The Node

Thoughts of a bytelander

19 Sep 2021

The China Model

The reason for writing this post is the recent actions by Chinese regulators like banning afterschool tutoring, the ban on video games for kids, Alibaba and Tencent crackdown, etc.

The Chinese model of Capitalism, also referred to Socialist Market Economy is a form of government where the state takes significant interest in managing the economy. This is quite different from India or the US where we practice free markets and minimal state involvement. If we ignore the politics, it is undeniable that the Chinese model has produced dramatically better outcomes for its people compared to India/US.

There are three main reasons for it:

  • Long-term planning: Amazon has done incredibly well over the past 20 years by focusing on long-term goals. Some of the most desirable places to live are master-planned communities (like Irvine, Summerlin, etc) which are single owner-managed and developed with a long-term focus. China is something similar where you have a single owner, the CCP working with a very long-term focus. The CCP can work with a long horizon as it doesn’t have to deal with 2-3 year election cycles like in India/US.

  • Deploying the state’s resources: The most valuable company in the world - Apple has an annual revenue of $350B. The annual budget of the US government is $4T! Add on top all the state and local government bodies, that is a huge number! China is able to effectively harness the state’s might to push long-term goals like localized manufacturing (COMAC aircraft, semis, solar, ev, etc), better transport/logistics networks (more high speech rail than rest of the world now), etc.

  • Control: A democracy has 3 branches of government and an independent press. These have ensured the longevity of democratic societies and the preservation of their citizens personal freedoms. As a result, the president or prime minister in a democracy has limited control. A quote I heard during the Trump era: “The president is the Captian of the ship with a tiny rudder”. Any change you want to make can get dragged into court or mired in controversy. For example, kids under the age of 16 playing video games or using social networks for hours together is bad for them. In India/US, you cannot crack down on this as you will immediately get sued, and the court case will get dragged for years. In China, the CCP exercises enormous control. The regulators crack the whip, and within weeks, the situation gets rectified. There is a risk that this power gets misused. To me, it looks like the CCP has shown good judgement in using its power (this is debatable based on personal beliefs).

Coming back to the topic of Chinese stocks, currently, Chinese stocks trade at a significant discount by any measure to non-Chinese stocks. There is no doubt that the recent Evergrande incident will lead to a real estate slowdown. However, looking at the long-term picture, the Chinese economy is going to be bigger than the US economy soon. The intent behind the recent crackdowns is misunderstood. My take is that Chinese mega-caps will outperform the US mega-caps over the next five years.

Related: I highly recommend reading “The Changing World Order” by Ray Dalio. Ray writes on the rise and fall of empires and the rise of China in that context.