Party-State Capitalism: China's Communist Party and Rule by Market
https://www.youtube.com/watch?v=BMb3S8Jin_ABy Isaac B. Kardon and Meg Rithmire June 19, 2025
How should we understand China's unique variety of party-state capitalism? In this episode of The World Unpacked, Isaac Kardon sits down with Dr. Meg Rithmire, a renowned scholar of political economy in China and the James E. Robison Professor at Harvard Business School, to discuss how capitalism functions in a party-state that tries to maintain “rule by market” without ceding too much control to private capital.
Their discussion is based on Dr. Rithmire's chapter in a new volume released from Carnegie called The Life of the Party: Past and Present Constraints on the Future of the Chinese Communist Party. They explore how private capitalists have been important to China’s economy since the 1950s, and how China attempts to exert control over companies to ensure that their activities serve party-state objectives, like Made in China 2025.
Notes:
Yvonne Chiu, Isaac B. Kardon, Jason M. Kelly, “The Life of the Party: Past and Present Constraints on the Future of the Chinese Communist Party,” Carnegie Endowment for International Peace, June 9, 2025.
Isaac B. Kardon Senior Fellow, Asia Program
Meg Rithmire Meg Rithmire is F. Warren MacFarlan associate professor in the Business, Government, and International Economy Unit at the Harvard Business School and author of Precarious Ties: Business and the State in Authoritarian Asia (Oxford University Press, 2023).
Hello, I'm Isaac Carden and this is the world unpacked.
It is a real pleasure to have on the podcast today uh Dr. Meg Rhythm who is
the James E. Robison professor at the Harvard Business School and a renowned
scholar of China and political economy and comparative politics in Asia that
we're really just fortunate to have on the podcast today. And the approximate
reason for having her today is a new volume that we've just released from Carnegie to which she's contributed an
excellent chapter. The volume is called the life of the party, past and present constraints on the future of the Chinese
Communist Party. Uh, and Meg's chapter is all about the Chinese Communist Party
and its relationship to capitalism. Uh, and she's been working in this space for
a very long time. And we're going to draw on that essay as well as a couple of her other essays. and we can link the
book uh or rather the the volume which includes Meg's essay as well as a bunch of other work in the show notes.
But now that we have you here, Meg, thank you so much for joining us.
Thanks for having me and congratulations on a really great volume actually. Thanks. Well, thank you. We're glad to get it
out there and we hope that it's going to help inform uh a discussion on the CCP in Washington which is not always
terrifically illuminating. And I think that your essay in particular is something that really needs to be
considered by folks trying to understand some of the economic policy levers and
in particular the nature of the firms in China, private as well as stateowned and
their relationship to the party state. Um so we'll just jump right in and I I
will uh note that you've argued that we should understand China's political economy as quote unquote party state
capitalism. uh or I should say party state capitalism a contra a contrast emphasis on the party exactly as opposed
to maybe the more familiar idea of state capitalism that has its own uh historical anticcedants. Uh so for those
listeners who are familiar with that term what what is this distinction uh that you're offering and what does it
imply about how political and economic power actually function in China?
Great. Um, well, I should mention that that that that particular term party state capitalism comes from joint work
uh with Margaret Pearson from the University of Maryland and Kelly Thai from Nor Eastern University. And so it's
not exclusively my IP uh just to give credit where credit is due. But what we
noticed several years ago is a a really profound shift in the way in which uh
China's government, so the CCP, the party state itself, intervenes in the Chinese economy. And so for such a long
period of time, we've known that, you know, China has an authoritarian political system and a Leninist party.
But it seems, you know, the remarkable economic growth has been driven by markets, um, driven by private capital,
both capital coming from abroad, you know, foreign direct investment into China and China's entry into globalized
sectors. So for such a long period of time that's existed alongside um you know much of what you you've worked on
which is you China's state-owned enterprises S SOE. So these large mostly centrallyowned behemoth companies that
occupy the commanding heights in what people typically think of as strategic sectors. So you know from your own work
um you know shipping, ship building, port management, uh telecom, finance um
you know all kinds of of those kinds of strategic sectors. And so people were very comfortable in saying, you know,
China's not entirely capitalist, maybe it's state capitalists. And a lot of countries are described as state capitalists. And so India sometimes
described that way. Brazil because there are stateowned enterprises. Even Norway because Norway has this gigantic
sovereign wealth fund that it uses to kind of shape the way that Norway interacts with global markets and it has
Stat Oil. But those three countries are all democracies, right? And so we think of state capitalism as not entirely
political in terms of how power is shared. What was different for China we
noticed over the last 10 years or so and I think it predates Cinping in many ways
but has certainly accelerated um in the administrations of Cinping is that there's a mode of party state
intervention that is beyond just state ownership or state intervention for the sake of competing in globalized sectors.
And it's really about broad concepts of regime security. So in China when they talk about national security,
comprehensive national security, it's really about regime security as well as China's security visa v external actors.
And so in that sense, the logic of state intervention wasn't just about globalized competition, but also about
making sure that companies within China are doing things that align with the goals and the security goals of the the
the party state itself. And so that party um at the beginning of state capitalism is to signify it's something
different from what other countries are doing and a unique form of political economy that's based on this unique
Chinese political logic. Excellent. And just to sort of delve more deeply into what that means in
practice, one of the implications of the way that you've thought and written about this in the uh in this compendium
that we just put out as well as in your other work is I think to re-imagine the
the periodization of China's political and economic history where I think the
conventional understanding has been China from 1949
uh until say 1979 was this statist central planning oriented uh both
socialist in name and in practice type of system and then moved into this reform and opening era in which markets
are sort of the the uh the hero or the protagonist of that plot and then as you
mentioned something starting to change uh over the last decade plus in which I
think the you know the term that you hear a lot is this idea of the state striking back. Uh, and I think the story
you're telling gives us a different sense of what that periodization ought to be and there's a little bit more
continuity in it if I'm not mistaken. Um, yes. So, I wonder if you can help us
understand that a little bit more. Sure. That's great. Um, so yeah, a lot of what I've been trying to do with um,
some of my work, including with this essay in your volume, is thinking about crossing what many of us call the 1978
divide. Right. So, you know, there was, of course, I mean, it's it's hard. I don't want to under, you know, emphasize
the degree of change in the reform period, um, or the reform era, I should say. Um it it is profoundly different
from the period of Mauist state socialism as you describe where you know private out private enterprises were
essentially outlawed. They did exist actually um but they were outlawed um and most of consumption and production
was organized as you indicated by central planning. What's interesting about crossing that divide and taking a
longer view of the party's relationship with entrepreneurs and with markets more generally is you can ask yourself you
what have they ever wanted from private capitalists? What has been this relationship over time? And most
importantly, it's not as if China in 1978 was suddenly filled with new people with no sense of their history or past
experiences. Right? It's the same group of people who experience the great leap forward, the cultural revolution that
then chose to dive headlong into entrepreneurship and business in what most scholars of any disciplinary
training would say is a pretty bad formal environment for doing business. You know, weak property rights, weak
contract enforcement. It was that the orientation of the party itself changed to be primarily about economic growth um
and thought that they needed capitalists and markets in order to do that. And so part of what I do in this essay and in
other work is go back to an earlier period, the 1950s, when the CCP first came to power. And they came to power on
the heels of this rural revolution that was equal parts nationalist and kind of
communist revolutionary. And sure, they seem to have a a remit to destroy the
landlord class and nationalize all businesses, but the latter they do not do immediately. partly because they
realize that recovering economically from the damage of the civil war and
world war II is paramount uh importance actually to rebuilding the regime and so
during that period in the 50s they accommodate a wide variety of capitalists you know especially well
obviously only those who didn't flee to Hong Kong sh you know and and further a field but there's this group of of what
they called red capitalists in Shanghai and you know these people existed in Tianen and Chongqing you all these
industrial bases of China, they were the only ones who knew how to do accounting for corporate firms, who knew how to
organize supply chains, who knew how to, you know, think about the choices that business would make no matter who owns
them. And so that period um was really one of accommodation, right? Where as long as factory owners were not, you
know, part of the KMT, they were not openly opposing the CCP. And they and for many many of them, they kind of fell
all over themselves to say, "Oh, I'm I'm with you. I'm trying to do what you want to do." And you know, it becomes harder
and harder for these people over the course of the 1950s such that they eventually um you know, end up selling
their assets to the state or being nationalized in a kind of um you know, I'm going to say um a a way in which
they accept weaker terms of those deals because it becomes politically
impossible. But then these are the same group of people that then several years later are stoned in the streets during the culture revolution. And so that's
the stage of reprisal. And so this longer view allows us to understand the practicality with which the CCP has
always viewed private capitalists. They need them and yet my argument would be that they don't trust them and that that
distrust goes both ways in and it means a lot actually for how politics unfold.
Right. And that fundamental tension in the relationship or even contradiction is not something that has fundamentally
changed. I I suppose no. Um, and I guess the, you know, one of the ways that you've gotten into this that I'd like to
explore a little bit more. You write that market discipline also requires a tolerance for some instability. You
know, for example, bankruptcies, price movements, and that eliminates some political discretion.
