Isabella Weber, author of “How China Escaped Shock Therapy”, traced China’s journey to a market economy. After the cultural revolution, China underwent major agricultural reforms based on a dual price system that allowed greater market participation while ensuring price stability. As the successful model was gradually expanded to urban and industrial production, the dual track system gave away to further market liberalisation and pricing reforms.

However, as China's long term economic growth slows, potentially exacerbating underlying inflationary pressures, Weber explains that a power shift back to the state through recent measures such as the adoption of the dual circulation economic model, tightening of state control over the real estate and other sectors as well as the common prosperity initiative, is critical to maintaining price and market stability.

The following key points were discussed:

• How China escaped from shock therapy
• The debate on China’s market reform approach
• The introduction of dual-track system
• Guanzi influenced economic decision-making
• How state market participation has helped China maintain economic stability
• China’s roadmap for long term economic growth

How China escaped from shock therapy

Emmanuel Daniel (ED): In the 1980s, monetarism was on the rise as the dominant economic model and many countries around the world were quickly liberalising their financial systems to facilitate capital flows. The resulting “big bang” approach as it was called, had mixed results.

Some developed countries benefited tremendously from the financialisation of their economies, while others paid a huge price in failing to make the transitions.

It was during this period that China was just coming out of the cultural revolution and from its many failed attempts at a planned economy.

The fascinating story of how China’s young economic intellectuals at the time deliberated the options available to them and eventually took a gradual path is captured in a recent book “How China Escaped the Shock Therapy” by Isabella Weber.

Written originally as a PhD thesis, Isabella spent several years in China interviewing many of the intellectuals who have today become the who’s who in China’s economic policy making.

The reasons China is not a Russia today was never a given. It was always a fragile process. China could have made the same choices as any other countries, but it didn’t. It is this story of the intellectual process that the country went through that is instructive to us today. I talked to Isabella recently on how China laid the foundations for the way in which it is making the transition to a liberal economy and also how it can be projected into the future.

The debate on China’s market reform approach

ED: Isabella Weber, it's a great pleasure to be able to speak with you. I just want you to know to start off that the book that you've written, “How China Escaped Shock Therapy”, is perhaps one of the best economics thriller that I've read in a long time. It's real. It's about people. It's about history. And it's about policymaking, and it contributes to economic thought.

So I firstly must start by congratulating you on an excellent book. In fact, I'd said by starting that the book has a rather long title, it could have a catchier title because everything that you have to say in your book about how China escaped shock therapy, I read the book, to get clues in terms of how China's economic policymaking evolved. I said thriller because you captured the process where China's economists and intellectuals contributed to policymaking by deliberating on economic thought that was popular at that time, that was the period of the monetarists like John Galbraith and Milton Friedman and the so-called Washington Consensus.

In the 1980s, we were promoting the idea of shock therapy and many countries subscribed to that idea. The UK, Russia, Japan, but not China, and deliberately so. So firstly, I want to congratulate you on capturing the essence of what actually happened in China. Now, the first thing I want to ask of you is to explain to us, and it's in the book, just very briefly, the process by which Chinese economic intellectual thought evolved. How would you characterise it, as you've captured in your book?

Isabella Weber (IW): Let me start by thanking you so much for having me on the show. This is a great pleasure. Thank you so much for the high praise that you have expressed for my book, it means a lot to me, since it comes from someone who has so much experience in China with business and economic policymaking. So thank you very much.

On your question, in terms of the evolution of economics from the 70s, to the late 80s and early 90s, we really have a process that starts with the reinstatement of economics. During the Cultural Revolution, economics as a discipline, as a programme of research and education was very much cancelled. So in the late 70s, with the beginning of reform, it's also a rebirth of economics. Now, China embarks on very rapid agricultural reforms, at the same time, economics as a research programme is just being reborn. So this creates a situation where there are people who were engaged with the agricultural reforms, supporting the agricultural reforms through economic research, who were not part of the core discipline of economics. Why the agricultural reforms are happening, the discipline of economics is starting to make up its own theories and approaches to economic policymaking. And through this dual process, broadly speaking, two kinds of paradigms of thinking about economic reform emerged in the 1980s. In some sense, these competing paradigms continue throughout the 1990s and 2000s. Of course, with changing topics, changing points of focus, and so on.

