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On “China’s Growth Story”

by Li Ding

Two Points from the Author of “Whither China” and Their Implications

As Beijing is allowing more foreign firms into its domestic financial market, American investors should get ready to hear more about “China’s growth story.” In a sense, the whole “China Hustle” (A 2017 documentary that tells stories of systematic securities fraud. Small nondescript Chinese companies with possible links to the Chinese Communist Party listed their stocks. Then American investment banks hyped them up and sold them to U.S. investors.) is built upon this “story.” A media interview that the late renowned economist Dr. Yang Xiaokai gave before he passed away in 2004 may offer some refreshing points on this issue. .

Background: As a 19-year old during China’s Cultural Revolution, Yang published a political tract “Whither China” challenging Chairman Mao’s communist regime. His writing landed him in prison for ten years. Mr. Yang later earned his Ph.D. in economics from Princeton University and taught at Monash University in Australia where he passed away in 2004, at the age of 55. In a 2002 visit to Monash University, Professor James Buchanan, a 1986 Economic Science Nobel Prize winner, stated, “In my view, the most important and exciting research in economics in the world is done at Monash and it is done by Xiaokai Yang.” [1] Among many of his fellow economists studying China’s economy, Yang is known for his piercing views on China’s growth story. [2]

1) “Any country will get rich as long as the United States opens its market to it.”

Dr. Yang Xiaokai explained the above view during a media interview in 2003 [3]:

“… The U.S. market is a huge market. Since World War II, the United States has become the engine for global economic growth. After the Marshall Plan, the United States opened its market to Europe and Europe recovered. It opened its market to Taiwan and South Korea and, as a result, Taiwan and South Korea grew rapidly. The United States, with its population, is basically the largest unified market in the world. Europe is a divided market, with many languages and other differences. Some economists have said that the United States is the biggest market. Any country will get rich as long as the United States opens its market to it. This is basically true.”

What was the cost of this “China growth story” over the past 20 years, say, ever since China’s accession into the WTO in 2001? The US share of the Gross World Product (GWP) dropped from 31.7 percent in 2001 to 24.2 percent in 2019. Meanwhile, the European Union’s share dropped from 25.2 percent to 17.8 percent. China’s share increased from 4 percent to 16.3 percent in the same period, with an average annual growth rate of around 14 percent. [4] An even uglier cost to this side of the “China growth story” is the “China Hustle.” [5], That is, the average American investors have had to bear the cost of this “growth story” which resulted, in part, from those Chinese companies being listed in the US stock exchanges.

If the US chooses to close its market to China, will the “China growth story” continue?  “In order for man to be able to do business with a regime as repressive, autocratic, violent, and lacking in virtue as the communist regime´(6), the past seven US administrations sold the “China engagement story” to the American public (“if we do business with China, China will eventually embrace democracy”). As we can see today, that did not happen. Has Washington, the American public, or corporate America learned anything from this expensive policy failure? [7][8]

2) “The Curse of Late Comer”

Yang Xiaokai also held the view that many developing countries failed or chose not to spend time to embrace the time-tested institutional standards and political systems. Instead, “latecomers” feel it is a shorter path just to mimic the advanced technologies or “hardware” of the system. This may eventually curb or even reverse economic growth. (Yang attributed this theory to the late American economist Mancur Olson). Stagnation in Latin America, the Asian financial crisis, and Japan’s economic recession in the 1990s are examples of this “Curse of Late Comer.”

The reason for this phenomenon is, without systematic reform, fast economic and technological growth in late-developing countries might enable a small group of elites easily to monopolize social wealth. The elite group, due to its monopoly of wealth and political power, lacks innovative entrepreneurship and resists systematic reforms that might hurt their vested interests. Yang said that parts of China’s low-efficient State-owned sector had this very problem. (This “technology and economic system only” mimicking would naturally lead to a polarization of income groups and wouldn’t create a large enough middle class that could anchor long-term social equality and political stability.)

