Stepping Inside - Book Notes

Categories: Study 2024-06-30

Reading the Book

I recently finished reading “Stepping Inside - The Chinese Government and Economic Development”. I had a quick read last year, and recently, while it was raining continuously in Hangzhou, I stayed at home listening to the rain and reading, which was very pleasant. It’s a good book that’s worth reading twice. I spent some time transcribing some good points for future reference.

Transcribing the Book

1. There is a phenomenon in China’s economy: areas at administrative boundaries (especially provincial borders) generally have relatively backward economic development.

2. China is vast, but its population distribution is extremely uneven. If you draw a straight line from Aihui in Heilongjiang (now south of Heihe City) to Tengchong in Yunnan, dividing the country’s area in two, the eastern part, which occupies 43% of the area, is home to 94% of the population, while the western part, which occupies 57% of the area, is home to only 6% of the population.

3. In 2019, among the 53 counties (including county-level cities) in Zhejiang Province, 18 were among the top 100 counties in the country. However, in some other provinces, the “province directly administering counties” reform has encountered at least two difficulties. First, the province cannot manage them all. Before the reform, a province managed an average of 12 cities; after the reform, it managed an average of 52 cities and counties. Money and power were given to the counties, but supervision could not keep up, leading to various chaos in the county areas, such as the prevalence of land-related corruption.

4. Obtaining and transmitting information requires a lot of time and effort. Superiors must constantly communicate downwards, subordinates must constantly report upwards, and peers must constantly communicate. Therefore, a major feature of working within the system is “a mountain of documents and a sea of meetings.” Documents and meetings, as carriers of information, have also become one of the carriers of power, and a complex system of documents and meetings has become an indispensable part of the operation of power.

5. The information and phenomena that the public comes into contact with are mostly the results of games, and students who lack social experience are prone to mistaking the results of the game for the process of the game.

6. So-called power is essentially the question of who makes the final decision when things are unclear.

7. To grasp the true intentions and trends of the government, one cannot just read documents; one must also look at the flow and quantity of government funds. Therefore, finance is never a purely economic issue.

8. To understand the model of government governance and operation, one must first understand the distribution rules of power and resources within the government system, including both the vertical distribution between superior and subordinate governments and the horizontal distribution among governments at the same level.

9. The functions of various levels of government in China are basically isomorphic, with superiors leading subordinates. In principle, the superior has the final decision-making power over all the work of the subordinate and can overturn all the decisions of the subordinate. However, it is impossible for the superior to master and process all the information, so many matters are actually handled solely by the subordinate. Even if the superior wants to intervene, they often have to rely on the information provided by the subordinate. For example, when a superior inspects work, they must listen to the subordinate’s report. The superior does not necessarily know whether the content is reliable. If the superior does not have an independent source of information, they may be led by the nose by the subordinate. Therefore, although the superior nominally has the final decision-making power and possesses “formal authority,” due to the complexity and difficulty of processing information, the subordinate actually has a great deal of autonomy and possesses “actual authority.” Maintaining the balance between these two types of authority is the key to the effective operation of the government. If the subordinate has a clear information advantage and bears the main consequences, then they should make autonomous decisions. If the subordinate has an information advantage, but the consequences of the decision are very important to the superior, the superior may intervene more. However, the superior’s intervention may reduce the subordinate’s work enthusiasm, and the result may not be more favorable to the superior.

10. Because information is complex and unreliable information is everywhere, and power and responsibility are highly personalized, the rules and regulations within the system cannot completely replace personal trust. When a superior promotes a subordinate, in addition to considering their work ability, they must try to arrange trustworthy people in key positions.

11. Successful policies are backed by successful negotiation and compromise, not mechanical command and execution. Therefore, understanding conflicts of interest and understanding coordination and resolution mechanisms are the basis for understanding policy.

12. The model of local governments promoting economic development in China has three major characteristics: first, “heavy on land, light on people” in the process of urbanization; second, “heavy on scale, heavy on expansion” in the competition for investment attraction; and third, “heavy on investment, heavy on production, light on consumption” in the economic structure.