ED: Take us one step back.  This is right after the period of the Great Leap Forward, which was a politically induced process. It had political ambitions in it.

IW: The Cultural Revolution, right?

ED: The Cultural Revolution and then came the desire for market reform. And you throw in many wonderful names, and some of whom I've had the pleasure of encountering. Zhang Weiying, and then we have Wu Jinglian, but Zhang Weiying especially, because he wrote that paper, that Moganshan paper that started the ball rolling in terms of a gradualist approach. What were the choices that China had after the Great Leap Forward in terms of making that market reform ambition a reality? What were the choices that they had in front of them at that point?

IW: After the Great Leap Forward, which is a pretty long time before the beginning of reform, there was a revival of forms of market organisation, but then there's the cultural revolution, which is really all about enlightening people through revolutionary consciousness, mass mobilisation, and so on. So the idea during the Cultural Revolution and late Maoism is to try to bring China forward by pursuing evermore revolutionary forms of organization. Then Mao dies in 1976, and in fact, his designated heir, Hua Guofeng, starts to refocus the efforts on a more technocratic kind of developmentalists paradigm. But at that time in the 70s, the attempt is to move towards another big push industrialisation with a 10-year plan that is meant to push China ahead, pretty much still in the spirit of Soviet type of economic development. That failed drastically, mainly because this plan was based on importing foreign technology and exporting petroleum. But that petroleum that was projected was never found, so this would have risked China entering a balance of payment crisis. However, this did do something important to the whole agenda in China, since it did start a new kind of opening up, and it did start an engagement with foreign technology and foreign forms of industrialisation in a new way. So that parallel occurance of the failure of an attempt at another big push, while at the same time, the realisation on the part of many important Chinese leaders, also leaders that were later on considered so-called conservatives like, for example, Deng Liqun, that the foreign countries had developed so much, not only Europe and the US, but also the neighbouring East Asian countries had leapt ahead where China was perceiving itself still as a backward poor country. So in the late 70s, after the attempt of creating socialism and higher forms of communism during the cultural revolution had failed, and then the more technocratic developmentalist big push had failed, the question was, how can China move forward. China was still a very poor country, as many of my interview partners had pointed out to me, the beginning of reform was really about the basic question of how to make sure that everybody has enough to eat and a good house to live in. So in that sense, it was still about very basic questions of development. It became clear that these attempts of having one big plan, one big model, had pretty much failed so that China had to move towards a more eclectic kind of way of reforming its system, and in fact, creating a new kind of economic system where the idea was early on that markets should play a more important role. But the big question was, how could markets be mobilised and introduced into China's planned economy? This was the subject of the great market reform debate of the 80s.

ED: And the subject of your book. Thanks for bringing us right into where your book starts. So you start by coagulating the personalities who influenced the process and these were, essentially economists who had contributed to the thinking. So talk us through a little bit about the economic thought for market reform that built up in that period.

IW: Yeah, so on the one hand, you had economists who often were middle-aged economists at the time, who had been trained in Soviet economics, and who then very quickly tried to learn to their best the international kind of mainstream economics, and who were basically trying to figure out what a model for China's future economic system could be. These people followed a basic logic of craving a stylised understanding of the old system as one starting point, and then creating a model or blueprint of a stylised vision for the future system. And then reform was thought of as a way of transitioning from this initial system to the new system. So you have two sets of models. And the question is, how do you get from A to B. On the other hand, through the agricultural reforms, a process of gradualist reform had started. And in fact, at the core of the agricultural reforms, was the creation of markets within the old system. This created the impetus for an alternative vision for market reforms where the idea was not that you had to know what the target model would be from the outside and then kind of work your way backwards. But instead, you have to start from the specific conditions in the present and ask yourself, where within the prevailing system can you unleash market forces, and then harness these market forces as they are emerging. And then eventually, as these markets grow, and the market dynamic takes on a life of its own, you transform your whole system, but this is a gradualist experimentalists process where when you start, you do not know what exactly the target model will look like. So these were two competing visions.

