Many in the international press report that China has reached a point in its economic development where property and construction represent too much of GDP.

However, transitioning to a more consumer-driven economy is difficult if property prices fall and consumption drops in response. If that assessment is correct, what should policymakers do?

The main policy idea behind the property market is to curb housing prices, especially in Beijing, Shanghai, Shenzhen and other cities where markets are overheated. Policymakers want to ensure that prices stabilize at their current levels, not drop sharply or grow unsustainably. 

China is now trying to develop ‘mega-city circles.’ For instance, policymakers are connecting the outskirts of Shanghai and nearby cities in Jiangsu and Anhui provinces to build a mega-city circle. A network of high-speed railways, highways and subways makes it possible to build such developments. This change will attract people to live in these smaller cities in the circle and ensure housing prices remain stable or with only modest growth.

While we have built a lot of airports, high-speed railways and highways, the software and services for this infrastructure needs improvement. Improving the quality of goods and services and driving out less efficient or low quality producers can lead to economic growth. These structural changes are important economic drivers and support housing prices. This is why I don’t think China’s housing market  will  collapse like Japan’s did in the 1990s.

Many of the government’s recent policy actions seem sensible – eroding the duopoly that is Tencent and Alibaba, curbing the hours children spend on video games, etc., – but some observers say that the policies seem rushed. What motivated the government to push through so many significant changes in 2021?

We should differentiate policy changes between industries. The regulations in the financial sector, especially for fintech platforms, are well-thought-out and planned. They have arisen naturally given the state of fintech development and the platform economy. They were not rushed or prompted by a singular event, such as Jack Ma’s October 2020 speech.

Increased regulation of internet-based financial services had been carefully planned and implemented before Ma’s talk, including in internet auto insurance, personal insurance, internet small and micro loans and financial holding companies. Before a new regulation is implemented or announced, the People’s Bank of China (PBoC) or China Banking and Insurance Regulatory Commission (CBIRC) first solicits opinions. While these regulations were implemented after Ma’s talk, they were discussed at least one or two years in advance.

Financial regulators’ actions, especially their fintech regulations, make economic sense. They are tackling the fintech’s core business model problems. Fintech companies like Ant Group were providing all sorts of financial services under the cloak of a tech company that evaded the appropriate financial regulations.

The anti-trust regulations aimed at internet platform monopolies are also reasonable. The State Administration for Market Regulation (SAMR)’s April 2021 Alibaba fine signaled that regulators are moving to more strictly regulate market players backed by economic analysis.

Previously, the documents announcing fines were simple and short. This document was unusually long and detailed the economic reasons behind the $2.8 billion fine. This was a milestone for market regulation in China. Regulators understand the importance of making their regulations transparent to market participants.

What about the changes in education policy?

Education is very different from other kinds of business and needs a careful policy change. Kids are taking too many courses and don’t have time for play or sports. But what kind of policies will give kids play and leisure time? It’s a difficult task for policymakers.

American economist Lars Peter Hansen suggests that policymakers should focus more on macro issues such as market design and the motivation incentive instead of micro or specific questions and problems. We should focus more on setting rules and regulations that align the interests of each market participant with our social aggregate motivation. Micro or specific administrative policies are more likely to introduce frictions in the market and regulators’ good intentions might backfire.

I think the widely used “rank-order tournament” system for education in China is one of the fundamental factors driving the country’s tutoring problems. We select “excellent” teachers and students at the school, city, province and national level based on their relative academic performance. This might motivate some people, but over-stratification at any level, especially during the early stages of education, distorts the incentive for students and teachers and pushes everyone to focus on grades rather than personal growth. 

When you survey the Chinese economy, which other areas need closer regulatory oversight? Where do you expect more government intervention in the next year or two?

The development of the fintech industry and platform economy and subsequent regulatory changes are consistent with the idea of 摸着石头过河 (crossing the river by touching the stones). We allow the industry to grow during its infant stage and don’t overly restrict it.

Once it matures and problems emerge, we think about how to deal with them. To know which industries face regulatory changes, look for industries that are growing too rapidly. In the past 10-15 years, we saw rapid growth in fintech. We also see this in peer-to-peer lending (P2P), Bitcoin, Ant, Meituan, Didi, Waterdrop and other internet-based platforms, the so-called “internet plus” businesses.

“Internet plus” was meant to improve production efficiency across industries. However, the network effect associated with internet platforms can lead to a natural monopoly. If monopolistic power is combined with financial intermediation without appropriate regulation, moral hazard and risky behavior will destabilize the market. Platforms might use their monopolistic power to exploit their users.

Without proper regulations, it is natural for platforms owners to bump up their returns and maximize their profit margins using all sorts of leverage or capital manipulation. This kind of business sector will definitely receive special regulatory attention.

What are the biggest regulatory challenges in this space?  

The key to regulating the platforms is separating information services from financial intermediation. Take P2P for example— the government should build a centralized information exchange platform that connects small entrepreneurs, shop owners and businesspeople who seek financing and with investors like venture capitalists, private equity and angels who have high-risk, high-reward appetites. Startups and entrepreneurs with innovative technologies should be directly funded by VC/PEs or angels as opposed to commercial banks.

For these types of high-risk projects, risk sharing is important. It is difficult to assess these projects’ risks upfront, hence indirect financing through bank loans is not suitable. Direct financing with risk sharing between investors and entrepreneurs is better, as these players want returns above bank loan interest rates and can afford to take bigger risks.