In his words during the 2004 interview, “The Former Soviet Union was such an example. Its economic development was a success in the 1930s and the 1950s, when its growth rates were higher than that of current China. The former Soviet Union learned about mass production, the production assembly line, standardization, and about Taylor scientific management, after whom the production control management in the Soviet Union was named. The Soviet Union learned every single technique of advanced capitalist management and technology, but neglected the social system. The Soviet system is characterized by public ownership and a planned economy. The country used an extremely backward system to initiate the production of extremely advanced technology. Of course, the growth rate was very high. You can find that its growth in the ‘30s was higher than that of China by more than 10 percent. On average, the Former Soviet Union maintained a high average growth rate of 9 percent for a very long period of time. But so what? Eventually it just broke down. It broke down all of a sudden. This is a major problem.”

For American investors, there are three implications:

First, it may imply a material risk which occurs only rarely, but does exist— the regime change in China or other events that make the Chinese bonds to be non-enforceable. [9] China is known to have had dynasty changes in her long history. In the past one century or so, in 1911, the Republic of China (RoC) toppled the Qing Dynasty. The People’s Republic of China (PRC) took it over in 1949. Between these three regimes, American retail investors lost over $1 trillion worth of Chinese bonds that they bought but the next regime(s) did not acknowledge. [10]

Some fund managers might argue that to have one more emerging market (China) in the pool of the investable portfolio might help with diversification. The problem is if this additional diversifying market as a whole has a greater additional risk than all the others in the basket. It actually drags down the realized long term return and/or adding on the risk profile. We will have a separate in-depth analysis on China’s country risk.

Second, if the social and political institutions are much more important than any advance in technology or “hardware,” is China’s eroding of the existent western institution to push through its so-called integration into the world (or China’s ambition to dominate the world with its own socialist institution and one-party rule) an even worse practice than its intellectual property and technology theft from the West? In addition, we in the West have been accommodating out of our ignorance or greed. A typical example is that, for the last 20 years, hundreds of Chinese firms got listed on US stock exchanges WITHOUT conforming to the US laws and regulations that every other American company has to comply with. Given Wall Street’s indulgence of this practice [11], are we killing the gold-standard of the financial world — the inceptions of the US capital market — that the Securities and Exchange Commission Chairman Jay Clayton has been touting? [12]

Third, for American investors who currently hold Chinese stocks or bonds (it can be many of us though unwittingly) [13], it is important for us to understand that the “latecomer curse” symptom is evident in China’s stock market.

Chinese listed firms’ share prices tend not to be in line with their financial fundamentals and sometimes share prices become highly volatile. Beijing officials may blame it on the retail investors’ dominance (80 percent of Chinese stock market investors are retail investors). Some western media repeat this narrative. [14] Yet even Chinese economists acknowledged that a fundamental reason is the stock market is designed to be “a mere fund-raising vehicle largely for failing state-owned enterprises, with investors’ interests being only a secondary consideration. The regulation of stock markets is subject to the principle of maintaining one-party rule.” [15]

It is widely held among Chinese netizens that as a rule of thumb for the loss vs. break-even vs. profit rate among Chinese stock market investors, the ratio is “7 – 2 – 1.” That is 70 percent of Chinese stock investors will lose money, 20 percent will break-even, and 10 percent, the lucky ones, will make a profit. The ratio may vary from year to year. [16] A netizen summarized the dilemma from the Chinese retail investors in the following way: “The investment companies won’t tell you the truth – they are waiting for you to accept what they want to dump. You cannot trust the issuers; at most only 30 percent of their public financial reports are truthful. You cannot trust the stock news media – don’t worry, you (the retail investors) will forever be the last ones to know the real information.” [17] An independent Chinese economist described the Chinese stock market as a “Wealth Squeezer (from the retail investors)” controlled by the Chinese government. [18] This is a typical symptom of the bad capitalism that Yang described as “the curse of latecomer.”  Acemoglu and Robinson also described it as a non-inclusive or extractive institution. [19]

American investors also need to be aware that in China “insider trading” is not just a white-collar crime as we in the west understand it; it is more a collusion between money and power (the government). In the language of Yang, the “referee is also a player,” i.e. it is a systematic institutional problem. In the 2015-2016 Chinese stock market turbulence, a number of high officials from the China Securities Regulatory Commission (CSRC), as well as the several firms in the “National Team” i.e. big state-owned securities companies including CITIC, were later all investigated for insider trading to manipulate the market. [20]