The introduction of dual-track system

ED: Right. And they were starting from a very strong agrarian base, and when you say market reform you meant market reform of agricultural products, essential goods, not market reform of discretionary products. So this is where China was in the early 80s. And then you said that there were two competing approaches. One was a gradualist, and the other was the packaged reform. So talk us through the two models that were considered who were their champions, and the decisions that will be in that process.

IW: On the part of the gradualist, the champions were really an alliance of older generation revolutionaries, or who used to be revolutionaries, people like for example, Du Runsheng, who is considered the father of China's agricultural reforms, together with young reformed intellectuals who had spent their youth in the countryside during the Cultural Revolution, then returned to the cities, were still committed to the question of how to organise agriculture in China. And the question of what China's future should be at this critical crossroads in the late 1980s. So these returning young intellectuals, intellectuals in the sense that they often had a background from intellectual families or in the sense that they entered universities, after Deng Xiaoping reopened the entrance exams in the late 70s. They were committed to the question of agricultural reform, and received support from the older generation leaders. Now, they basically supported reform not so much by coming up with one big theory of what reform should be, but by studying local experiments that were emerging at the time around agricultural reform and trying to understand what they meant, trying to understand what kind of logic these experiments followed, and asking the question whether the lessons of these experiments could be translated into a form of national policy.

At the core of this approach was what is called the dual-track price system, which again emerged initially from the agricultural reforms, where the idea was that before reform, the communes would be delivering their quota of say grain to the national plan. After reform, households would be producing their share in the quota. But once they had produced their share of the quota they could go off and do whatever they wanted, including producing for the market. So as a result of this, you get a duality of plan and market where the plan continues to exist, but at the same time the households are allowed to also produce and engage in market activities. And this same kind of logic was then transferred into the urban industrial economy, where the production units continued to do their share in the plan. But once they had fulfilled their share in the plan, they were allowed to produce for the market.

On the surface, this is simply a dual track price system. In reality, this is a mechanism as Zhang Weiying, in fact, pointed out in his important paper, this is a mechanism for reform in the sense that these market mechanisms are allowed to emerge. And as they emerge and as every enterprise now no longer only caters to the plan, but also caters to the market, these enterprises changed their very nature, they changed from being units that simply receive commands and orders from higher up levels, into enterprises that begin to be market oriented, that start to study how to sell their product, how to innovate products, how to move into new segments of the market, and so on. As such, the dual-track price system emerges as a reform approach more broadly.

ED: It was during the third plenary of the 11th Central Committee in 1980, that Deng Xiaoping put that road to market reform of agriculture at that point, and then by 1984, that's when the Young Turks as you will call them, the packaged reformers came to the scene. And I guess Zhang Weiying would be a packaged reformer?

IW: Zhang Weiying has an interesting intellectual trajectory in the sense that today we think of Zhang Weiying as one of the strongest neoliberal voices in China. In the 1980s, when Zhang Weiying first entered the scene in 1984. He at the time was actually a Master student from a peasant family. So he clearly was not part of the Beijing intellectual movements. But he was part of this conference at Moganshan. Since this conference, was recruiting people from across the country based on essay submissions and Zhang Weiying’s essay was chosen. So at that time, Zhang Weiying had already encountered some of it in Friedman's writings and so on. But at the same time, he was coming at these questions from the perspective of the political economy of agriculture. And he was arguing for a dual-track system in the sense of a mechanism for reform, as I've just pointed out. Even though he started to be acquainted with “neoliberal” economics, and later on, actually became one of the champions of this way of thinking about the economy. In the 80s, he played a critical role in carving out an alternative to packaged reform, where packaged reform was much closer aligned with the thinking of Milton Friedman.