What is it about eliminating political discretion, accepting instability that
is anathema to leadership of the Chinese Communist Party? And what are the ways that they have dealt with that? How how
free have markets been in China? Uh you know feel feel free to to uh give some
examples concretely or or help us understand abstractly. Yeah. So I I just described um this
relationship between private capitalists right so individuals that are you know building businesses investing in
businesses conducting their business and you know they've always had my argument would be this view that their prosperity
and their ability to make choices about capital allocation and what they do as
precarious. So, you know, they're not um they're not totally able to exist in
this system with the kinds of political rights and guarantees of, you know, livelihood and property that, you know,
entrepreneurs in other parts of the world that do have those guarantees would have, right? And so, you know, I I
think it's a double-edged sword. So, in many ways, it's made many of those people incredibly scrappy is the word I
would like to use, right? They're very good at um you know, there's a Chinese idiom that's like you smell the wind and
act accordingly, right? but anticipating the next campaign and you know keeping their ear to the ground to hear you know
what's the next policy direction both in terms of you know what might become impossible right so we think just a few
years ago there was this rather sudden set of decisions which shut down the entire tutoring sector you may remember
in China so the tutoring for profofit sector was basically eliminated over a two-e period and then you know I
remember at that time a bunch of people I know in China saying now we're going back to all of Cining's speeches is to
reread, you know, every single industry he points out as possibly having negative social consequences. And so
they're very good at trying to think about that and anticipating that. It also makes them pretty good at
anticipating other trends in the global economy. So, you know, what is the next, you know, supply shock to come? How do I
think about, you know, acting really quickly to scale up or pivot how I do things to adapt to global needs just
because they have what I've argued are short time horizons. So, how, you know, how much money, how successful can I be
in like a 3 to five to sevenyear time period. They're not thinking in terms of the next generation all that much in
terms of what they're actually doing in business. So, that's kind of how the the entrepreneurs I think relate to this
system of political uncertainty. The markets question is a similar question, right? So, what does the CCP want with
markets, right? And in some ways it seems like a stupid question because you know many of us and many people
listening to this are coming from you know an English-speaking western perspective where we think markets are great. You know they help us meet supply
and demand at a proper price point and allocate resources appropriately. Um and so, you know, we think that markets are
inherently good, but they're also really unstable, as anyone who's lived in the last, you know, 15 years of um global
capitalism can tell you, right? They're unstable because of political choices, but also because, you know, markets can
be punishing, right? They generate bubbles. Um they generate winners and losers, all of those kinds of things.
And so, um what does the CCP want with markets? And here I'm going to be a
little bit academic in a in a way that I hope isn't too punishing for readers, right? But there are lots of different kinds of markets, right? We frequently
talk about capital markets, you know, how um how capital is allocated either through stock markets or through bank
lending. We think about land markets, you know, who's buying and selling land, labor markets, right? How do people move
about and find employment and get remunerated for that? Um but also product markets, right? So um and
product markets are the are the first kind of market that really got in right
in the 80s and this is Barry Nton's work and other people's work that product markets in China have in the reform era
always been ruthlessly competitive and the idea very early on was look companies need these intermediary parts.
I don't care who's supplying them. I don't care who owns what company that's so I don't care if you're a town and village enterprise if you're a
collective if you're stateowned. If you're privately owned, if you're one of those things, but you call yourself
another thing, as long as you're selling me a high quality, good price widget, I
really don't care. And so product markets have always been really open and really competitive in China. But those
other markets I described, capital, land, labor, have always been really regulated. And if you just take capital
markets in particular, right? So, we have a state-owned banking sector that's dominated by state-owned banks that
have, you know, um a lot of political interference in what they do. Um they're
not freely able to price risk by pricing different interest rates and lending to
different people. And a lot of that is because the CCP wants capital to flow to the enterprises it wants it to flow to.
Whether that's stateowned enterprises so that they have a lower cost of capital to pursue some strategic goals or
whether it's saying hey I want all the loans to flow to small and medium enterprises because that's what we need
right now politically to I want to focus on semiconductors and electric vehicles because that's part of my security
orientation right now or my new competitive orientation and so the but the key thing about markets so what do
markets do they allocate resources right and that's why we think they're so great they're so efficient at allocating
resources um and I should apologize I am sitting here at Harvard Business School. I don't think markets are for absolutely
everything. I'm, you know, I'm not, you know, uh, uncritically devoted to capitalism as the best possible system.
It's not Milton Friedman. I get it. I'm not Milton Freriedman. But mostly, you know, markets are efficient way of
allocating resources imperfectly and not in all places at all times. So, you know, why would you want markets? Why
would you want say a stock market in China? You know, what do you want from a stock market? Um, and a lot of it is I
think the CCP, and this is what I argue in this volume, they want markets to tell them how to allocate resources,
right, to do certain things, right? It's good to have markets tell you, you know, what are the good companies, right? What
who should get capital, right? Who should get um state resources, whether it's land or capital or other things.
But then markets also discipline companies that do poorly at things, right? So if your company you know is
overvalued or you know an asset is overvalued markets typically cause some
instability but force you to exit and that is the function that is not so
beloved by authoritarian regimes in particular the PRC under the CCP right
because that means that you know no matter how well connected a company is right it might end up having to go
bankrupt and we've seen over and over again intervention to prevent that whether because those company principles
are connected to the state or because they're in industries where they don't want to see this kind of widespread instability. And so they seem to want
the beneficial aspect of markets which is to allocate things efficiently and
give them knowledge about how people are going to behave. But this more disciplinary aspect of markets seems to
be not not so well tolerated. Yeah. And this segus into another really
nice turn of phrase that you've used, this idea of rule by market. And you're describing a very instrumental way of
thinking about how to use markets in in a in a governance capacity.
And I guess this couple questions on this and feel free to to take them as you will. Um I guess the first thing to
say is you know h how do we differentiate this idea of a rule by market versus just you know markets disciplining uh economic actors and then
and then I'm really curious having spent a lot of time thinking about uh law in
China you often hear what I take to be sort of the inspiration or the parallel
here this idea of rule by law um right and I guess I'm I'm curious you're talking a lot about you know the
environment in which these uh entrepreneurs and private firms are operating trading uh and it it's
certainly not a rule of law system and you mentioned things like there were no
property rights for a very long period of time. There's nobody owning land. Uh you have a court system that is
vertically integrated into the into the party state. There are all sorts of things that and not impartial
a non-impartial judiciary. Uh all these things that we think of as kind of all these good things that go together to
create uh functioning markets. What what does it mean to have a rule by market
system in that context? Sure. Yeah. So, you're exactly right. I was inspired by legal scholarship on on
China, which the the phrase there is rule by law. And so, it's interesting because China has the edifice of a lot
of the things you're describing. There are lawyers, there are company charters, there are contracts, there are courts,
right? There are court decisions. Some of them are transparent. You know, there's all of this stuff going on. And then when you think about the corporate
governance system, it's the same. There are stock markets, there are there is bank lending, there are debt markets and
bond markets, there's, you know, boards and boards of directors, there's, you know, quarterly and annual reporting,
right? That all of these things exist. But the idea that, you know, and rule by
law is, yeah, there's a huge system of laws in the people's republic. It's actually and, you know, that system is
becoming more and more intricate, right? We have all of these new laws we've seen in the last 15 years that are very
interesting. cyber security, data security, counter espionage, counterterrorism, national intelligence
law, those require a bunch of things um for companies and other individuals like to assist the state with matters of
national intelligence or national security. But it's not as if right um the laws can be used by non-state
parties to discipline the state. So there are some exceptions to that and there's a lot of work on say the
administrative litigation law, things like that, right? But for the most part, the state rules by law, but it's not
itself subject to the rule of law. Right? So the key test is, you know, would the state itself also be
disciplined by law? And no, right? The law is used as a as a tool to wield, you
know, state power coercively and, you know, sometimes constructively in the building of the society that the state
wants to build, but it doesn't constrain the state, right? And the same is true of markets, right?
So they use markets to help them learn, right? Help them learn how people are going to behave, help them figure out
what kinds of business models or what kinds of even industries and sectors are going to prosper or fail. Um but they
don't really let themselves be disciplined by the market, right? So the best example um I can give of that is
the 2015 stock market crisis. So in 2015, I mean 2013, 2014, without getting
into too many of the details, you know, China has a really high savings rate. Domestic savings is like 40% more of
GDP, right? Households saving a ton. Americans could only wish, right? We're at like 2% or negative. Okay, so they
save so much of their wealth and where do you put it? So for a long period of time, they put it into real estate. That
was the subject of my first stream of work, right? And so Cinping, you know, years ago realizes as many Chinese
policy makers have. You've got to get these savings out of real estate and into something more productive,
something more sustainable. We've got a bubble. It's been brewing forever. Okay. So they push they say basically ah
everyone should expand equity markets. You know, households should invest in equity markets. At the time only 11% of
Chinese households were invested in equity markets. Very low, right? Very small equity market relative to the size of the economy. So everyone should
invest in equity markets. Oh, then you know the pe the the um the People's Daily, you know, starts running all
these editorials. Oh, invest in equity markets. Well, Chinese people are smart. So, they see that and they're like, "Oh, the government wants us to invest in
equity markets. That means they're probably not going to let them fail, right?" So, they start pushing money into the equity markets. You get a
bubble, a stock market bubble, right? So, the price toearnings ratios were out of control. The thing, you know, runs up
really fast. People start saying there's a bubble. The People's Daily says, "Oh, there's no bubble. bubbles are for
tulips and bitcoins, you know, not for China. And then everyone says, "Okay, I hear you. They're not going to let the
prices fall." So then the prices do fall eventually, right, after they're driven up even further. And at first, the state
says, "This is a a natural market correction." And everyone says, "Okay, that means they're not going to rescue
everyone, so I'm going to pull my money out even further." And then 2 days later they say um this is too fast of a market
correction and we're going to arrest journalists who have reported on you know asset bubbles. We're going to
suspend IPOs and we're going to do a massive kind of state intervention which was what what was called the national
team of shareholders were going to invest in a bunch of assets that they didn't want to see fall too quickly.
Right? So there's this whole, you know, interesting episode where these state investors are trying to buy falling
asset prices and then the asset managers are saying great because that's exactly what I want to sell. And so, you know,
you find this huge influx of state capital into the equity markets and then everyone's sort of saying, well, I was
going to be interested in investing in equity markets, but now I can't really trust that the markets are determining the value of the companies because the
state's always going to intervene. So the whole arbitrage game come becomes one of anticipating what the state is
willing and unwilling to tolerate and that's not really how efficient financial markets work. Um so the
question is you know in the same way that rule by law is you have laws to do the thing as a tool to do the things you
want to do but you will not be disciplined by them. Markets I think have worked in the same way. we have
markets to do the things we want to do, but then when they look like they're going to discipline the actions we want
to take, we will not tolerate that. And so there are limits I think in both of those domains. And I think that's a really useful uh
concept and it's it's a nice close cognate to this rule by law that I think people ought to ought to bear in mind
when they think about the kind of perennial and I think maybe not so helpful question of is China a
capitalist economy? uh you you end up ending having better questions and I
think this is a really useful way to get into it and I guess just to get into some of the the details about how this
functions in practice. One of the things that you have described in some of your
work with Margaret Pearson and Kelly Sai has to do with some of these most prominent private firms in China
particularly in the tech sector getting very entangled with certain party state goals uh in particular in the realm of
domestic security and here I'm thinking about firms like Hickvision or Dahua or
Huawei which is well known here in DC but maybe even extending so so I'm curious how how should we think about
those firms and the ways in which even as private entities, they're serving
certain uh state functions. And then maybe just to tack on another one to
maybe complicate things a little bit, how do we think about a firm like Deep Seek uh which was all the rage earlier
this year and I'm I'm sure will come back onto the radar fairly soon given the cycles in these uh AI technologies.
