Exclusive Insight: How China Can Learn from America's Mistakes: Lessons for the Future
China's Increasing Emphasis on Regulatory Control in Light of US Regulatory Lapses
In this commentary, the author explores the topic of regulation in the context of the recent banking crisis in the US and China's reaction to it. The article takes a critical look at the failures of US regulatory agencies in controlling the growth of emerging industries and highlights the steps taken by China to address its own regulatory issues. The author argues that China's emphasis on regulation is rooted in its political foundation and sees regulatory control as a way to manage risks to the government's power. The article also discusses the controversial nature of Xi Jinping's regulatory policies and provides a different perspective on their goals and objectives. Ultimately, the article raises important questions about the role of regulation in modern economies and invites readers to consider whether the West might one day "copy China's homework."
In the first two years of the COVID-19 outbreak, the Chinese government was quite effective in controlling the spread of the virus, creating a significant contrast with the chaos experienced by other countries around the world. As a result, nationalist sentiments among Chinese official media and "little pinky" enthusiasts were greatly emboldened, leading to the creation of a novel phrase: "copying China's homework," which belittled the West's failure to learn from China's COVID-19 management strategies. However, such derision can be perceived as a form of ideological bias, typical of Chinese propaganda, given the harsh and coercive nature of the measures implemented by China, which have been widely condemned. The imposition of a full lockdown in Shanghai in April 2022 silenced this taunt, and soon almost all of China faced the same excruciating eight-month ordeal. The disastrous outcomes of China's "zero-tolerance" policy in 2022 dealt a severe blow to the populist sentiment of China's hawks, and the notion of "copying China's homework" is now ridiculed in the West. It is apparent that the West has little interest in replicating China's actions.
Nevertheless, China may be inclined to emulate the West's actions.
Just last week, the bankruptcy of another US financial institution shook the world. This did not come as a surprise. The sudden collapse of Silicon Valley Bank (SVB) overnight sparked another liquidity crisis and value decline in the US banking sector, endangering several banks' financial stability. Despite the White House issuing a series of remedies to placate the markets, the current market reaction remains optimistic, but the crisis appears to be far from over. As this crisis rapidly spreads to Europe, Credit Suisse, also facing a crisis, was acquired by UBS at a low price.
We are no strangers to every financial crisis in the US and the West. Every time we review the root causes of a crisis, regulatory lapses always (if not always) play the most important role in the crisis. This time is no exception. The Trump administration's deregulatory measures for low-asset banks in 2018 (economic growth, regulatory relaxation, and consumer protection bills, S.2155) are considered to be the main reason for the collapse of SVB today. Of course, we are not discussing the issue of accountability here, and we do not need to single out the Trump administration, because regulatory lapses, as the fundamental reason for the crisis, span multiple presidential terms and parties. The Clinton administration also repealed the Glass-Steagall Act in 1999, which is widely regarded as the root cause of the 2008 financial crisis. Therefore, the media and academia have been calling for strengthened regulation in the financial and technological fields for many years.
However, US regulatory agencies appear to be sluggish in their efforts to formulate relevant policies. Despite Gary Gensler, a former Wall Street executive and a top expert in cryptocurrencies, assuming the role of chairman of the US SEC in 2021, he has yet to introduce more regulatory policies for the cryptocurrency market, which he described as the "Wild West" during a Senate hearing. This lack of action has led to the collapse of FTX and a series of cryptocurrency crashes, all of which could have been prevented through stronger regulations.
Looking back, the recent Netflix documentary on Bernie Madoff exposed how his Ponzi scheme evaded regulation repeatedly, both before and during the 2008 financial crisis.
Therefore, regulatory lapses are a fundamental issue in almost all crises.
By contrast, the failures of regulation in the United States may provide a "lesson" that China is willing to learn. Due to its political foundation, the Chinese government has always placed greater emphasis on regulation than the West, seeing all economic crises as potential threats to its political power.
