Global attention has been riveted in recent weeks to a raft of new economic and regulatory measures introduced by President Xi Jinping. These include tighter supervision of where Big-Tech firms can list, how they handle customer data, and even restricting the amount of time that students are allowed to play video games. All of these reforms have been wrapped up in an enticing wealth redistribution and social equity package labelled “common prosperity.”
Commentary has so far been focused on the impact of these new regulations on the Big-Tech firms and their ability to grow at the spectacular rates of the past decade. This is narrow thinking because what President Xi is setting out to do, in essence, is to establish a new economic order in China with an explicit expectation that everyone—the Chinese public, domestic and foreign investors, and the world at large—will have to comply. China is decoupling well before anyone expected and has significantly raised the stakes for America and its partners to respond.
Before we dig into the specifics, it is useful to set some historic context to what President Xi is attempting to do, which is a fundamental reordering of China’s post-1979 economic consensus which was built on the proposition that the country’s openness to the tailwinds of globalization, trade and investment would make it gloriously rich. The peak moment of China’s openness was surely the country’s accession to the WTO in the early 2000s and achieving its ambition of becoming the factory of the world.
As Xi approaches the end of his second term and (potentially) prepares to start a third, he is attempting to open a new chapter in China’s history by seeking to sustain the Communist Party’s hold on power, while restructuring the economic, social, and political incentives away from winner-take-all capitalism.
The president is deeply ambivalent about the rise of the country’s capitalist class, note the public rebuke meted out to Jack Ma late last year for his intemperate outburst on the ills of China’s financial system. At the same time, the president must have been nervous about the prospect of someone like Jack Ma using his wealth and privilege to challenge the supremacy of the Communist Party in the future.
Ma’s disappearance from the public arena should be seen as a Mikhail Khodorkovsky moment for China—just as when Vladimir Putin sought to reduce the influence of the oligarchs two decades ago by detaining the most prominent of them.
The President’s pre-occupation with securing domestic political control coincided with a desire to become more assertive on the world stage. The chaos and disruption of the Trump era, when hostilities over trade and investment touched its peak, came as a challenge and a gift to Xi to complete his consolidation over the levers of power.
The articulation of a “dual circulation” strategy last year as a new model of economic growth was the first sign of China’s decoupling. Dual circulation has been described as a “new development pattern” where domestic and foreign markets can boost each other, with the domestic market as the “mainstay.”
For foreign investors still eager to tap into China’s enormous domestic market, the message from Beijing was clear—you play by our rules or don’t play at all. The rush of global finance into China’s bond market and into wealth management is a sign that Xi’s decoupling strategy is paying off.
The rules-based international order which China advocated during an earlier era now essentially boils down to a Xi-based international order. The new anti-sanctions bill slowly making its way will penalize American and European financial institutions operating in Hong Kong who implement western sanctions against Chinese businesses and individuals. This is a single circulation chokepoint for foreign investors in Xi’s grand vision to decouple from the western order and build his own.