It seems to have not been in the scope of you know party sort of tasking it to
do certain things. It wasn't an obvious national champion. It came out of nowhere. What do we expect with a firm
like that now that they you know uh uh Leewan Allan gets invited to sit with
Xiinping and all these other entrepreneurs? What what happens? Well, I I'm glad you asked this question and
about, you know, the work with Margaret and Kelly, which, you know, is partly part of state capitalism and partly what
what we're trying to say is that there was there was so long this distinction between private companies and stateowned
companies, right? So, even if you look back at, you know, the speeches of Bill Clinton even like, yeah, you know, we're
welcoming them into the WTO and they have these stateowned firms, but it's really the private firms that are
competitive and those are the good guys. These are the people who want, you know, democracy and rule of law and, you know,
property protections through change in the political system, etc. Where it's the stateowned people, you know, these are old dinosaurs. They'll they'll fade
away. Um, and I, you know, what's interesting is there's no longer this distinction, right? There's no longer
that distinction between state and private partly because, you know, partially through the episode I just
described, you have state investment all through the economy, right? And that's also the the mo of made in China 2025
which is Cin Ping's big industrial policy um technical upgrading campaign
and campaign is the right word um you know to push all this private because they realize you know it's not going to be these stateowned behemoths that you
study you know no offense that are going to be the ones that are innovating on like the frontier of quantum computing
and you know electric vehicle battery storage chemistry processes right these are like men and women in dorm rooms you
know starting new startups and so the state wanted to find a way to get capital to them. So if there's state
capital in all these frontier sectors then you kind of ask yourself where does the state end and private firms begin
and the answer coming from where you sit in Washington DC has been like there's no limit now now we're worried that all
Chinese companies partly because of that capital presence and partly because the legal regime in China is not a rule of
law country but they have all these weird alarming laws which is kind of an interesting puzzle right why do they
even have all these laws given that it's not as if the ministry of state security needs a warrant under the national
intelligence law to interfere with a firm it's just going to do that but those laws have been alarming to people
outside of China um so you know then you think about okay what are the roles of these firms it's not only that you know
there's you described the special shares so the CCP basically saying with media companies look we're going to need to
sit on the board and make sure that we're there we're going to need to make sure that we have some sort of content
um uh you know authority over what you're able to do and then that's alarming to people outside of China who
say, "Hey, Bite Dance is like a private company, but it's got a special share for the CCP. Does that mean it's going
to push propaganda?" Right? And some of those concerns we've seen play out in real time. The other thing that my work
is about though, and this is what I'd really like to emphasize, is how dealigned capitalists can be with
the interests of the CCP. And actually that is a huge reason why you see the
greater encroachment of the CCP and private enterprises. Not because private
enterprises are easy willing foot soldiers in, you know, the the the state's pursuit of security domestically
and globally, but sometimes because they're not, right? They're not. And they generate instability. They do all
kinds of things that can be bad for China, bad for China's global image, you know, bad for domestic financial
stability. And so you know the PRC or the rather the CCP wants to sit in the boardroom not just because every company
is doing the bidding of the regime but because they might not be and what they really want is oversight there. So I
want people to understand that there's a huge tension, right? That and you mentioned, you know, Huawei, you mentioned Deep Seek. You know, there's
times I think Huawei would like nothing more than to have no association with the CCP, right? It's, you know,
basically out there saying, "Hey, we're just a telecom infrastructure company. We just want to deploy these things and
get contracts. We have nothing to do with the CCP." I think Deep Seek, you know, might want to say the same thing.
We're just an AI company. we want to go head-to-head with, you know, chat GPT and claude and open AAI and, you know,
all of these different companies. But then you have all these concerns. Well, Deepseek is a Chinese company and the
guy is appearing with Cining. I don't know if I want to give it my data and have it on my desktop computer, right,
in my system. And so, you know, this tension where Chinese companies want to benefit from some of the resources
they're given in China, uh, versus, you know, want to be seen globally as not an instrument of state power. And I think,
you know, interestingly, it's increasingly true, I think, of American companies, too, right? Like, hey, we're just a company, but are you or are you
an instrument of state power? Are you an instrument of Chinese power if even if you're an American company? So, all that
consternation is all mixed up. But I don't want people to get the view that just because we think it's that there's
blurred boundaries between the state and the private sector that every Chinese company is doing the bidding of the state. It's not right. And you know, you
mentioned deepseek and there's just this thing where once you get above a certain size or above a certain level of um
strategic importance, it's going to be very difficult to escape the radar of authorities who are going to want you to
do things in certain ways in China. And so I think that's what we're seeing now. And you know, Deepseek has such an
interesting kind of decentralized model. And will that be able right to to
persevere given the strategic importance I think is a super interesting question. But I'm no AI scholar, so I'm not going
to bore your listeners who are by saying things I don't know. Well, there there are certainly a lot of
self-identified AI scholars running around, but we're we're lucky at Carnegie actually have a lot of people working on this very substantively. So,
I will I will bring it bring it back for their consideration. So think thank you
for offering that helpful corrective on I think a kind of lazy way of thinking about private firms in the PRC and just
saying oh they're you know this is just CCP incorporated and they're carrying out their bidding as in a lot of areas
there's sort of a dialectical tension there. They wouldn't be working so hard in the central party state to assert
their control if they had total control and everybody was listening and they're using these unwieldy instruments as
you're talking about, you know, rule by market, rule by law that doesn't necessarily get things
going the way they the way they want. Uh, and so there's always there's this constant uh dialectic or kind of uh back
and forth between trying to exercise. You sound so Marxist actually with your dialect. We we'll do some historical
materialism. lessons after this. But I I wanted to to get into the question of so
what what does this actually do to the private sector in China? We hear the this the 6070 8090 phrase and these
numbers may be a little out of date but that refers to the idea that private firms contribute 60% of China's GDP,
70% of its innovation, 80% of urban employment and 90% of new employment. Um, so obviously these are like the the
powerhouse of the economy and this this is an important correction to the idea that it's an entirely state-owned system
of course and most of the firms that people are familiar with are in fact these private firms. Um, just how
corrosive are these efforts of the party to rule by market and to insert itself
into private firms for their productivity, for their innovation? Um, and I guess maybe sort of an adjunct
question on this that may help illustrate this story. What happened to Jack Ma? Uh, where where did he go and
why did he come back not so long ago, right? Um, yeah. So, I I find it so
interesting, you know, Jack Ma that was all 2020 when that happened. And um, and
I had been kind of studying these crackdowns that followed that stock market crisis I told you about um, since
2016. and he he was like, you know, the 15th person on my list to have been detained or to disappear for a little
while. And so people think that there was a crackdown that started in 2020. Um it it didn't start in 2020. In fact, I
would say it didn't even start um in, you know, 20 anything, right? That this
is once again the cycle of accommodation and reprisal. So you know, we need your
skills to build financial and digital architecture. you know, then you got this IPO perspectus that, you know, I
mean, there are a lot of things, you know, people want to say, oh, it was his speech. It was his brazen, you know, this and that. I think it's also that it
was basically a a a bank that was looking like a tech firm and being regulated like a tech firm, but actually
had so many assets under management that it was it looked like a bank and needed to be regulated like a bank. And so
there's an antitrust veilance, I think, to that also. But, you know, I understand that as as part of that that
same cycle. And so what does it mean, you know, for the private sector in China and and its importance, its
longevity, its sense of security? I don't think you'll be surprised that I think it doesn't mean anything
particularly good, right? Um and so you asked about innovation and I think that's been a um I think it's been an
interesting focus and maybe the wrong focus, right? Which is like, oh, you can't have innovation in economy where
people aren't free. And you know the mechanisms there you know to be clear I do like a free society but you know the
mechanisms there are oh people are afraid to speak their mind they won't explore things you know they won't innovate you can't get next stage
innovation um from a closed kind of political system so that turns out to
not quite be right right in many many different ways we're getting a lot of innovation out of China and guess what
it's nothing new right this kind of innovation we're getting is very different the innovation we've had in
China over the last you know 40 years has been a lot process innovation as um Ed Steinfeld and Yonas Nam have called
it, right? Companies that you know can manufacture things and do things and and produce a product in a way that
basically no company anywhere could have thought of. And you could actually think of deepseek as a bit like that, right? It was the process through which they
arrived at their model that shocked everyone. Not just that the Chinese engineers had created a large learning
models, they did it in a different way. So you know what is but what does it mean for the behavior of capitalists?
And this is where I'm most interested. I mean, my view is really if you talk to people who are, you know, they want to
start a business, they are engineers, they're scientists, they have ideas about how to produce something, they're
pretty dedicated people and they want to do it. And just because you can't get so rich that you become the richest person
in all of Asia for all history without any challenge to your wealth doesn't mean you're not going to invest and do
the things you want to do. Right? Most people, they want to be efficacious. They want to build something. they want
to do something. I'm more interested in like a lot of the smallcale folks,
right? So there's a a lesserk known campaign lesser known than Mr. Jack Ma, right? Which was called um sweep away
the black, right? So um this kind of trua is what it was called, right? And so it was a kind of an anti-organized
crime campaign, but they were going after a lot of smallcale business people for taking illegal loans as long as 20
years ago. Well, guess what? The only loan you could get 20 years ago was an illegal curb loan, right? And so these were the
things that entrepreneurs were doing to try to get around China's bad formal institutions we've been talking about.