13. The so-called “land finance” includes not only the huge income from the transfer of land use rights, but also various tax revenues related to land use and development. Of course, local governments do not make money by selling land; what they really want is the industrial and commercial economic activities attracted after land development.

14. The economist Steven N.S. Cheung once made an analogy: a local government is like a shopping mall, and attracting investment is like bringing in shops. Shops only need to pay a low entry fee (similar to industrial land transfer fees), but their operating income must be shared with the shopping mall (similar to value-added tax, which is shared regardless of whether the shop is profitable, as long as there is turnover). The shopping mall wants to maximize its overall income, so it must consider both the balance between entry fees and rent, and the balance between different shops. Some shops are famous and can bring more customer traffic to the shopping mall. In that case, the shopping mall can not only waive their entry fees, but also reduce the share, and can even subsidize them (similar to various subsidies given to enterprises by local governments).

15. This land-centered urbanization neglects the true core of urbanization: people. Land prices need to be driven by housing prices, but housing prices must be paid by the people, and mortgages must be repaid by the buyers’ income. Therefore, the capitalization of land is essentially the capitalization of personal income. What supports housing prices and land prices is people’s income. Ignoring people, ignoring that urbanization should serve people and create a better environment and higher income for people, urbanization has gone astray.

16. Local governments can not only create an environment for economic development, they are also deeply involved in economic development themselves. This is fully reflected in the process of attracting investment.

17. The most prominent feature of China’s unbalanced economic structure is insufficient consumption… Residents’ income is transferred to the government and enterprises, becoming infrastructure such as highways and high-speed rails, factories and machinery, while the proportion of consumer goods such as cars and home appliances for the common people is relatively low… In the early stages of economic development, transferring more resources from household consumption to capital accumulation, turning them into infrastructure and factories, can effectively promote economic take-off and industrial transformation, and increase productivity and income. However, when economic development reaches a certain stage, this method becomes unsustainable.

18. Real estate is often called the “mother of economic cycles,” the root of which lies in its inherent supply-demand contradiction: on the one hand, banks can create almost infinite new purchasing power through mortgages; on the other hand, the supply of non-renewable urban land is limited. This contradiction often leads to cyclical cycles of asset bubbles and bursts, which is the core contradiction of financial and real estate instability. And real estate is not only connected to banks, but also to the wealth and consumption of thousands of households, so its impact is huge.

19. When housing prices rise, it not only increases the burden of mortgage debt, but also widens the gap between the rich and the poor, thereby stimulating low-income groups to borrow for consumption. This phenomenon is called “trickle-down consumption.” Among those in debt, the debt burden of low-income groups is particularly heavy. High household debt makes it difficult to withstand economic recessions, especially those caused by falling housing prices. The wealth of low-income groups is almost entirely in real estate, most of which is mortgages owed to banks. Their debt-to-asset ratio is very high, and they are very vulnerable to the impact of falling housing prices.

20. To resolve the risk of household debt, in addition to curbing the upward trend of housing prices, the fundamental solution is to increase income, especially the income of middle- and low-income groups, and encourage them to work in places that can provide more opportunities and higher income. Let the economic development and income gap between regions become an opportunity for low-income groups to seek development, rather than an obstacle to population flow.

21. The accumulated wealth gap is generally much larger than the annual income gap, because people with wealth tend to accumulate wealth more easily, have higher returns on assets, and have more investment options and means to deal with risks.

22. In the land acquisition stage, developed countries generally require enterprises to use their own capital, while China allows real estate companies to borrow money to “buy land,” which stimulates them to compete to raise land prices and hoard land. The hoarded land can then be used as collateral to leverage more borrowed funds, and thus hoard more land, so the scale and debt of real estate companies are rolling larger and larger.

