China's Social Engineering Pitfalls

CPC fixation on stability and control undermines the the inherent ethos of consumerism.

China’s physical engineering prowess is nothing short of extraordinary. From world-class infrastructure and eco-friendly cities to space exploration and high-speed trains, the accomplishments of Chinese engineers as agents of transformation on the supply side of its economy are nothing short of remarkable. The problem is those skills are not easily transferable to the demand side, especially for Chinese consumers.

The disconnect arises in China’s political system. Modern Chinese governance places great emphasis on stability and control. That priority, in conjunction with an historical culture of scientific breakthroughs and massive investments in STEM-based higher education (science, technology, engineering and mathematics), has led to a deep-rooted ethos of physical engineering accomplishments. Last week, I stressed the critical role these considerations played in defining the DNA of China’s “ultimate producer.” At the same time, I raised doubts as to whether this approach was applicable to the DNA of the Chinese consumer. This week, I will attempt to unpack that statement.

Steeped in the legacy of central planning, Beijing policymakers are relying on a timeworn engineering approach to jump start consumer demand. But in this case, it is a great experiment in social engineering dominated by government diktat rather than the organic responses of human behavior. That stands in sharp contrast to the incentive-based, free-wheeling spirit of individuality that has become so prevalent in the consumerism of the West. Unfortunately, as underscored by the sub-40% GDP share of Chinese consumption, Beijing’s efforts at social engineering have floundered. This raises serious questions about the potential success of China’s consumer-led rebalancing strategy

As seen through the famous template of John Kenneth Galbraith’s Affluent Society, the American experience offers some strong hints of the DNA of a consumer society. Key characteristics include upward mobility of income and wealth, free and open communication and dissemination of information, shared, or networking, of lifestyle perceptions, individuality and the associated freedom of choice, diminished inequality of lifestyles, intergenerational wealth transfer, and, ultimately, and, ultimately, the political freedom of choosing elected representatives. Notwithstanding considerable controversy over this Galbraithian perception, as seen through the western lens consumer societies are, in essence, very much an aspirational value proposition.

That raises a basic question for Chinese strategy: Is China’s political system compatible with the aspirational values of a consumer society? That’s where China’s translation of the DNA of the ultimate producer stands in sharp contrast with the DNA of consumer-led growth. As noted, China’s political system places enormous emphasis on control and social stability; recent technological advances — especially face recognition and other forms of surveillance — in conjunction with the advent of a “social credit scoring system,” and increased censorship clearly up the ante on State-directed control of China’s vast population. What some have dubbed a techno-authoritarianism of Chinese governance is seemingly antithetical to the aspirational values of Western consumer societies.

Therein lies an important dichotomy: producers are far easier to control than consumers. That was the case for China in the early days of the PRC when producers fell under the tight control of the State Planning Agency. And it is the case again today as the pendulum of Chinese economic power has swung back from a once dynamic, entrepreneurial private sector toward state-directed, state-owned enterprises. This a point that I touched on in my most recent book, Accidental Conflict, that merits further emphasis.

The risk is that Beijing’s fixation on state-directed control may well be at odds with the DNA of a modern, dynamic consumer society. Recent shifts in Chinese governance raise serious concerns about this potential clash. In early 2013, shortly after assuming his leadership position, Xi Jinping emphasized a “mass-line” education campaign that attempted to address four “bad habits” — formalism, bureaucracy, hedonism, and extravagance — that he believed were key sources of social decay and corruption of the Communist Party of China. This was initially viewed as an offshoot of Xi’s signature anti-corruption campaign. It has since taken on a life of its own.

Indeed, some eight years later, in 2021, a regulatory crackdown on internet platform companies drew attention to an even sharper focus on bad habits, in this case, targeting not just freewheeling entrepreneurs like Alibaba’s Jack Ma, but also so-called lifestyle excesses associated with video gaming, online music, celebrity fan culture, and private tutoring. All this points to an increased focus on state-directed social engineering, raising obvious and important questions about China’s political tolerance for the western-style aspirational value proposition that is so fundamental to the DNA of a modern consumer society.

A comparable issue arises in China’s recent attempts to cope with its serious population problem. With the working age population now set to decline through the end of this century due to the legacy of distortions associated with the now disbanded one-child family planning policy, Beijing has just taken yet another in a long series of actions aimed at boosting birth rates of child-bearing females. Recent targeted measures include enhanced childbirth support, expanded childcare, strengthened education support, and general efforts to foster a “birth friendly” social atmosphere. Yet as the chart below on female fertility rates shows, China is expected to remain in a very deep demographic hole.

This is not the first time Beijing has attempted to address China’s looming demographic crisis. In October 2015, China adopted a two-child policy. Then in 2021, a three-child policy was announced, complete with a package of financial incentives and social support actions aimed at boosting fertility rates. Despite these efforts, as the chart underscores, Chinese fertility rates have held well below the so-called replacement rate of 2.1 live births per child-bearing woman. China’s large population of potential mothers has largely resisted government-directed social engineering efforts. Polling data point to two reasons for this development — concerns over sharply rising costs of Chinese child rearing expenses and increasingly entrenched one-child societal norms. This latter point may well be key — a generation of younger Chinese have now gotten use to smaller families. Here as well, the very human reaction of resistance to the attempted coercion of state-directed social engineering bears noting in thinking about China’s efforts to stimulate the behavioral norms of consumer demand.

Admittedly, in keeping with the famous critique of Yale’s Jonathan Spence, all of the above is a western perspective of a Chinese problem. I have learned over the years to be mindful of the need to look at China’s problems through its own lens. But this issue touches on the very core of the human experience: Can there ever be a consumer society with Chinese characteristics that contradicts the aspirational value proposition that we see in flourishing consumer societies elsewhere in the world? The ultimate solution to China’s chronic underconsumption problem may well hinge on these deep considerations of human behavior.

This conclusion is especially relevant to the current Chinese policy debate. A recent meeting of China’s Central Economic Work Conference hinted at yet another big consumption stimulus to come. But if Chinese authorities remain steadfast in tightening control over social norms and the human spirit, then all the stimulus in the world – from trade-in campaigns to social-safety-net reforms – could be for naught.

NOTE: This is the last dispatch of Conflict for 2024. With much appreciation for your readership and feedback, I wish you all the very best for the Holidays. See you in early 2025.