But they, you know, they had to do those things and yet they were technically breaking the law, but it wasn't organized crime. And now people are
saying, look, if they're taking people down for stuff they did 15, 20 years ago, like why would I, you know, set up
a small business now? Why would I do these kinds of things? And so I think we're finding that fall in private
investment which follows that cycle of reprisal that we were talking about um that makes it really difficult. But the
most interesting thing I think here is that the insecurity of capitalists
leads them to behave actually kind of badly right. So a lot of it is this
arbitrage I was describing. Everyone's sort of focused not on market fundamentals. You know what's the price
to earning ratio for this company? Does it have a good business model? Is it in a sector that the government's going to
protect? Is it a guy that the government knows? You know, is it going is it does it employ enough people that they're not
going to let it fail? And so, it's kind of a game of political arbitrage more than it is of market fundamentals. But
then you have incentives for capitalists to behave in a very short-term fashion,
which means that they ride these waves in ways that are kind of bad for China,
right? And bad in some ways for other people, right? So you know the best example I can give is the belt and road
right so you see a lot of companies during the height of the belt and road campaign calling themselves all kinds of
I'm closing ping I'm doing this that what they were actually doing is expat trading their assets by investing in
Europe or North America right and getting out of China while the getting was good while the state administration
of foreign exchange was willing to turn their remn into something else right and so all of that generates this financial
instability which I would argue really constrains the state and the PRC in in significant ways. And so um it's not
just a one direction of power that the state controls capitalists. As a result
of that, capitalists want to do things to get beyond the state's control. And as you say, that's sort of compromising
for the overall goals of China. Yeah. And that's a that's actually a a narrow point I'd like to to dive in on a
little bit. this idea of Chinese entrepreneurs and other wealthy people
figuring out ways to get capital out of the country. How should how should we
understand that? There's certainly a lot of people again around DC who view that as ipso facto. This is a this is a
rotten system and everybody wants to send their kids to Harvard or they used to uh and everybody everybody wants to
buy real estate in uh in uh La Hoya and they'll do anything that they can to get
their assets out of China where they can be predated by this party state. How how would you describe the the motivations
for people to get capital out of China? It sounds like there are periods in which it's possible and periods in which it's not. What's a what's a what's a
better understanding of that phenomenon? Yeah. I thought you were going to ask me how do people get their money out of China. I was going to say that's a
totally different podcast if you want. Yeah. Macau casinos and transfer
pricing. That's a different Yeah. Yeah. Why? You know, I have to say it's
not that original or profound, but I actually think the broad brush kind of DC view of that is right. Right. which
is like I don't know when the CCP may come for me if I'm going to be a a
target of the next campaign and so as a result right I feel like my property is
much more secure and sometimes my person and my children are much more secure out
of the country right so I mean the prestige of you know getting a degree from a a foreign institution aside
that's a little bit different but like why would you want real estate in in Vancouver right or real estate in, as
you said, La Hoya or Cambridge, Massachusetts, right? It's a way to park your assets beyond the reach of the CCP.
And I I actually do think that logic is very basic, but very real. But it has
But, you know, it has something it has an implication for something else that's held very dear in DC, which is anytime
we find a secret Chinese transaction, it's a strategic plot on the part of the
CCP to infiltrate XYZ. To be clear, sometimes it is right. But just as often
you have people who are working, they're hiding their connections and they're hiding what they're doing not to escape
US regulatory scrutiny but to escape Chinese scrutiny, right? And so, you
know, there's like, you know, this this concept and logic of kind of type one, type two errors, right? So, to you know,
you you either under capture the error, you know, oh, I think all of these are commercial transactions. Well, I know that's not right. Or you over capture.
And if you over capture and you assume that everything an individual or company does that comes from China is some data
point in the CCP's 100red-year marathon to, you know, pursue its strategic goals, you're going to get a lot of
noise that you're reading as signal. And so understanding that there's both that kind of strategic tactical thing that
China does, but also this totally ham-handed we can't control our own actors thing, I think makes us a lot
smarter. Yeah. I' I'd like to think we're totally capable of doing a lot of type one and a lot of type two errors. Of course,
we're equal opportunity mistake makers. That's right. Um well in the spirit of
trying to make fewer mistakes of either variety maybe just for a kind of final
uh summary question I want to invite you to be a little bit more comparative
which I know uh you've done a lot in Asia and maybe take take you to a comparison between the US and China
which is obviously the uh the main plot line and a lot of the discussion about great power competition. But what should
we understand about this rule by market system, this party state capitalist
system? What what sorts of competitive advantages and disadvantages do those conferred to China? If we're thinking
about an international system in which economic matters and in particular
technology are extremely rivalous with the United States, how how does China match up with the US in that regard? And
then just to to give you a potential direction, you mentioned this made in China 2025 industrial policy, which I
think for most observers has been a wildly successful program. They didn't hit on every single item that they
targeted, but there's some extraordinary gains in that regard. And this was a this was an industrial policy that
leveraged a lot of these aspects of the Chinese party state capitalist system that you've mentioned.
Is that something that we should be looking at in the United States and saying we should figure out a way to
emulate that with our system or is that uh sort of a category error that that's
not something that's even conceivable in this setting? And I I don't want to put my finger too too much on the scale, but
I'm curious how you would uh describe that. Well, I could talk about that for like three hours, but I won't do that. Um, so
look, I mean, how how does Made in China 2025 work? you know, all of our discussion of subsidies and spending and
all these kinds of things. I mean, I would point to, you know, mechanistically, there are some things
that they did and they do, right, that can be very effective. I'm going to use the word effective at getting, you know,
competition off the ground in sectors where, you know, it's kind of a frontier sector, right? There's no market and so
you have to do some market making and some demand generation as well as some supply side stuff. And so you know the
best examples and I I again would point you to Jonas Nam's work on this right the best examples would be you know the
way in which they kind of give the subsidies but make the subsidies conditional on you know for the EV
example you know longer and longer charge you know uh or mileage per charge
right so basically you know he there's this thing where you know the Chinese you talk to them about that you know
it's not subsidies it's also innovation and and um professor Nam has said yeah but the innovation was also subsidized
Right. But so how do you get smart about making some of those policies? So you know, sure we could do tax credits that
are conditional on, you know, ever ratcheting up technological standards and efficiency. That's fine.
Yes, you were. You're right. Made in China was effective. Right. So when we think about how effective it was, like
did it generate a lot of, you know, market competition, especially in EVs? And here's like that's also very
interesting and I think like part of what we've been talking about which is you have this system of extraordinary state in inter intervention but also
super competitive right so you know here at Harvard Business School we think oh the state supports you you become
uncompetitive no those sectors are ruthless so ruthless that you know the the term is involution now nijuan that
they're so competitive they're kind of eating each other's flesh and now that needs to get sorted out right that's the
language they use in in China to talk about this. So super competitive, it's effective. Is it efficient? No, it's
incredibly wasteful, right? So super wasteful, right? So you have reports about electric vehicle graveyards for
fleets that were, you know, bought by local governments and retired within weeks because the, you know, the the
mileage for another product got much longer and put that one out of date. You know, you've got stories of
semiconductor um fabs that were I'm I'm doing air quotes semiconductor fabs that were
established by specialists on Chinese medicine who bought ASML machines then mortgaged them before they even arrived
on Chinese soil and absconded to Japan with a bunch of cash, right? I mean, so whenever you push this much capital out
into the system, um grifters will follow. Like I I personally love a good grift story and boy, there's a lot of
grifting in China over these kinds of things. So, it's really really good. And and look, we can't do that in the United
States. Every time there's one, you know, company that goes bankrupt, there's some expose about how tax dollars went to the blah blah blah. And
that's partly our politics. It's partly our open media. And it's partly that our population is a little bit intolerant of
waste and fraud. Whereas, I think a lot of Chinese people are pretty much used to it. So, can we do everything that they did on that model, on that scale?
No. Should we? No. What are we better at historically than they have been?
allocating capital. Okay? Because our financial system has worked pretty well. And yeah, I'm going
to get skewered. Harvard Business School professor says financial system works really well. Like there's all I don't mean executive compensation. I don't
mean, you know, inequality. What I mean is it's usually efficient companies who end up getting capital in the United
States and inefficient companies are forced to exit. So I think that's a feature of a democracy because financial
systems modern financial systems require not just like good enough institutions
but really good institutions. You have to have you have to have actually the impartial judiciary. You have to have
actual transparency. You have to have accountability. You have to have rule of law. can't have half the companies for
whom corporate governance is basically a fiction um because you know we all know the bottom line is political and half
the companies and say oh you're governed by law right that's not going to work and so what I think China's challenge
will be is trying to develop into a consumption driven economy
innovationdriven economy without that financial institution because I see I see the financial sector as basically
impossible with the institutions that China has and for the United States what we have to worry about right now is
whether our financial sector can survive um some of the things that look a little
bit more like not impartial rule of law and a lot of state intervention and winners and losers within our legal
system and whether our financial system will will continue to be the envy of the world given that political conditions
are changing but I don't want to get too political so right well we we would never contemplate killing the golden goose and uh
stripping oursel of the advantage of these deep capital markets and attractive debt. Can't can't imagine it,
but I haven't been reading the news. Uh yeah, so we could go on for hours and
hours, Meg, but conscious of the extraordinary demands on your time and expertise, we're going to wrap it up
here, but I want to encourage everybody not just to read this recent Carnegie volume in which uh Meg's written a
brilliant essay, but also all of her other wonderful work. And it's been really enjoyable and informative to hear
some of these really nuanced and textured and empirical uh insights into
how uh capitalism actually functions in China today and we'll look forward to
continuing this conversation sometime soon. Thanks so much Meg. Thanks Isaac. Great great to be on and thanks for the volume. It's it's great.
All the essays are great. So thanks for having me. Thanks Meg.