ED: That alternative turned out to have changed history, because Russia took on the shock therapy, as it were, and liberalised prices, which essentially eventually benefited foreigners, rather than the local population. It didn't give a benchmark in terms of where price discovery at the present level, at the agricultural level, could be sustainable in Russia. Then, it created inflation and created all sorts of problems from there. Talk to us in terms of the dual-track approach, what was the political price that China had to pay to take that approach both domestically and globally? Because I think at that point, China was at variance. In some ways, the Washington Consensus didn't reach China, it was really up to China whether it wanted to subscribe to that approach. And so it was left very much to its own. But did it have pressure to reform more quickly or to become market oriented in a more dramatic fashion, rather than the way in which it took?

IW: I think the genius of the dual track system was that within the old system, it created stakeholders who had very strong interest in moving towards more market since if you think about it, the officials were now starting to cater to the market at very strong incentives for this system to go on. Through the plan, they got support from the state and cheap inputs and so on, through the market they could generate high revenues become rich personally and also move ahead their production units. At the same time, the dual-track itself had a dual nature, it was genius, but it was also a curse, since it created huge incentives for corruption on the part of the officials who were in charge of these precious state assets and precious state inputs at low prices.

This problem of corruption did become very prevalent in the late 80s. Furthermore, as a result of this maintainence of unreformed parts of the system, and dual-track that wasn't a kind of perverted situation, where in some cases say a professor will be making less money than a peddler who is selling eggs in the street. So this created enormous social tensions since intellectuals, people who used to be in the highest stratas in the old system started to become very dissatisfied with this kind of arrangement.

So then,  This becomes a pretty explosive type of mix that in the late 80s, in 1988, creates a new momentum towards implementing comprehensive price reform, doing away with the dual-track system in one big blow. Since the idea of wholesale liberalisation suggested that there could be somewhat painful, but quick and clear solution to the kind of mess that was emerging. However, this solution came along with enormous risks. Since it did risk the possibility of inflation, and inflation in China was politically, enormously sensitive. First of all, the revolution happened in a context of the nationalists having failed to bring hyperinflation under control. So as such, it had a huge political historical significance. Secondly, throughout the Maoist period, prices in China were very stable. And Chinese people were not really dependent on fluctuating prices, they were used to getting their models rationed and having access to modestly priced consumer goods, of course, on a very low level of consumption, but still, there was a stark sense of stability. So being faced with sudden price rises had an enormously explosive political implication.

In this context, in 1988, Deng Xiaoping ultimately withdrew from the project of the “Big Bang”. But I think it's critical to see that having the dual-track price system in place, allowed China to withdraw from a Big Bang. They had a second-best solution if you want so for the problem of reform. It wasn't perfect, it had its problems and so on. But it allowed them to withdraw and go with a different kind of approach instead.

ED: What's interesting in what you're saying is you've not used the word state-owned enterprises yet. The fact that the Chinese economy at that point for everything except manufactured goods was essentially a closed economy. And this whole price control mechanism, the gradualist approach, was possible because basically, for all essential goods, it was state monopolies that own them, ran them, and still does today. Was that part of the formula in terms of being able to absorb some of the inflation that you're talking about?

IW: Yeah, thank you, it's great that you have emphasise this duality of essential and non-essential goods. One other aspect of this dual kind of system was letting go of non-essential, small commodities while maintaining control over essential goods. So the key of the reform debate was really, how to organise the most essential most upstream types of industries. There was not too much disagreement whether a local toy producer should be state controlled or not, this is a marginal product that could be let go of. And both the packaged reforms and the gradualist would think that the state should not be involved in every production activity for every small and non-essential good. But the key of the question was whether or not to keep a certain kind of control over essential goods. Now, in the late 80s, when inflation started to become a serious issue, this coincided with the letting go of more and more goods, some of which turned out to be more essential than people might have thought. So for example, tobacco and certain kinds of liquor turned out to make more of an impact on people's consumption behaviour. Right? [JH5] More than one would have thought. The struggle in some sense is also about the definition of the boundaries between what is essential and what is not essential, and therefore, where the state should be engaged in what form.