Chinese netizens believe for the Chinese A share stock market, there is no “slow bull” or “long bull.” There is often “crazy bull.” [21] If you see the A share stock is on the rise, especially if it is rising rapidly, it may mean some “invisible hand” is pushing it up and hoping retail investors will follow. Then the hidden hands could suddenly cash out when the price is high enough. Therefore they make money at the cost of the crowds of retail investors who are left when the price collapses. This is one of the many tactics the “hidden hands” can employ. That is sort of the same tactic used in the case of Luckin Coffee. In Chinese, it is called “cutting leeks” (leek is a popular Chinese veggie, known for growing fast even after being cut or harvested; meaning that retail investors can be scammed easily). [22]

End Notes:

[1] “Xiaokai YANG (1948 – 2004), Personal Chair in Economics (2000 – 2004)”
[2]”苏晓康:世间已无杨小凯”, (English translation: “Su XiaoKang: There Is No More YANG XIAOKAI in the World”)苏晓康:世间已无杨小凯/
[3] “Renowned Economist Yang Xiaokai, On China’s Economy: An Interview by NTDTV”
[4] The World Bank.
[5] “Review: ‘The China Hustle’ Is the Most Important Film of 2018”
[6]  Chinascope: On Divine Intervention – Part III
[7] ”United States Strategic Approach to the People’s Republic of China”
[9] “Investing in Foreign Bonds Can Be Dangerous”,

“Taiwan not required to pay Qing Dynasty bonds, China is: former premier”
[11] “Wall Street Pushes Back on U.S. Threats to De-list Chinese Firms”
[12] “SEC’s Clayton Says U.S. Is ‘Far Superior’ in Market Regulation”
[13] “Americans Are Investing More in China—and They Don’t Even Know It”
[14] “Expect more market shocks in China as investors figure out what they’re doing, ex-central bank chief says”
Why Is the Chinese Stock Market So Volatile?”
[15] Li, Guoping; Zhou, Hong (2016). “The Systematic Politicization of China’s Stock Markets”. Journal of Contemporary China. 25 (99): 422–437.
[16] This “rule of thumb” is a widely held view among Chinese netizens, such as
From official or semi-official surveys or informal surveys, different years may yield different data. “China Household Finance Survey (2012)” found that the ratio among “loss vs. break-even vs. profit” among stock market investors’ was 56.01% vs. 21.82% vs. 22.27% (i.e. roughly 80% Chinese investors did not make money from stock market).
A survey in early 2014 found the ratio was 58.7 percent vs. 11.2 Percent vs. 22.6 percent (i.e. roughly 70 percent survey responders did not make money from their stock market investment).
The year of 2015 was termed as “China stock scare” when the Shanghai Stock Exchange Composite fell from over 5000 to below 3000, the ratio became 60.6% vs. 26.5% vs. 12.9% (i.e. over 85% Chinese stock investors did not make money).
[18] “何清涟:中国股市:一台由政府操控的财富榨取机”, (English translation: “He Qinglian: Chinese Stock Market – A Wealth Squeezer Controlled by the Government”)
[19] “The Origins of Power, Prosperity, and Poverty: Why Nations Fail,” by Daron Acemoglu and James A. Robinson
[20] “分析:中国股市监管从救市转向整肃’内鬼’”, (English translation: “Analysis: Chinese Stock Market Regulator is Turing from Rescuing the Market to Purging ‘Internal Mole,’”
“史上罕见股灾 救市者成’内鬼’” (English translation, [Ten Top Banned News: No. 3] Historical Stock Market Meltdown, Market Rescuers Becomes Internal Mole,
[21] “我为什么不炒股?中国的股市只有三种状态:疯牛、疯熊、慢熊,不存在慢牛”, (English translation: why I don’t invest in (Chinese) stock market? There are only three status in Chinese stock market: crazy bull, crazy bear and slow bear, there is no slow bull),
[22] “兩岸專題:一條龍造假 股價插八成半 福建幫炮製瑞幸千億騙局,” (English translation: Across-strait Focus: One-Stop Fraud, 85 percent Fall in Stock Price, Fujian Gang Creates Luckin Fraud).