Authors
Barry Gill Dr. Keyu Jin

Like everyone this year, I was forced to sharpen my thinking on the investment case for China. We came into the year with high hopes for the economy and financial markets based on a post-COVID re-opening. As we all know, this has not materialized.

In my attempt to make sense of events, I came across a book called 'The New China Playbook' by Dr. Keyu Jin. Dr. Jin is a Chinese economist, associate professor of economics at the London School of Economics and a World Economic Forum Young Global Leader.

Her book is a refreshing take on China that spans a wide-range of topics; from technological innovation, to trade and from consumer and savings habits, to the demographic and psychological hangovers of the one-child policy; from finance and corporate competition, to the unique and delicate dynamic between central and local government (I.e., the ‘Mayor economy’).

More than anything though, it forces us to think of China as a dynamic country and economy that is changing in front of our eyes. As Dr. Jin sees things, the ‘old playbook’ was one of industrial subsidies and technology transfers, but a radically different younger generation is set to reshape China’s future. The new China that is emerging is dynamic and exciting but by no means perfect and not without risks.


Barry Gill

Can you explain why you wrote this book and what you hoped to achieve with it?

Dr. Keyu Jin

China is a large complex country and is often misunderstood. I set out to provide perspectives from the inside through a cultural and historical lens. Ultimately, I want to reduce the misgivings that often divide the East and West.


What is the single biggest thing we in the West get wrong about China?

Instead of a highly centralized state with heavy top-down decision making, the Chinese development model is in reality characterized by political centralization with an extreme form of economic decentralization.

Local government officials in China are highly entrepreneurial.

Local government officials in China are highly entrepreneurial. They are focused on doing what is best for their prefecture or province. They implement economic programs, protect the environment and pursue high and hard tech technological innovation.

There is also a common misunderstanding about Chinese people and culture. Chinese people have always had to balance the deference to authority with their independent exertion of free will. Whether between children and parents, subjects and the emperor, or now citizens and the Chinese state, things have never been black and white. Often irreconcilable paradoxes to the Western eye, but they are not so in China. They can coexist.


Can you explain how the so-called ‘mayor economy’ works and the intricate relationship between central and local government?

The term “mayor” captures the fact that provincial governors or party secretaries are highly motivated to develop their local economy; whether through supporting innovation, pushing hard reforms, maintaining social stability or protecting the environment. They are in charge and are held accountable.

Take Hefei. A city of five million, it is home to what is known as the Global Quantum Avenue, a hub of innovative high -tech companies, and the headquarter of NIO, a high performance smart electric vehicle manufacturer. What some hailed as the “Hefei model,” the local government took an entrepreneurial approach in courting tech companies and investing in them. Many local officials from other prefectures and provinces followed suit to try to build Silicon Valleys all over the country. None of this was ordered by the central government.

However, the West has somehow bought into the idea the state suppresses private entrepreneurs. But it is the opposite. Local officials need private entrepreneurs more than the other way around – for tax collection, employment, or technological innovation.


Can you tell us how the state-owned enterprises (SOEs) have evolved over the last few years and how you see their role in the future?

SOEs have evolved over time along with private enterprises. In fact, the rise of the private sector and stronger competition has accelerated the need for SOE reforms .

While SOEs still have monopoly power in a certain number of strategic sectors, their share of the economy has gradually eroded. Manufacturing, services and technology are sectors dominated by private companies. But then again, they push each other. Collaboration between the state and private business is very nuanced , and state enterprises often take an equity stake, directly or indirectly. That relationship is interesting because having a big SOE as a significant stakeholder can help remove barriers to entry or help obtain local financing.

Also, contrary to conventional wisdom, data shows that SOEs have become more productive over time, and this is largely due to reforms.


For decades the investment theme behind China has been about infrastructure spend, leading to an imbalanced economy. What needs to happen for consumer confidence to grow in such a way that the savings rate declines?

Firstly, there is currently a severe lack of confidence in the Chinese economy. This has a lot to do with China not injecting a major stimulus package in the way that Europe and the US did during the pandemic.

In my view, that also explains a significant part of the tepid recovery after the pandemic as well as the need for the savings rate to fall significantly. The recovery will take time.

It is not really a confidence issue, either. It is about habits, culture, housing prices and a lack of financial sector development.