Guanzi influenced economic decision-making

ED: As that process evolves, we come into the 1990s, and then 2001, China's entry into the WTO. What gave China the confidence of saying that, Okay, at this point, we engage market reform at the global level.

IW: Already in the late 80s, there is the emergence of the so-called coastal development strategy, which is based on the idea that, that on the one hand, the East Asian Tigers have been successful in exporting light industry, labour-intensive goods. On the other hand, these same East Asian Tigers were at the brink of losing their competitiveness in these sectors. Since the labour costs were rising, the living standards were rising, and so on. China's Zhao Ziyang, in particular, spotted an opportunity there where China could fill that gap that was emerging by creating a light industry export-oriented sector of the economy, where the idea was that if you were able to generate foreign revenues by basically exploiting cheap labour, you could then upgrade your upstream industries, with foreign technology and so on without endangering foreign indebtedness. And I think that this avoidance of foreign indebtedness is quite critical in the way in which China has engaged with the global economy since it was, in some sense, a necessary condition for China to engage with the global economy on its own terms.

In the early 2000s, this model is then kind of taken to the next level with the accession to the WTO. Clearly, export becomes a very major part of China's economy. At the same time, I think that with the benefit of hindsight, we can say that the ambition of China's leadership was never for the Chinese economy to simply dissolve in the global economy, or for China to simply be the workshop of the world, but that there was an ambition to create China's own national champions to upgrade China's own core industries. So that eventually it would be an economic power that could rely on its own competitive forms, rather than simply relying on the export of cheap labour. So in that sense, the export of cheap labour, which then becomes even more important after the accession to the WTO is a means to an end. And the end is the upgrading of China's economy is the development of the basic material conditions of China's economy, the creation of competitive firms, and not simply being the workshop of multinationals headquartered in the US or the EU.

ED: In fact, I'd say this, that in reading your book, it gives me context in terms of what happened in the 80s and 90s and the intellectual framework. The wireframe, as it were, that guided the process through. Then it leaves me with so many questions as to how that framework can be extrapolated to where the issues that China faces today. I'm going to come to that in a second. But the other thing that I found extremely interesting and wonderful about your book is that you also explored the intellectual dimension. You gave reference to China's historical perspective. You talked about China's Spring and Autumn period, the Guanzi  period, where you had the iron and salt debate of the Han Dynasty. You brought that in, you also took a look at price controls during World War Two in the US. You're deriving ideas from these perspectives. To what extent were these perspectives in the minds of the intellectuals that you talked about in your book?

IW: The reason why I have this chapter on ancient Chinese economic thought and long traditions of statecraft is to make sure that thinking about market and state in the Chinese context is happening against the background of a very long history. On the one hand, my book by focusing on the escape from shock therapy in the 80s, suggests that there was a real discussion, and that much was at stake, and that consequential decisions were being taken. So in that sense, it's not like the long history simply predetermines what happens to China. So there was a moment of decision making. But at the same time, in this decision making, the long history and intellectual trajectories play some role. And in particular, I think that a specific way of thinking about state market participation, that we can trace all the way back to the Guanzi, is important in the Chinese context.

This basic conception of state market participation was also in encapsulated in the so-called ever normal granaries, which was the granary system that prevailed in different forms, and with ups and downs, and so on. But basically, throughout the Imperial period, where the idea was that publicly owned graneries will be buying grain during harvest time and selling grain just before harvest time, and thereby stabilising the price of grain. Now, this specific example, might seem very specific and irrelevant to thinking about what's happening in the 80s or now, but I think if we move to a more abstract level, we can see that this is a very specific kind of state market relation where the state acts as a market player. The public granaries are publicly owned, but they participate in the market reacting to price movements. In essence, they are market players, but at the same time, they have not simply, the profit of the economic granary in mind, but they have the stabilisation of the market itself in mind. So as such, this is a state market participation that is meant to stabilise the market, but also thereby ensure that the market is working and that marketisation continues and that people are producing for the market.

