting to take into account in the most recent developments is that my impression is that there's a sense in China of preparing for a fire in the real estate sector, but also more broadly, preparing for a continued heightened instability in the global economy. so that the timing of this regaining control over strategically important sectors, I think is also connected to an attempt to kind of ring-fence the Chinese economy and prepare the Chinese economy for possibly pretty major turbulences ahead. And of course, these attempts themselves, as for example in regard to climate change, can then again unleash turmoids as we have just seen in the

energy market, right? So it's not necessarily the case that trying to prepare for turmoil and trying to come up with policies that facilitate the kind of fast structural change that seems to be

necessary not only in China but around the world in order to respond to climate change will be a smooth right. But I think that this is kind of part of the context in terms of what we have been seeing and what we probably are going to see in the next months to come. So this is one more thing that I realized we haven't touched on during this entire conversation, which is going to influence the question. But to what degree is China actually worried about

the middle income trap? Because we used to hear all the time that, you know, this was like the ultimate threat to China's economy. They were really, really worried that they would go the same route as various other Asian emerging markets. And they would never be able to get out of it and that this was sort of informing all of their economic policy decisions and the way they were structuring their economy. But I don't know, it feels like you don't hear so much about that anymore. So I'm wondering if that's no longer perceived as like a major threat. Yeah, interesting question. I mean, it seems like that at least until very recently has been a sense of new confidence in China in terms of its economic model and so on.

But I think that the strengthening of industry and the attempt to regenerate resources into semiconductor industries and to basically ensure that China is strong in the upstream technology intensive industries that has also been touched upon in the interview with Dan Wong in some sense can be seen as part of China's strategy to try to avoid being trapped in a middle income situation since I think this is seen as some sort of a precondition for the creation of native companies that have global competitiveness which again is at least one element of trying to.

to not get stuck in a middle income trap, but instead forge ahead to the technological frontier in key sectors, which then has implications for the growth model. Well, Isabella, I think that's a great place to leave it. Really appreciate you coming on. Congrats on the new book and all the praise it's getting. And thank you for joining us on Adlaq. Thank you so much for having me. This has been great pleasure.

Thank you for your great question. It's an honor to join you. Thanks, Isabella. That was so good. Really appreciate it. Thank you so much. So I found that really helpful, Tracy, this sort of big picture historical sweep. I mean, I think that like, look, this idea that a, you know, and other, Dan has talked about this

before and others, this idea of, like, markets serving a broader purpose and markets not being an end to themselves. But I think Isabella did a really good job sort of talk about this. It's kind of dangerous. It's risky. Like, things can get out of control. I think she used the term dancing with the tiger at some point. And I think thinking about like Evergrand or maybe the rise of, say, the private tutoring industry, even though it doesn't have the same financial implications, sort of a good example.

It's like you can aim for that. And China has arguably done a good job, you know, obviously lifting millions of people out of poverty. But there are risks left and right to the model when you. introduce markets to the world. Right. I mean, to me, Evergrand is sort of the ultimate expression of that tension. But I think two things that stood out for me from that conversation. One was this idea that, you know, China is willing to allow markets to build up certain industries and kind of ignore them until they actually become pervasive and important. And again, like, I think this is something that you've seen most clearly recently with the consumer tech crackdowns.

It does feel like in 2020, everyone realized what an enormous part of the economy, those had actually become. And so the authorities started paying more attention to them. And then the other thing that stood out to me was this idea of a sort of fluid relationship between socialism and capitalism. So this idea that it doesn't develop in a straight line or your ideology doesn't necessarily unfold in a straight line, and that, you know, China and the West can actually share some characteristics. So Isabella had that great example of, you know, Western economies after World

War II in the 1950s and 1960s, where there was a lot of government expenditure on infrastructure and social programs. And I think that's also a great reminder that these things can ebb and flow. Yeah, absolutely. That is super helpful. And, you know, I guess maybe another way I'm thinking about, you know, because we started when we started doing these recent series of China episodes, I'm sure we'll do more in the near future.

You know, as I keep going back to this question, like, what is the, what is the goal here? What is the so-called like end game? And I'm starting to feel like maybe it, you know, it's like, you have these like two tracks, something that resembles more socialist, something that resembles more sort of like Western style liberalism and capitalism. It does feel like what we're seeing right now is a sort of recognition that China perhaps had gone too far down the sort of like liberalized track. It is trying to make a hard pivot to the other one. And I think maybe, you know, Isabella brought up like this idea. It's like, okay, it's one thing if an e-commerce,

companies sells books or use books online. It's another thing if they also run like every like payment system that everyone uses. And so maybe there's just the sort of recognition that right now there's this moment to like skip over to the other, skip back to the other track and remind everyone on what the purpose of all this is. Yeah, totally. And again, we've spoken about this before, but there are plenty of Western governments out there who would probably like to do a sim. thing with their tech companies. Of course, the difference would be, you know, they would do it in a different way and it would take years and years to get done and no one would agree on what actually needed to be done

in order to curb big tech. But, you know, here we are. And again, it kind of like goes back to that idea of similarities between the two economic models, or at least they sort of like switch back and forth maybe between socialism and capitalism more than we actually realize. Absolutely. Well, lots more. I'm sure we'll be talking about this a lot more in the weeks to come. Yeah, so much more to come. Okay, shall we leave it there? Yeah, let's leave it there.

All right. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. Follow our guest, Isabella Weber on Twitter. She is at Isabella M. Weber, Assistant Professor of Economics at UMass. and the author of the new book, How China Escapeed Shock Therapy, the Market Reform Debate. Be sure to follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson.

Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.