The searching or matching costs of high-risk entrepreneurs and investors can be significantly reduced by establishing a centralized information exchange platform owned by a public, non-participant third party. A private owner might exploit the monopoly power and use leverage to bump up the profit margin, which is why all P2P was abolished in China by the end of 2020.   

With Ant as a pioneer, most e-commerce, social media, ride hailing, food delivery and other service platform apps in China now offer loan programs, trying to embed financial services within information service platforms. The regulators have already noticed and held regulatory talks with these platforms in April 2021.

In many ways common prosperity appears to be aimed at ensuring China hews closer to a northern European market-socialist model, but with a deeper level of state ownership in strategic sectors. Is that a fair assessment or too simplistic?

The main idea of the common prosperity and northern European model is fairness that originates from Marxism. The “fairness” is not to ensure everyone earns exactly the same, but everyone is rewarded fairly for their efforts. Some people were concerned by “common prosperity,” as they thought that common prosperity meant “seizing the wealth of rich people and distributing it to the poor,” which is wrong.

So, common prosperity is not Marxist in the sense of “From each according to his ability, to each according to his needs,” nor is it socialist, it’s somewhere in between?

Yes. A good market mechanism should reward people who put effort into their work. We should focus on a market design to ensure this kind of fairness, which is a valid path towards attaining common prosperity.

One of the problems laid out in Thomas Piketty’s book Capitalism in the Twenty-First Century and exemplified by the US is the concentration of wealth due to the nature of competitive financial markets in a developed economy. They are like casinos. Imagine that you are wealthy and I am not. We get into a “flip a coin” game with infinite rounds until one of us broke. Both of us have a 50-50 chance of winning each round. But if your wealth is a thousand times more than mine, then you will win in the end. I will have to leave the table after ten consecutive losses, but you can afford 100 or more consecutive losses. I think this is one of the reasons behind today’s wealth concentration.

Entrepreneurs in China have historically faced higher borrowing costs than state-owned enterprises. Is this still the case? And, if so, what can be done in the years ahead to lower those costs?

This is a common misconception about borrowing and bank loans in China, especially when we compare SOEs to private entrepreneurs. Yes, on average SOEs get more loans from commercial banks compared to private firms and entrepreneurs. But in the US, look at who gets loans from banks; it’s always the large, mature companies with low risk and stable cash flows. It is small, new firms with high risk that go to the stock market, to PEs or VCs to get financed. Their financing costs, of course, are much higher than bank loans.

After the Law of Commercial Banking was implemented in 1995 and revised in 2003, China’s banking industry has undergone important reforms. All commercial banks in China now operate according to the same business model of commercial banks from any other country.

Commercial banks focus on questions such as, “How can I maximize profits while managing risk enough to satisfy regulators?” Large commercial banks in China have professional credit analysts and credit officers experienced in managing credit risk. Commercial banks no longer give out policy loans at the request of the local government. However, the risk management of small city and rural commercial banks is poor in comparison.

What if you are a trader in Wuxi who has no ambition to go to the stock market, but you still want to grow. What can be done to help those people?

This is the reason why we have city and rural commercial banks. These are the commercial banks that resemble local or community banks in the US. They were established to serve local households and small enterprises because they have more information about local businesses and a better understanding of how to manage their credit risk.

Are entrepreneurs given the same interest rates as SOEs?

Loan and interest rates are determined by the credit risk of the borrower. If the commercial bank assesses the default risk is low or the company’s credit quality is good, the company will get a lower interest rate. It is a purely economic question, not a discrimination question based on whether you are private or an SOE. In fact, some large private companies with good credit quality get lower interest rates from banks than SOEs.

More commercial banks in the US and China are using credit rationing for small retail loans. As small retail loans are large in number but low in value, it is more economical for commercial banks to set a default risk cutoff rate, with identical interest rates for all of these loans. If a Wuxi trader can provide information to local banks proving that he is a low-risk borrower, then he will get the loan.

You have written extensively about Chinese stock markets. Compared to markets overseas, do you see any need for further reform/reshaping of China’s stock markets?

There have been a lot of changes to financial market regulation and how financial regulators convey information. One milestone is the recent 2.4 billion RMB court fine against Kangmei Pharmaceutical for accounting fraud. Small investors grouped together to sue the company because Kangmei manipulated their accounting books for three years.

The China Securities Regulatory Commission (CSRC) originally only fined the Kangmei CEO $900,000. But the fine was insignificant compared with the CEO’s large dividends. After the slap on the wrist, around 1,000 investors filed a class-action lawsuit against the company. Now, after the first trial, the fine is 2.4 billion RMB. This was a big step towards protecting small investors in the stock market.

Another sign of change is the new IPO policy. Previously, IPOs were approved by the CSRC, but now it’s a registration process. When the CSRC decided which firms could IPO, there was a lot of room for regulatory capture and rent seeking, which is part of the reason why it is difficult to get a special treatment (ST) firm delisted. Allowing ST (zombie) firms to stay in the stock market opened it up to moral hazard and speculative trading. Now the regulations are headed in the right direction.

Finally, in the case of Evergrande, the regulators (PBoC, CBIRC and CSRC) have made it very clear that a bailout is unlikely and that debt restructuring will be solved in the market. The regulators’ statement conveys clear information against the bailout and reduces uncertainty in the market.

Nan Li is associate professor of finance at the Antai College of Economics & Management at Shanghai Jiao Tong University. 

原文链接：https://www.amcham-shanghai.org/en/article/insight-magazine-evolution-chinas-regulatory-regime