After experiencing the impact of the COVID-19 pandemic, the rise of anti-globalization sentiments, and intensified geopolitical competition, the operational environment of the global economy has significantly differed from the one during the era of globalization. This change is not limited to the international scene but is equally true to China as well. In recent years, we have observed certain systemic changes in such an environment of the Chinese economy.
For private enterprises, the challenges in business operations are increasing. The business environment too continues to deteriorate, and there is little wonder to see the weakening confidence in the future market. For foreign enterprises, the heightened geopolitical competition has raised concerns about investing in China. On one hand, there are worries about possible sanctions and restrictions from the Western world, and on the other hand, concerns exist that China might overreact in response to the West, putting pressure on foreign investments. For ordinary consumers, due to unfavorable expectations regarding economic prospects, employment, income growth, and capital markets, their confidence in consumption and investment is noticeably restrained. From the perspective of economic operation mechanisms, the goal set in the country's Third Plenum of the 18th Central Committee to "allow the market to play a decisive role in resource allocation" has not been effectively realized so far.
Entering 2024, researchers at ANBOUND believe that there is unlikely to be a significant change in the overall economic and geopolitical environments, both domestically and internationally. This implies that the operational situation and mechanisms of the Chinese economy are also unlikely to undergo the anticipated reforms and changes. Despite the hope for reforms similar to the Third Plenum of the 11th Central Committee, aspirations do not necessarily align with reality. Therefore, there should be an objective analysis of the operational mechanisms and institutional characteristics of the future Chinese economy.
The future trajectory of the Chinese economy has sparked various opinions, with one perspective suggesting that China will move towards a "war-driven economy". Accordingly, investment strategies should align with its principles. The focus would be on two key areas: military industry, cutting-edge technologies, food security, supply and marketing cooperatives, large-scale community canteens, and low-end consumption. Conversely, the promotion of high-end consumption, large-city strategies, and individual wealth creation should be discouraged.
ANBOUND's founder Kung Chan explicitly disagrees with this viewpoint. Chan argues that as a generation that emerged from a war-driven economy, they understand the implications, and it is highly unlikely for China to engage in actual warfare. Historically, "war-driven" and "economy" have been incompatible. If the emphasis is on war, the economy suffers, and vice versa. Some may question this, citing countries that have developed their economies while engaging in military preparedness. However, the "war-driven economy" referred to here signifies a sustained state of preparedness, where the economy is driven by and subordinated to the goal of preparedness for war, and not normal defense investments.
The example of the Soviet Union serves as a cautionary tale for the so-called "war-driven economy". During the Cold War, the Soviet Union's intense focus on preparation for war to compete with the United States led to the development of a massive military apparatus at the expense of economic capabilities. This approach eventually contributed to the disintegration of the Soviet Union. During the era under the leadership of Leonid Brezhnev, despite the Soviet Union reaching its zenith in comprehensive national strength and ranking as the world's second-largest economy, its economic structure became increasingly distorted. Due to the one-sided development of the military-industrial complex, heavy industry's share of the total industrial output remained consistently between 73% and 75%. Soviet military theorists believed that developing the military industry was crucial for national security, asserting that "to strengthen national defense forces, it is essential to maintain the country's military-economic potential at a level sufficient to smoothly counter and crush any aggression".
Looking back at the logical contradictions of the "war-driven economy", Chan believes that its inherent logic lies in the fact that while armament is crucial infrastructure development, it is also a long-term liability for the nation. The outcomes of intense armament are essentially twofold: either it is used for war, which means sacrificing the economy, or it drags down the economy because the massive military apparatus is a considerable burden that requires an enormous economic scale for support. ANBOUND has long pointed out that infrastructure represents materialized debt. Not only does it require investment upfront, but there are also ongoing costs for maintenance in the future. Regardless of the type of infrastructure, if the quantity is excessively large, repayment is inevitable. This logic highlights the incompatibility between "war-drivenness" and "economy". China must avoid falling into the trap of a "war-driven economy.
If the "war-driven economy" is not China's option, what model will the future Chinese economy adopt? At the recently held ANBOUND 2024 Trends Symposium, Chan put forward his assessment that it is more likely for China to move toward a "centralized economy". The term "centralized economy" refers to an economic form dominated by state power that achieves resource control. In our view, the "centralized economy" has two prominent characteristics:
The first aspect involves achieving effective coverage and control in strategic fields. This means that almost all industries with crucial value will be controlled by the Communist Party or giant state-owned enterprises. These sectors are diverse, including traditional areas such as commercial banking, insurance, securities, telecommunications, oil, coal, grain, electricity, infrastructure, automotive manufacturing, and critical mining, where central or state-owned enterprises have maintained a dominant position. Even in fields like real estate, semiconductors, venture capital, bank card clearing, digital technology, and asset management, which were not traditionally dominated by state-owned enterprises, they are gradually becoming increasingly so.
The second aspect is achieving dominant concentration in competitive fields. In the past, the delineation of territories for state-owned enterprises emphasized their control in significant areas related to national security and people's livelihoods, and in foundational sectors. However, in areas characterized by more market competition, such as the internet, retail, textiles and apparel, internet finance, photovoltaics, electric vehicles, batteries, etc., private enterprises have been the main players. Nevertheless, in the "centralized economy" model, even if private enterprises are the main operators in these fields, the central government will control almost all private enterprises through a systematic policy framework.
A typical example is Alipay of the Ant Group, which was once entirely been under Alibaba. After undergoing rectification driven by the Chinese central government, things have changed. On December 29 last year, the People's Bank of China (PBoC) released the data on major changes in non-bank payment institutions' permits (up to December 2023). According to this information, the PBoC approved the change of Alipay Network Technology to a state without an actual controller. This means that Alipay will no longer have a single actual controller and will be governed by major shareholders independently exercising their voting rights. This change originated from Ant Group's decision to adjust its voting power structure in early 2023, reducing Alibaba founder Jack Ma's voting power from 53% to 6.2%. A year later, the central bank approved Alipay under Ant Group to become a private enterprise without an actual controller, signifying the central bank's recognition of Ant Group's equity rectification.
While Jack Ma once half-jokingly mentioned that he could give Alipay to the country if needed, this time, despite state-owned enterprises not holding equity in Alipay, transforming Alipay into a private enterprise without an actual controller enhances the perceived security and controllability of its financial operations from the perspective of policy authorities. In fact, transforming a company into one without an actual controller provides an important prerequisite for the PBoC to implement financial supervision and exert control over Alipay. Therefore, we believe that the "centralized economy" could become an important characteristic of China's future economy.
Concerning the question if the "centralized economy" is the same as the planned economy, we believe that there are differences between the two, primarily due to the addition of a market element. Under a planned economy, there is no market in China; however, under the "centralized economy", there is still a market that will continue to expand with economic growth, operating according to market rules. The key distinction is that this "market" will be subject to some degree of central control. Policy systems or major projects, along with fiscal and financial resources, can be utilized for achieving this indirect control over the market.
Final analysis conclusion:
The future development of the Chinese economy may take on a "centralized economic" form. The central government is likely to maintain coverage and control in crucial strategic sectors through central enterprises. Simultaneously, a certain level of control over competitive sectors of private enterprises may be upheld through policy systems and resource allocation. Market entities and government institutions may soon need to adapt to these changes in the Chinese economy.