In the 1990s, China's economy mainly comprised traditional industries such as agriculture, primary manufacturing, and finance, making government regulation relatively straightforward. Consequently, China's regulation outpaced the development of its economy and industry during this period. Private enterprises at the time constantly urged the government to relax industry regulations, resulting in an "over-regulation" era. Specifically, the financial industry, which emerged as an "innovative" industry in China in the early 1990s, has been under strict government control since its inception, with regulations at every step of the way. Today calls for further relaxation of regulations have prompted the China Securities Regulatory Commission to delegate IPO approval to the stock exchange.
However, as the new millennium dawned, China's technology industry experienced a completely different scenario. With the growth rate of the industry far exceeding the government's expectations, driven by independent research and development, foreign enterprises, and the rise of China's internet, the industry underwent rapid development. However, the Chinese government's serious lack of understanding of technology and the internet, bureaucratic inaction, and inadequate emphasis on development led to a lag in regulating emerging industries such as the internet, high-tech industries, new service industries, and the real estate industry, which only allowed private participation in 1998. The resulting time gap created the most profitable era for every investor, whether foreign or domestic, in China's history.
Unfortunately, the good times ended in late 2020 when the Chinese government halted Ant Group's IPO, signaling the start of the latest wave of regulation that continues to this day. While Western media and markets have widely interpreted Xi Jinping's tough measures as an unprecedented crackdown on the entire private economy, regardless of industry or specific company, the Chinese government has not faltered from its regulatory plan. It is clear that Xi Jinping and his team are not concerned with how the outside world interprets their policies. The strengthening of regulation across various industries remains the government's top priority, with more regulatory policies on the horizon, as demonstrated by the recent closure of a widely used bond market software in China.
Although 40 years of economic reform have brought immense success to China, rapid economic development has also created a breeding ground for crises, with the accumulation of numerous bubbles and potential risks.
ns?
Xi Jinping's decision to tackle China's economic issues before they become "too big to fail" is a bold move that underscores his understanding that China's economic control system is fragile despite its second-largest global economy status. Xi and his government are aware that bubbles and potential risks could accumulate rapidly and create a breeding ground for crises that they may not be able to resolve alone if they get out of control and burst. Therefore, they are committed to resolving these issues and risks as early as possible.
Investors in the Chinese stock market, particularly foreign investors, are less concerned about Ant Group's lack of financial industry regulation, the chaotic phenomenon of illegal parking caused by shared bicycles, or the lawless expansion of Chinese internet giants that could affect the normal development of Chinese startups. For them, enterprise profit growth and stock price increases are the most significant concerns. However, Xi must face the consequences of these problems, and this has resulted in the "three red lines" restricting the real estate industry, the regulation of Ant Group, the internet and education industries, and the controversy surrounding Jack Ma.
Although the means employed by Xi have been criticized, it is essential to note that his actual purpose is different from the West's interpretation. Speculating on China's regulatory goals purely from an ideological perspective is misleading. The absence of Western-style elections does not imply that rulers cannot exercise legitimate regulatory authority. Strengthening regulation is not about Xi's personal political power but rather the government's administrative power to manage risks, which is no different from other governments' objectives. The "strengthening regulation" agenda is about making up for the lack of regulation over the past two decades and establishing a normative activity area for every type of economic activity, particularly emerging industries. This policy will allow participants to engage in economic activities normally, and issues that outsiders are concerned about will be addressed one by one. The recently established National Bureau of Statistics is an excellent example of regulatory control over national data security and the latest policy developed in response to the Didi incident two years ago.
The US regulatory system has lagged far behind the urgent needs of industry development, and this has resulted in their inability to regulate lobbying by internet and Wall Street giants, causing worldwide damage. China is closely watching these developments, and every crisis, such as the bankruptcy of SVB, stimulates Beijing's nerves. If Chinese regulation proves successful, it is an interesting question whether the US and the entire West would choose to emulate China's operations.
(The author of this article is Liu Zihan, a financial professional in Asia and a special analysis expert for "The China Brief".)