You've been listening to the world unpacked, an audio production of the Carnegie Endowment for International
Peace. Views expressed are those of the host and guest panelists and not necessarily those of the Carnegie
Endowment for International Peace. Subscribe to Carnegie Podcasts on popular podcast platforms such as
iTunes, Stitcher, or wherever you listen to podcasts. You can find our episodes on Carnegiey's YouTube channel as well.
Learn more at the carnegie endowment.org. Hiwan Park is our executive producer and audio engineer. I'm Isaac Cardon, senior fellow in the Asia program and the host of this episode of The World Unpacked. Thanks for listening.
Yvonne Chiu, Isaac B. Kardon, Jason M. Kelly, “The Life of the Party: Past and Present Constraints on the Future of the Chinese Communist Party,” Carnegie Endowment for International Peace, June 9, 2025.
Isaac B. Kardon Senior Fellow, Asia Program
Meg Rithmire Meg Rithmire is F. Warren MacFarlan associate professor in the Business, Government, and International Economy Unit at the Harvard Business School and author of Precarious Ties: Business and the State in Authoritarian Asia (Oxford University Press, 2023).
Hello, I'm Isaac Carden and this is the world unpacked.
It is a real pleasure to have on the podcast today uh Dr. Meg Rhythm who is
the James E. Robison professor at the Harvard Business School and a renowned
scholar of China and political economy and comparative politics in Asia that
we're really just fortunate to have on the podcast today. And the approximate
reason for having her today is a new volume that we've just released from Carnegie to which she's contributed an
excellent chapter. The volume is called the life of the party, past and present constraints on the future of the Chinese
Communist Party. Uh, and Meg's chapter is all about the Chinese Communist Party
and its relationship to capitalism. Uh, and she's been working in this space for
a very long time. And we're going to draw on that essay as well as a couple of her other essays. and we can link the
book uh or rather the the volume which includes Meg's essay as well as a bunch of other work in the show notes.
But now that we have you here, Meg, thank you so much for joining us.
Thanks for having me and congratulations on a really great volume actually. Thanks. Well, thank you. We're glad to get it
out there and we hope that it's going to help inform uh a discussion on the CCP in Washington which is not always
terrifically illuminating. And I think that your essay in particular is something that really needs to be
considered by folks trying to understand some of the economic policy levers and
in particular the nature of the firms in China, private as well as stateowned and
their relationship to the party state. Um so we'll just jump right in and I I
will uh note that you've argued that we should understand China's political economy as quote unquote party state
capitalism. uh or I should say party state capitalism a contra a contrast emphasis on the party exactly as opposed
to maybe the more familiar idea of state capitalism that has its own uh historical anticcedants. Uh so for those
listeners who are familiar with that term what what is this distinction uh that you're offering and what does it
imply about how political and economic power actually function in China?
Great. Um, well, I should mention that that that that particular term party state capitalism comes from joint work
uh with Margaret Pearson from the University of Maryland and Kelly Thai from Nor Eastern University. And so it's
not exclusively my IP uh just to give credit where credit is due. But what we
noticed several years ago is a a really profound shift in the way in which uh
China's government, so the CCP, the party state itself, intervenes in the Chinese economy. And so for such a long
period of time, we've known that, you know, China has an authoritarian political system and a Leninist party.
But it seems, you know, the remarkable economic growth has been driven by markets, um, driven by private capital,
both capital coming from abroad, you know, foreign direct investment into China and China's entry into globalized
sectors. So for such a long period of time that's existed alongside um you know much of what you you've worked on
which is you China's state-owned enterprises S SOE. So these large mostly centrallyowned behemoth companies that
occupy the commanding heights in what people typically think of as strategic sectors. So you know from your own work
um you know shipping, ship building, port management, uh telecom, finance um
you know all kinds of of those kinds of strategic sectors. And so people were very comfortable in saying, you know,
China's not entirely capitalist, maybe it's state capitalists. And a lot of countries are described as state capitalists. And so India sometimes
described that way. Brazil because there are stateowned enterprises. Even Norway because Norway has this gigantic
sovereign wealth fund that it uses to kind of shape the way that Norway interacts with global markets and it has
Stat Oil. But those three countries are all democracies, right? And so we think of state capitalism as not entirely
political in terms of how power is shared. What was different for China we
noticed over the last 10 years or so and I think it predates Cinping in many ways
but has certainly accelerated um in the administrations of Cinping is that there's a mode of party state
intervention that is beyond just state ownership or state intervention for the sake of competing in globalized sectors.
And it's really about broad concepts of regime security. So in China when they talk about national security,
comprehensive national security, it's really about regime security as well as China's security visa v external actors.
And so in that sense, the logic of state intervention wasn't just about globalized competition, but also about
making sure that companies within China are doing things that align with the goals and the security goals of the the
the party state itself. And so that party um at the beginning of state capitalism is to signify it's something
different from what other countries are doing and a unique form of political economy that's based on this unique
Chinese political logic. Excellent. And just to sort of delve more deeply into what that means in
practice, one of the implications of the way that you've thought and written about this in the uh in this compendium
that we just put out as well as in your other work is I think to re-imagine the
the periodization of China's political and economic history where I think the
conventional understanding has been China from 1949
uh until say 1979 was this statist central planning oriented uh both
socialist in name and in practice type of system and then moved into this reform and opening era in which markets
are sort of the the uh the hero or the protagonist of that plot and then as you
mentioned something starting to change uh over the last decade plus in which I
think the you know the term that you hear a lot is this idea of the state striking back. Uh, and I think the story
you're telling gives us a different sense of what that periodization ought to be and there's a little bit more
continuity in it if I'm not mistaken. Um, yes. So, I wonder if you can help us
understand that a little bit more. Sure. That's great. Um, so yeah, a lot of what I've been trying to do with um,
some of my work, including with this essay in your volume, is thinking about crossing what many of us call the 1978
divide. Right. So, you know, there was, of course, I mean, it's it's hard. I don't want to under, you know, emphasize
the degree of change in the reform period, um, or the reform era, I should say. Um it it is profoundly different
from the period of Mauist state socialism as you describe where you know private out private enterprises were
essentially outlawed. They did exist actually um but they were outlawed um and most of consumption and production
was organized as you indicated by central planning. What's interesting about crossing that divide and taking a
longer view of the party's relationship with entrepreneurs and with markets more generally is you can ask yourself you
what have they ever wanted from private capitalists? What has been this relationship over time? And most
importantly, it's not as if China in 1978 was suddenly filled with new people with no sense of their history or past
experiences. Right? It's the same group of people who experience the great leap forward, the cultural revolution that
then chose to dive headlong into entrepreneurship and business in what most scholars of any disciplinary
training would say is a pretty bad formal environment for doing business. You know, weak property rights, weak
contract enforcement. It was that the orientation of the party itself changed to be primarily about economic growth um
and thought that they needed capitalists and markets in order to do that. And so part of what I do in this essay and in
other work is go back to an earlier period, the 1950s, when the CCP first came to power. And they came to power on
the heels of this rural revolution that was equal parts nationalist and kind of
communist revolutionary. And sure, they seem to have a a remit to destroy the
landlord class and nationalize all businesses, but the latter they do not do immediately. partly because they
realize that recovering economically from the damage of the civil war and
world war II is paramount uh importance actually to rebuilding the regime and so
during that period in the 50s they accommodate a wide variety of capitalists you know especially well
obviously only those who didn't flee to Hong Kong sh you know and and further a field but there's this group of of what
they called red capitalists in Shanghai and you know these people existed in Tianen and Chongqing you all these
industrial bases of China, they were the only ones who knew how to do accounting for corporate firms, who knew how to
organize supply chains, who knew how to, you know, think about the choices that business would make no matter who owns
them. And so that period um was really one of accommodation, right? Where as long as factory owners were not, you
know, part of the KMT, they were not openly opposing the CCP. And they and for many many of them, they kind of fell
all over themselves to say, "Oh, I'm I'm with you. I'm trying to do what you want to do." And you know, it becomes harder
and harder for these people over the course of the 1950s such that they eventually um you know, end up selling
their assets to the state or being nationalized in a kind of um you know, I'm going to say um a a way in which
they accept weaker terms of those deals because it becomes politically
impossible. But then these are the same group of people that then several years later are stoned in the streets during the culture revolution. And so that's
the stage of reprisal. And so this longer view allows us to understand the practicality with which the CCP has
always viewed private capitalists. They need them and yet my argument would be that they don't trust them and that that
distrust goes both ways in and it means a lot actually for how politics unfold.
Right. And that fundamental tension in the relationship or even contradiction is not something that has fundamentally
changed. I I suppose no. Um, and I guess the, you know, one of the ways that you've gotten into this that I'd like to
explore a little bit more. You write that market discipline also requires a tolerance for some instability. You
know, for example, bankruptcies, price movements, and that eliminates some political discretion.
What is it about eliminating political discretion, accepting instability that
is anathema to leadership of the Chinese Communist Party? And what are the ways that they have dealt with that? How how
free have markets been in China? Uh you know feel feel free to to uh give some
examples concretely or or help us understand abstractly. Yeah. So I I just described um this
relationship between private capitalists right so individuals that are you know building businesses investing in
businesses conducting their business and you know they've always had my argument would be this view that their prosperity
and their ability to make choices about capital allocation and what they do as
precarious. So, you know, they're not um they're not totally able to exist in
this system with the kinds of political rights and guarantees of, you know, livelihood and property that, you know,
entrepreneurs in other parts of the world that do have those guarantees would have, right? And so, you know, I I
think it's a double-edged sword. So, in many ways, it's made many of those people incredibly scrappy is the word I
would like to use, right? They're very good at um you know, there's a Chinese idiom that's like you smell the wind and
act accordingly, right? but anticipating the next campaign and you know keeping their ear to the ground to hear you know
what's the next policy direction both in terms of you know what might become impossible right so we think just a few
years ago there was this rather sudden set of decisions which shut down the entire tutoring sector you may remember
in China so the tutoring for profofit sector was basically eliminated over a two-e period and then you know I
remember at that time a bunch of people I know in China saying now we're going back to all of Cining's speeches is to
reread, you know, every single industry he points out as possibly having negative social consequences. And so
they're very good at trying to think about that and anticipating that. It also makes them pretty good at
anticipating other trends in the global economy. So, you know, what is the next, you know, supply shock to come? How do I
think about, you know, acting really quickly to scale up or pivot how I do things to adapt to global needs just
because they have what I've argued are short time horizons. So, how, you know, how much money, how successful can I be
in like a 3 to five to sevenyear time period. They're not thinking in terms of the next generation all that much in
terms of what they're actually doing in business. So, that's kind of how the the entrepreneurs I think relate to this
system of political uncertainty. The markets question is a similar question, right? So, what does the CCP want with
markets, right? And in some ways it seems like a stupid question because you know many of us and many people
listening to this are coming from you know an English-speaking western perspective where we think markets are great. You know they help us meet supply
and demand at a proper price point and allocate resources appropriately. Um and so, you know, we think that markets are
inherently good, but they're also really unstable, as anyone who's lived in the last, you know, 15 years of um global
capitalism can tell you, right? They're unstable because of political choices, but also because, you know, markets can
be punishing, right? They generate bubbles. Um they generate winners and losers, all of those kinds of things.