 And I think that this basic logic is a recurring theme in China, since the 80s. Even if we look at developments more recently, for example, the stabilisation of prices of matters in 2021. And you read in the news that, whereas in the US the whole inflation debate is all about the Fed and monetary policy, in China it's also about the rise of the prices of certain important commodities. And then you read that the state is mobilising the state-owned enterprises to release some of that reserves and not hoard certain matters. And at the same time, there's a state reserve of certain matters, which is releasing some of its stocks in order to stabilise the price of matters that have the ability to push up costs for more downstream goods, then this is the same kind of logic of state market participation as a way of steering the economy as a whole.

ED: What's interesting, bringing you right into today, and what you just mentioned, when China participated in the WTO, it had its state-owned enterprises that were essentially the players. But something very interesting happened. In Shenzhen, you started seeing the digital companies just blossom and become huge and become infrastructure in themselves. And very interestingly, they raised capital outside China. And so they are actually funded from outside the country. So this is a whole new dimension that didn't exist before and wasn't intended. In the narration that you're giving me, I don't see any intention to allow even China to be funded from a global capital market perspective. And they now contribute to more than 50%. of national income tax.

Where you think economic thought is right now in embracing this element into the overall China story? And the question that I ask, the very policymakers that you've interviewed is two things. The liberalisation of the Renminbi and the opening up of the capital account, the convertibility of the capital and current account. Now, the story that I'm getting is that the intellectual community is committed to eventual liberalisation of that convertibility. And I would like to see that happen as well, because that also contributes to a more justifiable or more transparent price discovery mechanism. If everything is domestic, and especially when China is importing a lot more than before, the whole price discovery mechanism has to be global in nature. Otherwise, you will see that China is subsidising a lot of essential goods, infrastructure and so on. And then you've also got the dimension of increasing indebtedness of the national balance sheet. So, a lot of that has been created to support infrastructure building, which will be ongoing in terms of productivity and so on. Now, given all of these new dimensions that have been added, what are you looking at as an intellectual, as someone who has thought deep and true about economic policymaking? What are the elements that you look out for?

How state market participation has helped China maintain economic stability

IW: On the question of foreign capital, I think we can think of this a little bit like a dance with a tiger or something. The idea of, yes, it's useful to have foreign capital, it can be used towards national development, right? But at the same time, it unleashes a whole dynamic of its own, that can become dangerous, and that can get out of hand. As such, I think that foreign capital has played an incredibly important role. But there's always a sense of making sure that the importance of foreign capital is not crossing certain lines so that the party in the state ultimately maintain control over steering the economy. On the question of Renminbi liberalisation and the price discovery mechanism. I think there is a logic in China that direct control is in some sense, the most costly form of control. So the more market you can use, the more efficient in a sense.

 ED: I see that too.

IW: Yeah, but at the same time, you want to be in a position from the perspective of the state to leverage markets towards your own ends, and that requires very sophisticated complex kinds of institutions. And my sense is that for the RMB internationalisation, these institutions are still trying to be figured out and haven't quite been figured out. In terms of the indebtedness and bubbles and so on that you are mentioning. I think that's one way of thinking about the current Evergrande crisis and the fear and anxiety that has been unleashed around that.

ED: In fact, just to take that one point, now that you mentioned Evergrande, the thing is that inflation just caught up in one item, which is property prices, right? In fact, there's also inflation in the cost of education, for example, and stuff like that. So inflation has popped up and there are elements of it, which are out of control at the moment. So please continue what you're saying.