The younger generation’s spending habits are very different from previous generations.

For example, the younger generation’s spending habits are very different from previous generations. 85% of aggregate consumer credit is taken up by people under 35.

This also helps explain the lack of development in the financial system. If you look at aggregate credit, 80% is intermediated by banks. Such a lack of capital market depth is a typical feature of an immature financial market.


China's GDP and stock market are famous for being uncorrelated. You have some interesting theories as to why. Could you elaborate?

The correlation between economic fundamentals and the stock market is almost zero, which puts China in the same bucket as Iran and similar countries. For reference, the correlation for the US or UK is above 50%, sometimes 80%.

To file for an IPO in China, companies must go through a stringent approval system . It is not registration base as is the case in the US – although China is exploring this approach. Companies are required to show consecutive years of profitability before filing, which could tie up resources and often results in stocks declining post-IPO.

Also, Chinese companies listed in overseas markets, such as Hong Kong or New York, perform much better than homegrown IPOs. This is because of better corporate governance, and unfortunately Evergrande is the poster child. However, reforms to the stock listing process and the introduction of the Shanghai Stock Exchange Science and Technology Innovation Board (STAR Market) are encouraging.


You talk about many seismic, but unintended consequences of the one-child policy. What do you mean?

The one-child policy is something close to my heart because I have done research on it. I was also part of the first batch born in the early 1980s.

On the negative side, it created a demographic issue. And having gotten used to small families with no siblings, the current generation has not dramatically changed habits since the policy was relaxed. The social fabric of family traditions has changed.

More positively, there used to be a huge hierarchy between parents and kids. Nowadays there is more equality. In fact, sometimes children enjoy a higher status than their parents because there is only one child.

There have been other unexpected economic consequences, too.

My research found that the one-child policy explains a large part of the high savings rate.

My research found that the one-child policy explains a large part of the high savings rate. People with one child tend to spend less than those with more children. They also tend to save more for retirement as having a greater number of children generally means more support options in old age.

There is also a ‘quantity for quality’ trade-off, which has led to huge societal angst over education – with up to one third of household income being invested.

On the flip side though, it has led to a golden era for Chinese women. In the past, daughters were educated after sons, which meant that most were not. Levels of education between men and women have converged. And the returns on education for girls have outstripped boys; whether for publicly listed companies or in government, the share of female leaders has increased significantly.


How is all this going to affect consumption patterns, if at all, given the consumer economy is such a small part of the overall Chinese economy? And what are the big investable trends that might emerge?

I have high hopes. Firstly, surveys and data show the younger generation is much more open minded and socially conscious; they care about worker inequality, the environment, and nature.

This is partly a result of the country maturing. It is an old country, but a young economy. As it matures and prospers, there is more scope for people to care about things other than just putting food on the table.

Consumption habits are changing. The younger generation likes to borrow, and they spend at least twice as much than previous generations on things like food and clothing, despite having much less income. The notion of ‘lying flat’ captures a generational rejection of societal pressure to be an overachiever. It (somewhat simplistically) depicts a generation that is highly educated and wants to enjoy life along with working hard. Of course, there are exceptions; entrepreneurial stars that are as ambitious, hardworking and disciplined as anyone in the world.

In terms of sectors, firstly there is a lot of competition in consumer -related sectors. But for snacks, specialty coffees, apparel and so on, luxury conglomerates enjoy a premium. Many younger Chinese are observing busy urban lifestyles and innovating to make people's lives just a little bit better.


What do you mean by Zero-to-One and One-to-N innovations and why is this useful for understanding China's and ultimately the world's technological future?

The definition of innovation is actually quite broad. It is really whatever makes something better. Any processes or products that make us leaner, cleaner, greener, more productive all count as innovation. This is what matters from an economic standpoint.

Zero-to-One innovations are fundamental breakthroughs – such as going to Mars, curing cancer, or inventing the first computer or steam engine. One-to-N are applications or improvements based on existing technologies and China has been successful with these. Even today, four out of the 10 most-downloaded US apps are Chinese: TikTok, the fashion app SHEIN, Temu (Pinduoduo's outpost in the US) and CapCut.

Many Chinese business models are world class, and are being copied; they used to be copiers and now they are being copied.

Many Chinese business models are world class, and are being copied; they used to be copiers and now they are being copied.