And so, um what does the CCP want with markets? And here I'm going to be a
little bit academic in a in a way that I hope isn't too punishing for readers, right? But there are lots of different kinds of markets, right? We frequently
talk about capital markets, you know, how um how capital is allocated either through stock markets or through bank
lending. We think about land markets, you know, who's buying and selling land, labor markets, right? How do people move
about and find employment and get remunerated for that? Um but also product markets, right? So um and
product markets are the are the first kind of market that really got in right
in the 80s and this is Barry Nton's work and other people's work that product markets in China have in the reform era
always been ruthlessly competitive and the idea very early on was look companies need these intermediary parts.
I don't care who's supplying them. I don't care who owns what company that's so I don't care if you're a town and village enterprise if you're a
collective if you're stateowned. If you're privately owned, if you're one of those things, but you call yourself
another thing, as long as you're selling me a high quality, good price widget, I
really don't care. And so product markets have always been really open and really competitive in China. But those
other markets I described, capital, land, labor, have always been really regulated. And if you just take capital
markets in particular, right? So, we have a state-owned banking sector that's dominated by state-owned banks that
have, you know, um a lot of political interference in what they do. Um they're
not freely able to price risk by pricing different interest rates and lending to
different people. And a lot of that is because the CCP wants capital to flow to the enterprises it wants it to flow to.
Whether that's stateowned enterprises so that they have a lower cost of capital to pursue some strategic goals or
whether it's saying hey I want all the loans to flow to small and medium enterprises because that's what we need
right now politically to I want to focus on semiconductors and electric vehicles because that's part of my security
orientation right now or my new competitive orientation and so the but the key thing about markets so what do
markets do they allocate resources right and that's why we think they're so great they're so efficient at allocating
resources um and I should apologize I am sitting here at Harvard Business School. I don't think markets are for absolutely
everything. I'm, you know, I'm not, you know, uh, uncritically devoted to capitalism as the best possible system.
It's not Milton Friedman. I get it. I'm not Milton Freriedman. But mostly, you know, markets are efficient way of
allocating resources imperfectly and not in all places at all times. So, you know, why would you want markets? Why
would you want say a stock market in China? You know, what do you want from a stock market? Um, and a lot of it is I
think the CCP, and this is what I argue in this volume, they want markets to tell them how to allocate resources,
right, to do certain things, right? It's good to have markets tell you, you know, what are the good companies, right? What
who should get capital, right? Who should get um state resources, whether it's land or capital or other things.
But then markets also discipline companies that do poorly at things, right? So if your company you know is
overvalued or you know an asset is overvalued markets typically cause some
instability but force you to exit and that is the function that is not so
beloved by authoritarian regimes in particular the PRC under the CCP right
because that means that you know no matter how well connected a company is right it might end up having to go
bankrupt and we've seen over and over again intervention to prevent that whether because those company principles
are connected to the state or because they're in industries where they don't want to see this kind of widespread instability. And so they seem to want
the beneficial aspect of markets which is to allocate things efficiently and
give them knowledge about how people are going to behave. But this more disciplinary aspect of markets seems to
be not not so well tolerated. Yeah. And this segus into another really
nice turn of phrase that you've used, this idea of rule by market. And you're describing a very instrumental way of
thinking about how to use markets in in a in a governance capacity.
And I guess this couple questions on this and feel free to to take them as you will. Um I guess the first thing to
say is you know h how do we differentiate this idea of a rule by market versus just you know markets disciplining uh economic actors and then
and then I'm really curious having spent a lot of time thinking about uh law in
China you often hear what I take to be sort of the inspiration or the parallel
here this idea of rule by law um right and I guess I'm I'm curious you're talking a lot about you know the
environment in which these uh entrepreneurs and private firms are operating trading uh and it it's
certainly not a rule of law system and you mentioned things like there were no
property rights for a very long period of time. There's nobody owning land. Uh you have a court system that is
vertically integrated into the into the party state. There are all sorts of things that and not impartial
a non-impartial judiciary. Uh all these things that we think of as kind of all these good things that go together to
create uh functioning markets. What what does it mean to have a rule by market
system in that context? Sure. Yeah. So, you're exactly right. I was inspired by legal scholarship on on
China, which the the phrase there is rule by law. And so, it's interesting because China has the edifice of a lot
of the things you're describing. There are lawyers, there are company charters, there are contracts, there are courts,
right? There are court decisions. Some of them are transparent. You know, there's all of this stuff going on. And then when you think about the corporate
governance system, it's the same. There are stock markets, there are there is bank lending, there are debt markets and
bond markets, there's, you know, boards and boards of directors, there's, you know, quarterly and annual reporting,
right? That all of these things exist. But the idea that, you know, and rule by
law is, yeah, there's a huge system of laws in the people's republic. It's actually and, you know, that system is
becoming more and more intricate, right? We have all of these new laws we've seen in the last 15 years that are very
interesting. cyber security, data security, counter espionage, counterterrorism, national intelligence
law, those require a bunch of things um for companies and other individuals like to assist the state with matters of
national intelligence or national security. But it's not as if right um the laws can be used by non-state
parties to discipline the state. So there are some exceptions to that and there's a lot of work on say the
administrative litigation law, things like that, right? But for the most part, the state rules by law, but it's not
itself subject to the rule of law. Right? So the key test is, you know, would the state itself also be
disciplined by law? And no, right? The law is used as a as a tool to wield, you
know, state power coercively and, you know, sometimes constructively in the building of the society that the state
wants to build, but it doesn't constrain the state, right? And the same is true of markets, right?
So they use markets to help them learn, right? Help them learn how people are going to behave, help them figure out
what kinds of business models or what kinds of even industries and sectors are going to prosper or fail. Um but they
don't really let themselves be disciplined by the market, right? So the best example um I can give of that is
the 2015 stock market crisis. So in 2015, I mean 2013, 2014, without getting
into too many of the details, you know, China has a really high savings rate. Domestic savings is like 40% more of
GDP, right? Households saving a ton. Americans could only wish, right? We're at like 2% or negative. Okay, so they
save so much of their wealth and where do you put it? So for a long period of time, they put it into real estate. That
was the subject of my first stream of work, right? And so Cinping, you know, years ago realizes as many Chinese
policy makers have. You've got to get these savings out of real estate and into something more productive,
something more sustainable. We've got a bubble. It's been brewing forever. Okay. So they push they say basically ah
everyone should expand equity markets. You know, households should invest in equity markets. At the time only 11% of
Chinese households were invested in equity markets. Very low, right? Very small equity market relative to the size of the economy. So everyone should
invest in equity markets. Oh, then you know the pe the the um the People's Daily, you know, starts running all
these editorials. Oh, invest in equity markets. Well, Chinese people are smart. So, they see that and they're like, "Oh, the government wants us to invest in
equity markets. That means they're probably not going to let them fail, right?" So, they start pushing money into the equity markets. You get a
bubble, a stock market bubble, right? So, the price toearnings ratios were out of control. The thing, you know, runs up
really fast. People start saying there's a bubble. The People's Daily says, "Oh, there's no bubble. bubbles are for
tulips and bitcoins, you know, not for China. And then everyone says, "Okay, I hear you. They're not going to let the
prices fall." So then the prices do fall eventually, right, after they're driven up even further. And at first, the state
says, "This is a a natural market correction." And everyone says, "Okay, that means they're not going to rescue
everyone, so I'm going to pull my money out even further." And then 2 days later they say um this is too fast of a market
correction and we're going to arrest journalists who have reported on you know asset bubbles. We're going to
suspend IPOs and we're going to do a massive kind of state intervention which was what what was called the national
team of shareholders were going to invest in a bunch of assets that they didn't want to see fall too quickly.
Right? So there's this whole, you know, interesting episode where these state investors are trying to buy falling
asset prices and then the asset managers are saying great because that's exactly what I want to sell. And so, you know,
you find this huge influx of state capital into the equity markets and then everyone's sort of saying, well, I was
going to be interested in investing in equity markets, but now I can't really trust that the markets are determining the value of the companies because the
state's always going to intervene. So the whole arbitrage game come becomes one of anticipating what the state is
willing and unwilling to tolerate and that's not really how efficient financial markets work. Um so the
question is you know in the same way that rule by law is you have laws to do the thing as a tool to do the things you
want to do but you will not be disciplined by them. Markets I think have worked in the same way. we have
markets to do the things we want to do, but then when they look like they're going to discipline the actions we want
to take, we will not tolerate that. And so there are limits I think in both of those domains. And I think that's a really useful uh
concept and it's it's a nice close cognate to this rule by law that I think people ought to ought to bear in mind
when they think about the kind of perennial and I think maybe not so helpful question of is China a
capitalist economy? uh you you end up ending having better questions and I
think this is a really useful way to get into it and I guess just to get into some of the the details about how this
functions in practice. One of the things that you have described in some of your
work with Margaret Pearson and Kelly Sai has to do with some of these most prominent private firms in China
particularly in the tech sector getting very entangled with certain party state goals uh in particular in the realm of
domestic security and here I'm thinking about firms like Hickvision or Dahua or
Huawei which is well known here in DC but maybe even extending so so I'm curious how how should we think about
those firms and the ways in which even as private entities, they're serving
certain uh state functions. And then maybe just to tack on another one to
maybe complicate things a little bit, how do we think about a firm like Deep Seek uh which was all the rage earlier
this year and I'm I'm sure will come back onto the radar fairly soon given the cycles in these uh AI technologies.