IW: Yeah. You mentioned cost of education. So the crackdown against private tutoring could also be thought of as a market stabilising in other parts of the state, where the state is basically in this case, not through market participation, but by the creation of new kinds of rules. Rules that constrain the profitability of the provision of private tutoring and thereby basically force the price of private tutoring down. Right. So in that sense, this is, again a form of anti-inflationary policy that is targeted at one specific kind of service sector. Now, you could think that private tutoring is some sort of inessential side, small downstream sector, which at some point in China's history was, but now it no longer is when you come to a point where in order to pass university entrance exams, you have to go through private tutoring and private tutoring is exorbitantly expensive in relation to the incomes of large numbers of people, then this is actually a very big part of consumer price inflation. So, as such, we can think of the crackdown on private tutoring also from this perspective. Not exclusively, it also has dimensions of equity.

Now, back to Evergrande. I think that, clearly, there has been an enormous inflation in real estate prices. As such we have seen a massive asset price inflation. And, in fact, this has been pointed out for a long time by now, I'd say almost a decade or so this has been a discussion and there has been this constant idea in commentary that eventually the real estate bubble will burst. And that some went as far as to say that this is what finally might like reverse China's fortunes and could create such instability, that it would drastically change China's trajectory in whatever way.

I think, in last year in August, the so called three red lines were issued and the capitalisation requirements for real estate companies were increased. This was in some sense, a way of reducing the speculative activities on the real estate market and thereby an attempt to reverse the building up of this massive bubble. So one way of thinking about what's happening right now is that this is possibly the most dramatic example of China's state market participation towards restabilisation, which also takes the form of countervailing the build-up of bubbles.  Bubbles clearly are not a stabilising element. So if you want to restabilise a market, you need to somehow get rid of these bubbles, whether this will be successful or not, I think remains to be seen, I think it's clear that a lot of thought and deliberation has gone into this and that probably there will be an attempt to ring fence the implications as much as possible and to protect the buyers of apartments and so on. So that the financial dynamic is contained as much as possible from the real side of the real estate sector.

ED: In your book, when you talk about price control, you're talking about essential goods, non-essential goods. And then with success in the economy with growing affordability, there’s a desire to own assets. And I guess that because the desire to control, China has not expanded the number of asset classes that can absorb the wealth that has been created, and properties, perhaps just the one most important asset. In fact, capital markets isn't one of them, because 70% of the capital market is owned by the state. There again the state uses its power to absorb fluctuations in the capital market to keep it controlled. In other words, there's a price control mechanism in capital markets.

IW: The price control mechanism. is not one of command and order. It's not like setting a price by commanding it to be that price, but basically through market participating or market shaping kind of policies.

China’s roadmap for long term economic growth

ED: That kind of mechanism. If it was any other state, it would cost the state a lot of money, and a lot of resources. Very few states will have the ability to intervene, to absorb and manage price control. There comes a point where China does need to liberalise even further, expand the asset classes that are available so that property is not the most important asset class, and then, of course, par down the debt that is created by inviting foreigners to take on some of the recurring debt and the bonds market that is created. 

So I'm just thinking, what should we be looking out for, in terms of economic policy going forward? Some of the personalities that you have mentioned in your book, Zhou Xiaochuan, and for example, is a champion of that price discovery mechanism eventually being even more liberalised. And what I'm being told by some policymakers is that at each point that China wanted to liberalise further, something happened in the global market. There was the 2008 US crisis, there was the 1997-1998 Asian financial crisis where that's what taught China that opening up too quickly has its consequences and hot money flows is not something that you want to encourage. Then there was the 2008 crisis and then a 2013 I think there was an inflation at that point in time. Every time that China wanted to confidently liberalise, it was faced with challenges that was not of his own making, it was something that was happening globally, and right now, of course, it's the pandemic and the massive amount of liquidity that exists outside of China, which in itself is a contributor to inflation, if China were to import that. So I don't expect to know answers from you, but I just want to get a sense of what should we be looking out for?

