Index > Briefing
Thursday, December 30, 2021
'Fallacy of Composition' and Systematicity in Policies

China is a major country that relies on policies as the main scaffolds for the Chinese government to govern the country, and at times such policies can have a decisive influence on the market. Since most policies are related to public interests, it is also safe to state that China is a big player in public policy. The Chinese government possess a huge number of resources, and the scope of government management affairs can be extremely wide. However, because China's marketization and rule of law still need continuous improvements, on the one hand, this has resulted in China's policies covering a wide range of areas, and on the other hand, many areas still lack regulatory frameworks.

Given the almost unlimited responsibilities of various policies, the efficiency of China's approaches has become an issue. After four decades of the country's reform and opening-up, China has undergone tremendous changes, and this to many, can be attributed to its reforms, as well as proactive measures taken by the government. The Chinese government is known to be highly competent in a number of areas, such as urbanization, infrastructure construction, major projects, industrial input, environmental protection, and adjustment of a variety of plans. All these mainly rely on strong policy implementation. Through the concentration of resources on major tasks and adopting a one-size-fits-all approach, it became possible for China to make major decisions and adjustments quickly.

Simultaneously, a decline in the efficiency of this approach can be seen. In the process of the central policies' communicating and implementation, there might be serious policy obstructions that may significantly compromise the will of the central government when implementation is carried out in localities. After the 18th National Congress of the CCP, there is improvement in terms of the measures taken by the CCP and government, which has largely resolved the obstructions in the implementation process. However, other problems have gradually emerged. When many policies are formulated and implemented in a one-size-fits-all manner, it often leads to poor results and more areas affected as well as an increase in negative external effects. In particular, such an approach often creates more problems when it was meant to solve a single problem.

Take China's recent education and training policy (the "double reduction" policy, i.e., reducing the burdens of homework and after-school tutoring) as an example. Such measures are only one of the more prominent parts that China's latest market regulation came in the past two years. Prior to this, China had already issued many measures to rectify the market. For example, we see the halt of Ant Group's IPO in October last year, the crackdown on the monopoly behavior of internet giants, the continuous strengthening of real estate control policies in recent years, and the crackdown ongray rhinos under the pretext of financial risk prevention. Compared with the past environment of rapid economic growth, rapid market expansion, loose policy standards, and encouragement of development, the current market environment is indeed much "stricter". On the whole, a strict "rectification" environment within China is taking shape.

Although market participants expressed some dissatisfactions about changes in the development environment, from the perspective of policy starting points and risks to be prevented, a series ofpolicy measures to regulate, tighten, and strengthen governance would be regarded as necessary to guard against financial risks and push the market to reduce leverage. In such a perspective, it would also be necessary tocurb the expansion of real estate giants and prevent their debt risks frombecoming "gray rhinos". The same is true in cracking down on themonopolistic behavior of internet platform companies, strengthening data security awareness and protect personal privacy in the era of Big Data, orrestraining foreign capital's control of the Chinese market against thebackground of increasing geopolitical frictions. Likewise, it is also necessaryto reduce the burden of students' homework, and the burden of family educationexpenditures, while preventing the alienation of the country's basic education system by profit-seeking capital.

From the standpoint of individual policies, each of them has a proper raison d'être. However, while these policies have no problem when they exist on their own, systemic changes will occur within China's market environment once they are combined. Objectively speaking, when a variety of regulatory measures are implemented together, the degree of easing required for market development is greatly reduced, the financing environment will generally become less active, with the market credit chain being tightened, and the issues faced by enterprises and entrepreneurs would have increased significantly. Researchers at ANBOUND have found in field surveys in the past two years that companies have felt it is increasingly difficult to do business in recent years, and that more and more entrepreneurs, large and small, have quit or plan to quit.

In fact, it is not just companies that feel that the market environment has become "tight" and "uneasy". Many government officials on the frontline also feel that things are becoming more and more difficult now. Since grassroots government officials (county and city levels) directly shoulder the responsibility of local economic development, attract investment, and help companies solve problems encountered in development, hence these officials can directly feel the issues faced by enterprises. Many of such grassroots officials lamented that the environment for doing business is getting more challenging, and there are more and more constraints. In addition to changes in the market environment, various formalisms and bureaucracies within the system have also become constrained. Some of these grassroots officials complained that there are too manyinspections, audits, and meetings, while there is less time to go to help companies resolving problems. In many cases, they are doing theirresponsibilities with heavy burdens.

For some higher-level policy and supervisory departments that hold policy power, they are in a different situation. Judging from the reflections of enterprises and grassroots government departments, the market does not appraise these policy and supervisory departments very highly. The market has no objection to the role of the government as the one imposing the standards, but what is puzzling is that some supervisory and policy departments only formulate policies and implement supervision from the perspective of a single department, and under such attempt to rectify the market, it has reduced vitality and affected the ecology. Taking real estate as an example, while there is nothing wrong with the long-term development idea of "houses are for the living, not for speculating", yet when implementing real estate regulation, multiple departments have formed a joint force where the financial regulatory authorities have constantly considered real estate to be ahigh-risk "gray rhino" and imposed restrictions or even cut-off financial capital. China's Ministry of Housing and Urban-Rural Development and other departments have issued documents to continuously regulate the order in real estate and strictly control housing prices. As a result, certain Chinese cities have rigorously limited the real estate market entry threshold from restricting the purchase side. Under such strict regulation, the banking system has also begun to continuously tighten the financing of real estate-reducing quotas and raise the costs.

We believe that some policy departments may need to strengthen their systematic understanding of how to prevent systemic risks. This is also a point of great concern to China's central government. The Central Economic Work Conference held earlier this month pointed out that "economic and social development is a systematic project, therefore aspects like politics and economy, reality and history, material and culture, development, and people's livelihood, resources and ecology, domestic and international factors must all be taken into consideration". The Conference stipulated that leading economic work "must have systematic thought and scientific planning". After the Conference, Han Wenxiu, the Executive Deputy Director of the General Office of the Central Financial and Economic Affairs Commission, further explained that long-term goals should notbe made into short-term ones, neither should systematic goals become fragmented, and the overall coordination must be strengthened. It is necessary to prevent the occurrence of the "fallacy of composition" and avoidthe superposition of partial reasonable policies to cause negative effects, in addition to preventing the "fallacy of division" and the oversimplification of the overall task which could make it unbearable for the grassroots.

The emergence of risks in influential market entities, though being sufficiently common risk factors, could very well cause systemic risks when occurring simultaneously. Relevant policy departments should also be aware that if risks are detonated at the same time for risk prevention, it will also cause systemic risks. Taking real estate regulation as an example again; in the current risk detonation, if 6 to10 real estate giants in China collapse at the same time, it could trigger a tsunami in systemic risk in China's domestic real estate market, urban economy, financial industry, and the public.

Obviously, this is not the desired result of the control policy. However, seeing the current approach of centralized rectification, policy resonance, and control measures being taken simultaneously, the above-mentioned systemic risk scenario will then be a possible outcome.

As an independent think tank focusing on public policy, the research team at ANBOUND has always believed that from problem raising to policy formulation, from policy promulgation to its implementation, and to policy effect evaluation, China's public policies should reduce the "one-size-fits-all" approach and the "fallacy of composition" in order enhance the systemic effect of policies. The differences in China's diverse regions, including urban and rural, as well as north and south, are considerably huge. The "one-size-fits-all" approach seemed effective at some point, but from a larger scale and longer time, it would be hard for such an approach to be sustainable.