It seems to have not been in the scope of you know party sort of tasking it to
do certain things. It wasn't an obvious national champion. It came out of nowhere. What do we expect with a firm
like that now that they you know uh uh Leewan Allan gets invited to sit with
Xiinping and all these other entrepreneurs? What what happens? Well, I I'm glad you asked this question and
about, you know, the work with Margaret and Kelly, which, you know, is partly part of state capitalism and partly what
what we're trying to say is that there was there was so long this distinction between private companies and stateowned
companies, right? So, even if you look back at, you know, the speeches of Bill Clinton even like, yeah, you know, we're
welcoming them into the WTO and they have these stateowned firms, but it's really the private firms that are
competitive and those are the good guys. These are the people who want, you know, democracy and rule of law and, you know,
property protections through change in the political system, etc. Where it's the stateowned people, you know, these are old dinosaurs. They'll they'll fade
away. Um, and I, you know, what's interesting is there's no longer this distinction, right? There's no longer
that distinction between state and private partly because, you know, partially through the episode I just
described, you have state investment all through the economy, right? And that's also the the mo of made in China 2025
which is Cin Ping's big industrial policy um technical upgrading campaign
and campaign is the right word um you know to push all this private because they realize you know it's not going to be these stateowned behemoths that you
study you know no offense that are going to be the ones that are innovating on like the frontier of quantum computing
and you know electric vehicle battery storage chemistry processes right these are like men and women in dorm rooms you
know starting new startups and so the state wanted to find a way to get capital to them. So if there's state
capital in all these frontier sectors then you kind of ask yourself where does the state end and private firms begin
and the answer coming from where you sit in Washington DC has been like there's no limit now now we're worried that all
Chinese companies partly because of that capital presence and partly because the legal regime in China is not a rule of
law country but they have all these weird alarming laws which is kind of an interesting puzzle right why do they
even have all these laws given that it's not as if the ministry of state security needs a warrant under the national
intelligence law to interfere with a firm it's just going to do that but those laws have been alarming to people
outside of China um so you know then you think about okay what are the roles of these firms it's not only that you know
there's you described the special shares so the CCP basically saying with media companies look we're going to need to
sit on the board and make sure that we're there we're going to need to make sure that we have some sort of content
um uh you know authority over what you're able to do and then that's alarming to people outside of China who
say, "Hey, Bite Dance is like a private company, but it's got a special share for the CCP. Does that mean it's going
to push propaganda?" Right? And some of those concerns we've seen play out in real time. The other thing that my work
is about though, and this is what I'd really like to emphasize, is how dealigned capitalists can be with
the interests of the CCP. And actually that is a huge reason why you see the
greater encroachment of the CCP and private enterprises. Not because private
enterprises are easy willing foot soldiers in, you know, the the the state's pursuit of security domestically
and globally, but sometimes because they're not, right? They're not. And they generate instability. They do all
kinds of things that can be bad for China, bad for China's global image, you know, bad for domestic financial
stability. And so you know the PRC or the rather the CCP wants to sit in the boardroom not just because every company
is doing the bidding of the regime but because they might not be and what they really want is oversight there. So I
want people to understand that there's a huge tension, right? That and you mentioned, you know, Huawei, you mentioned Deep Seek. You know, there's
times I think Huawei would like nothing more than to have no association with the CCP, right? It's, you know,
basically out there saying, "Hey, we're just a telecom infrastructure company. We just want to deploy these things and
get contracts. We have nothing to do with the CCP." I think Deep Seek, you know, might want to say the same thing.
We're just an AI company. we want to go head-to-head with, you know, chat GPT and claude and open AAI and, you know,
all of these different companies. But then you have all these concerns. Well, Deepseek is a Chinese company and the
guy is appearing with Cining. I don't know if I want to give it my data and have it on my desktop computer, right,
in my system. And so, you know, this tension where Chinese companies want to benefit from some of the resources
they're given in China, uh, versus, you know, want to be seen globally as not an instrument of state power. And I think,
you know, interestingly, it's increasingly true, I think, of American companies, too, right? Like, hey, we're just a company, but are you or are you
an instrument of state power? Are you an instrument of Chinese power if even if you're an American company? So, all that
consternation is all mixed up. But I don't want people to get the view that just because we think it's that there's
blurred boundaries between the state and the private sector that every Chinese company is doing the bidding of the state. It's not right. And you know, you
mentioned deepseek and there's just this thing where once you get above a certain size or above a certain level of um
strategic importance, it's going to be very difficult to escape the radar of authorities who are going to want you to
do things in certain ways in China. And so I think that's what we're seeing now. And you know, Deepseek has such an
interesting kind of decentralized model. And will that be able right to to
persevere given the strategic importance I think is a super interesting question. But I'm no AI scholar, so I'm not going
to bore your listeners who are by saying things I don't know. Well, there there are certainly a lot of
self-identified AI scholars running around, but we're we're lucky at Carnegie actually have a lot of people working on this very substantively. So,
I will I will bring it bring it back for their consideration. So think thank you
for offering that helpful corrective on I think a kind of lazy way of thinking about private firms in the PRC and just
saying oh they're you know this is just CCP incorporated and they're carrying out their bidding as in a lot of areas
there's sort of a dialectical tension there. They wouldn't be working so hard in the central party state to assert
their control if they had total control and everybody was listening and they're using these unwieldy instruments as
you're talking about, you know, rule by market, rule by law that doesn't necessarily get things
going the way they the way they want. Uh, and so there's always there's this constant uh dialectic or kind of uh back
and forth between trying to exercise. You sound so Marxist actually with your dialect. We we'll do some historical
materialism. lessons after this. But I I wanted to to get into the question of so
what what does this actually do to the private sector in China? We hear the this the 6070 8090 phrase and these
numbers may be a little out of date but that refers to the idea that private firms contribute 60% of China's GDP,
70% of its innovation, 80% of urban employment and 90% of new employment. Um, so obviously these are like the the
powerhouse of the economy and this this is an important correction to the idea that it's an entirely state-owned system
of course and most of the firms that people are familiar with are in fact these private firms. Um, just how
corrosive are these efforts of the party to rule by market and to insert itself
into private firms for their productivity, for their innovation? Um, and I guess maybe sort of an adjunct
question on this that may help illustrate this story. What happened to Jack Ma? Uh, where where did he go and
why did he come back not so long ago, right? Um, yeah. So, I I find it so
interesting, you know, Jack Ma that was all 2020 when that happened. And um, and
I had been kind of studying these crackdowns that followed that stock market crisis I told you about um, since
2016. and he he was like, you know, the 15th person on my list to have been detained or to disappear for a little
while. And so people think that there was a crackdown that started in 2020. Um it it didn't start in 2020. In fact, I
would say it didn't even start um in, you know, 20 anything, right? That this
is once again the cycle of accommodation and reprisal. So you know, we need your
skills to build financial and digital architecture. you know, then you got this IPO perspectus that, you know, I
mean, there are a lot of things, you know, people want to say, oh, it was his speech. It was his brazen, you know, this and that. I think it's also that it
was basically a a a bank that was looking like a tech firm and being regulated like a tech firm, but actually
had so many assets under management that it was it looked like a bank and needed to be regulated like a bank. And so
there's an antitrust veilance, I think, to that also. But, you know, I understand that as as part of that that
same cycle. And so what does it mean, you know, for the private sector in China and and its importance, its
longevity, its sense of security? I don't think you'll be surprised that I think it doesn't mean anything
particularly good, right? Um and so you asked about innovation and I think that's been a um I think it's been an
interesting focus and maybe the wrong focus, right? Which is like, oh, you can't have innovation in economy where
people aren't free. And you know the mechanisms there you know to be clear I do like a free society but you know the
mechanisms there are oh people are afraid to speak their mind they won't explore things you know they won't innovate you can't get next stage
innovation um from a closed kind of political system so that turns out to
not quite be right right in many many different ways we're getting a lot of innovation out of China and guess what
it's nothing new right this kind of innovation we're getting is very different the innovation we've had in
China over the last you know 40 years has been a lot process innovation as um Ed Steinfeld and Yonas Nam have called
it, right? Companies that you know can manufacture things and do things and and produce a product in a way that
basically no company anywhere could have thought of. And you could actually think of deepseek as a bit like that, right? It was the process through which they
arrived at their model that shocked everyone. Not just that the Chinese engineers had created a large learning
models, they did it in a different way. So you know what is but what does it mean for the behavior of capitalists?
And this is where I'm most interested. I mean, my view is really if you talk to people who are, you know, they want to
start a business, they are engineers, they're scientists, they have ideas about how to produce something, they're
pretty dedicated people and they want to do it. And just because you can't get so rich that you become the richest person
in all of Asia for all history without any challenge to your wealth doesn't mean you're not going to invest and do
the things you want to do. Right? Most people, they want to be efficacious. They want to build something. they want
to do something. I'm more interested in like a lot of the smallcale folks,
right? So there's a a lesserk known campaign lesser known than Mr. Jack Ma, right? Which was called um sweep away
the black, right? So um this kind of trua is what it was called, right? And so it was a kind of an anti-organized
crime campaign, but they were going after a lot of smallcale business people for taking illegal loans as long as 20
years ago. Well, guess what? The only loan you could get 20 years ago was an illegal curb loan, right? And so these were the
things that entrepreneurs were doing to try to get around China's bad formal institutions we've been talking about.