IW: Yeah, I think that there tends to be a tendency of downplaying the importance of big slogans that come out China as like some form of propaganda or just big announcements that don't really have a lot of repercussions. I think that is quite dangerous in the sense that I think we are better advised to take these announcements seriously. And we may like them or not, we may think this is the right direction or not. But I think that typically, when observing this over the last decades of reformed policymaking, when there are big announcements of big new slogans, they typically do indicate a new set of priorities. And then the question becomes, how are these priorities going to be pursued? And this is then a question of detail policy design. But such big announcements typically do indicate a certain direction. I think right now, we should be taking the announcement around common prosperity seriously it and I think what this means is a big question and we have to study carefully and watch closely. But I think we are well advised to take this seriously. Similarly, the dual circulation idea, which is in some sense, complimentary to the idea of common prosperity, which if we want to translate this into somewhat more standard macroeconomic terms can be thought of as a re-strengthening of domestic demand, while not giving up on the openness of the economy. At the same time, I think that what has been labelled as crackdowns, I'm not quite sure if this is quite the right word, but I just use it since it helps us know what we are referring to that, this is probably not over, but that we are seeing a kind of rebalancing of the of the power balance between the state and private actors. And this has started with the most obvious kind of sectors like, as we have talked about the private tutoring sector, but also of course, the whole ecommerce platform capitalism type of sector, it has now moved into some extent into real estate, which is, of course, another very major sector. So in these key sectors in which private enterprises and private actors have gained very significant amounts of economic and therefore also, to some extent political power, I think we are seeing a rebalancing and it doesn't seem to be over.

ED: Is dual circulation a rehashing of the dual-track reforms that you're talking about? Do you see lines from 1984 to today?

IW: I don't think it's a direct rehashing of the dual track system, but it is very closely connected to the coastal development strategy. So the idea that you do engage with the global economy, but you engage with the global economy, basically to serve the national economy, I think it is one that dates back to the 80s. And that reoccurs time and again, and that has now been strengthened once more as a key slogan.

ED: And the common prosperity. Do you see a shadow of Thomas Piketty’s capital in the 21st century, is there a spirit of that in common prosperity?

IW: I see a shadow of Deng Xiaoping’s some have to become rich first. So in some sense, if you say some have to become rich first, this means that you are going to accept a rapid increase in inequality. But if you take first, seriously, this also means that at some point there should be rebalancing. Right now, I'm not saying that this is this has been predetermined by Deng Xiaoping’s slogan. In fact, I think that whether this first really means first, or this means some have to become rich fullstop, has been a very contested issue within China. But it seems that China has reached a point where this element of some have to become rich first. So others also have to become more prosperous later seems to be upon us.

ED: Isabella, thank you so much for having this conversation with me, I hope that we will be able to have another conversation at another point. We live in a fascinating time where China seems to have created a very credible response to price discovery, to globalisation. On one extreme of the spectrum, while the US seems to be promoting the other extreme of the spectrum, where it's a weak state, where it is the markets that shape the entire economy, and has a trickle-down effect, so to speak. And they seem to be anathema to each other. And yet, in some strange way, they are feeding off each other. So that's the conversation I would love to have with you at some point.

IW: In some sense, it's interesting to see how in the context of a pandemic, there also seems to be a paradigm shift in the making in the US. Whereas in terms of economic policy paradigm, the two countries seem to be actually converging rather than diverging, this is happening in the context of quite intense political tensions, which, in some sense, defines this moment.

ED: So what you're saying is that in the US, actually I'm also hearing that a little bit, in as much as they are at both ends of the spectrum, the US is also learning that local government is important. That accountability, that the state can drive a lot of the infrastructure spending and so on. So that’s what you're referring to, I think.

IW: Yeah, I mean, in some sense, we are seeing the greatest revival of industrial policy in the US since the Reagan era. From that angle, the importance of public investment, the importance of this state, for infrastructure development, and so on now, all elements that are quite consistent with what we have seen in China.

ED: And speaking to someone who has written an incredible book, I'm glad to get that last statement from you. And I think we should leave it on that note, but let's continue on this conversation at a later date. Thank you so much.

IW: Thank you so much for having me.