23. The average total assets per household in Beijing (not net assets, without deducting mortgages and other liabilities) is 8.93 million yuan, and in Shanghai it is 8.07 million yuan, which is six or seven times that of Xinjiang (1.28 million yuan) and Jilin (1.42 million yuan). Most of this gap comes from housing prices. The rise in housing prices has also widened the inequality within the same city. Cities with high housing prices often have high vacancy rates. On the one hand, many people cannot afford to buy a house, and on the other hand, many houses are vacant. If all household wealth (assets), including houses, are counted together, according to the above-mentioned survey data from the People’s Bank of China, in 2019, the richest 10% of the population owned 49% of the total wealth, while the poorest 40% only owned 8% of the total wealth. The rise in housing prices not only increases the burden of mortgage debt, but also widens the gap between the rich and the poor, thereby stimulating low-income groups to borrow for consumption. This phenomenon is called “trickle-down consumption,” which is very common in developed countries. From 2014 to 2017, the savings of the lowest 50% of income earners in China were basically zero or even negative (income did not cover expenses). Since 2015, various personal consumer loans such as credit cards, Ant Huabei, and JD Baitiao have surged. According to data from the People’s Bank of China on the operation of the payment system, from 2016 to 2018, the average annual growth rate of the total outstanding credit balance in bank credit cards and debit cards was close to 30%. In 2019, credit card risks emerged, and various banks put on the brakes.

24. China’s household debt burden is close to that of developed countries, its government debt burden is lower than that of developed countries, but its corporate debt burden is much higher than that of developed countries.

25. The ballast of Chinese wealth is housing, and the ballast of American wealth is financial assets. This major difference can help understand some of the basic policies of the two countries, such as China’s emphasis on the real estate market and the United States’ emphasis on the stock market.

26. The process of debt accumulation or “leveraging” is the process of increasing business dealings between people, which will promote economic prosperity. And the process of debt contraction or “deleveraging” is the process of reducing business activities, which will bring about economic recession.

27. High household debt makes it difficult to withstand economic recessions, especially those caused by falling housing prices. The wealth of low-income groups is almost entirely in real estate, most of which is mortgages owed to banks. Their debt-to-asset ratio is very high, and they are very vulnerable to the impact of falling housing prices. In the 2008 US subprime mortgage crisis, one in every four mortgage loans was underwater, and the assets of many poor people were wiped out overnight. From 2007 to 2010, the net worth of the poorest 20% of people in the United States fell from an average of $30,000 to almost zero. The net worth of the richest 20% of people fell by less than 10%, from an average of $3.2 million to $2.9 million, and this decline was very brief. In 2016, with the rebound of the stock and housing markets, the real wealth (after deducting inflation) of the richest 10% of people increased by 16% compared to before the crisis. But the real wealth of the bottom 50% of income earners was cut in half, returning to the level of 1971. 40 years of accumulation were wiped out in a crisis.

28. Overall, whether it is bankruptcy reorganization or bankruptcy liquidation, China still has a long way to go in the reform and construction of its enterprise exit system.

29. New energy technologies must enter the market when they do not have a competitive advantage. At this time, there are only two ways: the first is to impose high carbon taxes or fossil fuel taxes on traditional energy to increase their costs and create space for the development of new energy; the second is to directly subsidize the new energy industry. The first method is obviously not economical enough, because in the early stage of new energy development, traditional energy occupies more than 90% of the market and has low costs. Imposing heavy taxes on it will greatly increase the tax burden and cause huge distortions. Therefore, a more reasonable approach is to directly subsidize new energy, accelerate its technological progress and cost reduction. After its market share continues to expand and its cost approaches that of traditional energy, gradually reduce subsidies while taxing traditional energy to accelerate its exit. 30.
30. From the economic development model to specific industrial policies, there is no one-size-fits-all answer that applies to all situations. Specific issues must be analyzed specifically and constantly adjusted according to changes in reality. Policy tools need to be constantly developed and changed because government capabilities and market conditions are also constantly developing and changing. In this sense, an in-depth understanding of the real development process of developed countries, understanding the specific difficulties they have experienced and the ways they have overcome them, is more enlightening than the grandiloquent “Washington Consensus.”

Insights

Overall, the author speaks from a relatively positive perspective. There are also many negative aspects that are probably not easy to talk about, but it is already a very good book on the Chinese economy and policies. Compared to my previous self, after reading this book, I at least see things a little deeper, and have corrected some of my own wrong cognitions and things I didn’t know. It’s very good. Reading is a process of gradually correcting one’s own perspective and cognition.