But they, you know, they had to do those things and yet they were technically breaking the law, but it wasn't organized crime. And now people are
saying, look, if they're taking people down for stuff they did 15, 20 years ago, like why would I, you know, set up
a small business now? Why would I do these kinds of things? And so I think we're finding that fall in private
investment which follows that cycle of reprisal that we were talking about um that makes it really difficult. But the
most interesting thing I think here is that the insecurity of capitalists
leads them to behave actually kind of badly right. So a lot of it is this
arbitrage I was describing. Everyone's sort of focused not on market fundamentals. You know what's the price
to earning ratio for this company? Does it have a good business model? Is it in a sector that the government's going to
protect? Is it a guy that the government knows? You know, is it going is it does it employ enough people that they're not
going to let it fail? And so, it's kind of a game of political arbitrage more than it is of market fundamentals. But
then you have incentives for capitalists to behave in a very short-term fashion,
which means that they ride these waves in ways that are kind of bad for China,
right? And bad in some ways for other people, right? So you know the best example I can give is the belt and road
right so you see a lot of companies during the height of the belt and road campaign calling themselves all kinds of
I'm closing ping I'm doing this that what they were actually doing is expat trading their assets by investing in
Europe or North America right and getting out of China while the getting was good while the state administration
of foreign exchange was willing to turn their remn into something else right and so all of that generates this financial
instability which I would argue really constrains the state and the PRC in in significant ways. And so um it's not
just a one direction of power that the state controls capitalists. As a result
of that, capitalists want to do things to get beyond the state's control. And as you say, that's sort of compromising
for the overall goals of China. Yeah. And that's a that's actually a a narrow point I'd like to to dive in on a
little bit. this idea of Chinese entrepreneurs and other wealthy people
figuring out ways to get capital out of the country. How should how should we
understand that? There's certainly a lot of people again around DC who view that as ipso facto. This is a this is a
rotten system and everybody wants to send their kids to Harvard or they used to uh and everybody everybody wants to
buy real estate in uh in uh La Hoya and they'll do anything that they can to get
their assets out of China where they can be predated by this party state. How how would you describe the the motivations
for people to get capital out of China? It sounds like there are periods in which it's possible and periods in which it's not. What's a what's a what's a
better understanding of that phenomenon? Yeah. I thought you were going to ask me how do people get their money out of China. I was going to say that's a
totally different podcast if you want. Yeah. Macau casinos and transfer
pricing. That's a different Yeah. Yeah. Why? You know, I have to say it's
not that original or profound, but I actually think the broad brush kind of DC view of that is right. Right. which
is like I don't know when the CCP may come for me if I'm going to be a a
target of the next campaign and so as a result right I feel like my property is
much more secure and sometimes my person and my children are much more secure out
of the country right so I mean the prestige of you know getting a degree from a a foreign institution aside
that's a little bit different but like why would you want real estate in in Vancouver right or real estate in, as
you said, La Hoya or Cambridge, Massachusetts, right? It's a way to park your assets beyond the reach of the CCP.
And I I actually do think that logic is very basic, but very real. But it has
But, you know, it has something it has an implication for something else that's held very dear in DC, which is anytime
we find a secret Chinese transaction, it's a strategic plot on the part of the
CCP to infiltrate XYZ. To be clear, sometimes it is right. But just as often
you have people who are working, they're hiding their connections and they're hiding what they're doing not to escape
US regulatory scrutiny but to escape Chinese scrutiny, right? And so, you
know, there's like, you know, this this concept and logic of kind of type one, type two errors, right? So, to you know,
you you either under capture the error, you know, oh, I think all of these are commercial transactions. Well, I know that's not right. Or you over capture.
And if you over capture and you assume that everything an individual or company does that comes from China is some data
point in the CCP's 100red-year marathon to, you know, pursue its strategic goals, you're going to get a lot of
noise that you're reading as signal. And so understanding that there's both that kind of strategic tactical thing that
China does, but also this totally ham-handed we can't control our own actors thing, I think makes us a lot
smarter. Yeah. I' I'd like to think we're totally capable of doing a lot of type one and a lot of type two errors. Of course,
we're equal opportunity mistake makers. That's right. Um well in the spirit of
trying to make fewer mistakes of either variety maybe just for a kind of final
uh summary question I want to invite you to be a little bit more comparative
which I know uh you've done a lot in Asia and maybe take take you to a comparison between the US and China
which is obviously the uh the main plot line and a lot of the discussion about great power competition. But what should
we understand about this rule by market system, this party state capitalist
system? What what sorts of competitive advantages and disadvantages do those conferred to China? If we're thinking
about an international system in which economic matters and in particular
technology are extremely rivalous with the United States, how how does China match up with the US in that regard? And
then just to to give you a potential direction, you mentioned this made in China 2025 industrial policy, which I
think for most observers has been a wildly successful program. They didn't hit on every single item that they
targeted, but there's some extraordinary gains in that regard. And this was a this was an industrial policy that
leveraged a lot of these aspects of the Chinese party state capitalist system that you've mentioned.
Is that something that we should be looking at in the United States and saying we should figure out a way to
emulate that with our system or is that uh sort of a category error that that's
not something that's even conceivable in this setting? And I I don't want to put my finger too too much on the scale, but
I'm curious how you would uh describe that. Well, I could talk about that for like three hours, but I won't do that. Um, so
look, I mean, how how does Made in China 2025 work? you know, all of our discussion of subsidies and spending and
all these kinds of things. I mean, I would point to, you know, mechanistically, there are some things
that they did and they do, right, that can be very effective. I'm going to use the word effective at getting, you know,
competition off the ground in sectors where, you know, it's kind of a frontier sector, right? There's no market and so
you have to do some market making and some demand generation as well as some supply side stuff. And so you know the
best examples and I I again would point you to Jonas Nam's work on this right the best examples would be you know the
way in which they kind of give the subsidies but make the subsidies conditional on you know for the EV
example you know longer and longer charge you know uh or mileage per charge
right so basically you know he there's this thing where you know the Chinese you talk to them about that you know
it's not subsidies it's also innovation and and um professor Nam has said yeah but the innovation was also subsidized
Right. But so how do you get smart about making some of those policies? So you know, sure we could do tax credits that
are conditional on, you know, ever ratcheting up technological standards and efficiency. That's fine.
Yes, you were. You're right. Made in China was effective. Right. So when we think about how effective it was, like
did it generate a lot of, you know, market competition, especially in EVs? And here's like that's also very
interesting and I think like part of what we've been talking about which is you have this system of extraordinary state in inter intervention but also
super competitive right so you know here at Harvard Business School we think oh the state supports you you become
uncompetitive no those sectors are ruthless so ruthless that you know the the term is involution now nijuan that
they're so competitive they're kind of eating each other's flesh and now that needs to get sorted out right that's the
language they use in in China to talk about this. So super competitive, it's effective. Is it efficient? No, it's
incredibly wasteful, right? So super wasteful, right? So you have reports about electric vehicle graveyards for
fleets that were, you know, bought by local governments and retired within weeks because the, you know, the the
mileage for another product got much longer and put that one out of date. You know, you've got stories of
semiconductor um fabs that were I'm I'm doing air quotes semiconductor fabs that were
established by specialists on Chinese medicine who bought ASML machines then mortgaged them before they even arrived
on Chinese soil and absconded to Japan with a bunch of cash, right? I mean, so whenever you push this much capital out
into the system, um grifters will follow. Like I I personally love a good grift story and boy, there's a lot of
grifting in China over these kinds of things. So, it's really really good. And and look, we can't do that in the United
States. Every time there's one, you know, company that goes bankrupt, there's some expose about how tax dollars went to the blah blah blah. And
that's partly our politics. It's partly our open media. And it's partly that our population is a little bit intolerant of
waste and fraud. Whereas, I think a lot of Chinese people are pretty much used to it. So, can we do everything that they did on that model, on that scale?
No. Should we? No. What are we better at historically than they have been?
allocating capital. Okay? Because our financial system has worked pretty well. And yeah, I'm going
to get skewered. Harvard Business School professor says financial system works really well. Like there's all I don't mean executive compensation. I don't
mean, you know, inequality. What I mean is it's usually efficient companies who end up getting capital in the United
States and inefficient companies are forced to exit. So I think that's a feature of a democracy because financial
systems modern financial systems require not just like good enough institutions
but really good institutions. You have to have you have to have actually the impartial judiciary. You have to have
actual transparency. You have to have accountability. You have to have rule of law. can't have half the companies for
whom corporate governance is basically a fiction um because you know we all know the bottom line is political and half
the companies and say oh you're governed by law right that's not going to work and so what I think China's challenge
will be is trying to develop into a consumption driven economy
innovationdriven economy without that financial institution because I see I see the financial sector as basically
impossible with the institutions that China has and for the United States what we have to worry about right now is
whether our financial sector can survive um some of the things that look a little
bit more like not impartial rule of law and a lot of state intervention and winners and losers within our legal
system and whether our financial system will will continue to be the envy of the world given that political conditions
are changing but I don't want to get too political so right well we we would never contemplate killing the golden goose and uh
stripping oursel of the advantage of these deep capital markets and attractive debt. Can't can't imagine it,
but I haven't been reading the news. Uh yeah, so we could go on for hours and
hours, Meg, but conscious of the extraordinary demands on your time and expertise, we're going to wrap it up
here, but I want to encourage everybody not just to read this recent Carnegie volume in which uh Meg's written a
brilliant essay, but also all of her other wonderful work. And it's been really enjoyable and informative to hear
some of these really nuanced and textured and empirical uh insights into
how uh capitalism actually functions in China today and we'll look forward to
continuing this conversation sometime soon. Thanks so much Meg. Thanks Isaac. Great great to be on and thanks for the volume. It's it's great.
All the essays are great. So thanks for having me. Thanks Meg.
You've been listening to the world unpacked, an audio production of the Carnegie Endowment for International
Peace. Views expressed are those of the host and guest panelists and not necessarily those of the Carnegie
Endowment for International Peace. Subscribe to Carnegie Podcasts on popular podcast platforms such as
iTunes, Stitcher, or wherever you listen to podcasts. You can find our episodes on Carnegiey's YouTube channel as well.
Learn more at the carnegie endowment.org. Hiwan Park is our executive producer and audio engineer. I'm Isaac Cardon, senior fellow in the Asia program and the host of this episode of The World Unpacked. Thanks for listening.