There is a difference between mastery of high tech and breakthrough technologies. China can master high tech because of the cumulative knowledge, the talent pool, the engineers, the scale, the financing. However, to create something out of nothing, you need basic research; you need a patient country with patient people, and patient capital links back to the financial system. People need to be intrinsically motivated by curiosity and passion, rather than just being extrinsically motivated by short-term profits and returns.

These are the things we admire about the US. I think it will take time for breakthrough technologies to become a focal point for China. Ironically, to have no focal point or no goals at all is a starting point for a country that wants to innovate on Zero-to-One technologies.


It is almost impossible to do an interview on China without touching on property. Is the situation really that bad?

In the short run, it is going to be difficult to find something to replace property as an engine of growth, especially because real estate accounts for half of the local government revenues. There were a lot of incentives to develop it.

But in the long run, the market should find a new equilibrium. If we look at urbanization, there is still a long way to go, meaning demand remains. There are millions in rural areas who want to have a house or apartment in urban areas, and house ownership is very important to the Chinese. The economy is still growing, which should trump demographics. Reaching middle income levels by international standards is far more significant since it applies to almost a billion people.

However, it is going to be a painful adjustment. The government will try to avoid a hard landing and provide support. In terms of the debt, a lot should be absorbed by commercial banks. In my opinion, a major financial crisis is less likely in a controlled and state-coordinated financial system.


What are the Belt and Road Initiative’s (BRI) weaknesses and how do you see China's soft diplomacy evolving? And what do you make of the evolving expansion of the BRICs in contrast to the legacy role of the G20?

The BRI was initially a very ambitious project. It was China's answer to a new paradigm of globalization, not only in trade and investment, but building a global network based on physical or digital infrastructure for greater connectivity. This made a lot of sense because almost everything today is part of a network. And you want to connect the nodes and be the most central component of that network.

But I think over time Chinese ambitions ran ahead of the global reality – i.e., not all the economies were ready for that scale of infrastructure.

There have also been misunderstandings over debt. Firstly, the quality of Chinese investments in Belt and Road projects have dramatically improved as well as the countries and regimes they have worked with. Secondly, most emerging market debt is held by Western financial institutions, not China. Thirdly, there are incorrect reports on debt seizures. There have been no seizures in Africa. Even in Sri Lanka, some local Sri Lankans have publicly stated that the blame put on China is unjust.

The idea of the BRI is good, but the implementation could have been better.

In terms of BRICS versus G20, emerging markets have a strong desire to have a greater voice in the global international monetary and financial system. They are pushing to create a coalition of powers that can counter or balance out Western powers.

We see this move on multiple fronts – including an alternative to the US dollar, whether it is a parallel system to SWIFT or the internationalization of the RMB.

BRICs is more than just a concept. We will see increased trade among the Global South and greater regionalization in a response to the geopolitical tensions and the unreliability of global supply chains. The rules for some of these multilateral lenders were written down by a handful of countries with little consideration given to the real needs of emerging markets. Being an emerging country and a great creditor, China sees itself as being more sensitive to some of their needs.

* Thank you to Brian Tart, President of Viking Books, for arranging this interview.

podcast

Barry Gill interviews Dr. Keyu Jin

54:32

A wide-ranging discussion where they try to unearth the real China, as well as explore its potential economic and financial future.

About the author
  • Barry Gill

    Head of Investments

    Barry Gill, Head of Investments at UBS Asset Management since Nov. 2019. Previously, he was Head of Active Equities at UBS AM. Barry joined O'Connor in 2012, overseeing long/short strategy. Prior to that, he led UBS IB's Fundamental Investment Group (Americas). In 2000, Barry relocated to the US, rebuilding Equities' long/short efforts post-O'Connor. He held leadership roles in London, including co-heading Pan-European Sector Trading. Barry started his career as a graduate trainee at SBC in '95.

External to UBS

Dr. Keyu Jin

Dr. Keyu Jin is an associate professor of Economics at the London School of Economics and Political Science. She is from Beijing, China and holds a B.A., M.A. and Phd from Harvard University. She is the author of The New China Playbook: beyond Socialism and Capitalism, which was a Financial Times Must Read of 2023. Her op-eds have appeared in the New York Times, the Financial Times, the Wall Street Journal, Time Magazine, and many more.

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