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Keyu Jin is a tenured professor of economics at the London School of Economics who has previously worked with institutions including the World Bank, International Monetary Fund and the China Banking Regulatory Commission. Her new book, The New China Playbook, argues for a new model of growth for the Chinese economy better suited to the needs of the country’s younger generations. The book ranges widely, covering sectors from tech to financials, while seeking to dispel some misunderstanding about how China works. We touched on several of these points in the following interview, which has been lightly edited for clarity and length.

Q: As everyone knows China’s economy has grown enormously in the last 40 years. But the title of your book suggests that the country now needs a ‘new playbook’ for the next stage of its development. Can you start by telling us why, and what the main features need to be?

A: China’s economy is entering a new era. There is no more scope for catch up growth, no more low-hanging fruit in the economy. The reform-based growth and stimulus from cheap credit worked very well in the past and delivered economic benefits to so many people in a short amount of time. But that kind of model is no longer feasible in the new era, which is about innovation-based growth, the only source of growth that is actually sustainable in the long run. 

China also has a new, more demanding civil society which is in search of a higher quality of life, focused on softer metrics of development, like the environment, food security, and more equitable growth. Part of the new playbook is that there is a radically different younger generation, very different from their parents’ generation which went through huge vicissitudes such as the Cultural Revolution. So China has an increasingly complex society, which is after more things than just growth. 

At various stages you talk about China as being a country with strong state capacity, but weak institutions. Can you explain what you mean by that?

This is a problem for all developing countries to a different extent. Weak institutions include things like incomplete legal frameworks, a lack of IP protection, bad corporate governance — most evidently in the financial system — and also the prevalence of red tape that has tripped up many private businesses. Institutions take time to build, to strengthen, and to mature. In the early stages, I would argue that the Chinese state was strong enough to partly overcome some of these institutional weaknesses: the state was able to help entrepreneurs overcome a lot of initial barriers. There are a lot of competitive mechanisms embedded in the political economy, such as local ‘mayors’ [local government leaders] competing with each other, that actually prevents China from becoming a state with exploitative powers. 

That strong state capacity is also the reason why China became the biggest consumer and producer of electric vehicles in less than a decade: rolling out 4 million charging stations, coordinated supply chains for manufacturers to battery makers — all that required strong state capacity, even just the basic physical infrastructure. Rather than waiting for markets to build over time, you had the initial jump starting of development, propelled by a strong state.

But now it’s got to the stage where China needs stronger institutions, stronger corporate governance, a stronger rule of law to ensure that different parts of society can drive growth, and so that the country is not just reliant on the state to drive the economy into the future. In the new era, the time has come for the state to step back. In contrast to the old playbook, where the state played a major role in building physical infrastructure and markets, now the state needs to let the markets do more of the work — because China’s economy is mature enough, the market economy works well, there’s competition, infrastructure, whether it’s physical or digital, already in place. The state now needs to hold back and have a lighter rein on the economy. 

In the new playbook, driven by innovation rather than industrialization, managing expectations and sustaining private-sector confidence are more important than ever. 

China’s institutions have matured greatly, if you look at the legal framework, or the judicial system, basic monitoring and enforcement institutions, even the bond market that has grown so rapidly in the last 10 years. Now the problem is that if, for instance, you want more innovation, you really need a very mature financial system where you have small to medium sized companies that can tap into the capital markets – which still accounts for only 10 percent of aggregate financing. The government also needs greater credibility, and to display its commitment to fostering a long-term stable business environment, and avoid erratic policies.

Critics would say that under Xi Jinping the country is not headed in that direction, though, and that what we’ve seen is greater reliance on state-owned enterprises, capricious regulation of sectors like tech, and increased state meddling. Isn’t that unlikely to deliver the sort of growth and change that you’re arguing is needed?

I look at these actions and interpret them in a slightly different context. Part of the new playbook is also about having a more restrained growth model. Legal boundaries were unclear in the past, meaning that companies that either were led by entrepreneurs with the right connections, or who could exploit regulatory loopholes, were able to make a lot of money. Capital is not going to be above politics in China, and we will see more regulation and monitoring in the future. 

The Chinese government used to talk about innovation coming first and regulation afterwards; you saw this blossoming of entrepreneurship and innovation but also problems in areas like P2P platforms, which were the embodiment of innovation without regulation. Now, the government is focusing more on consumer protection, and more on people’s data protection rather than simply letting companies thrive. 

So the intentions of these new regulations are not irrational. They are founded on the need to regulate big tech, to curb monopolies, and to protect consumer data. It’s a transnational issue, too: Governments in western economies also talk about more regulations, and how to come up with a good regulatory framework to adapt to the new digital information age. These are all legitimate questions. 

What has happened in China is that this has not necessarily turned into well implemented and designed policies, some of which is due to technocratic errors. And this is a very big lesson for the Chinese government: the unintended consequence has been a big drop in confidence, and a lack of government credibility. And that can really take its toll on the economy. 

Now, it’s about the government fine-tuning its policies: yes, they were dramatic, they were meant to come out with a big bang, to let everyone know that this is what’s happening. And now it’s being readjusted and recalibrated, many of these policies are being reconsidered. It’s not efficient, it has had ramifications on the economy, but it is a learning process. In the new playbook, driven by innovation rather than industrialization, managing expectations and sustaining private-sector confidence are more important than ever. And very few governments — including those in the West — are particularly good at that. 

Some would say, look at things like the growing use of Communist Party committees inside private companies, look at the investment-driven response to the recent economic slowdown: Is there a danger that instead of moving to the new playbook that you talk about, they’re actually going back to an old model for the economy?

Well, we have to look at the numbers and the stats. The fact is that the government really needs the private sector, even more than the other way around. The private sector provides 80 percent of all Chinese employment, 60 or 70 percent of national output and the majority of China’s innovation efforts. The government is keenly aware of that, evidenced by the fact that after the economy reached such a low point recently, now the government is embracing the private sector again. There have been some potentially poor policy choices in the last two years. But the evidence is that they need the private sector. 

So I don’t think there’s a reversion to the old playbook. You can see that growth targets are no longer the biggest deal in China: We don’t really talk about that as much anymore. They talk about a myriad of objectives, growth being one of them, employment being one of them, but also the environment, financial and social stability. There was, in the past, a single target and metric for local government performance, and that was GDP, and that really shaped the economic landscape. If we look at monitoring metrics, the fiscal metrics, the constraints on local governments to borrow and the focus on the financial system, it all goes to show that it is no longer the old playbook. 

You write that one of the key characteristics of the Chinese government has been that it is aware of the hazards of social discontent, and that it’s responsive to the needs of society as they emerge. As Chinese society becomes more complex, can the government keep on responding with this sort of Whack-a-Mole approach?

That is the big challenge: political development has lagged far behind economic development. There has been some political development, like more inner party democracy and grassroots elections and legal developments, the monitoring and supervising of officials — we have to recognise these vast improvements. 

But the big question for China is, how do you get the preferences of the masses reflected in terms of economic and political outcomes? How do you make it so that this pool of vibrant entrepreneurs and private businessmen have their voice reflected in how to shape the economy going forward? How do you get expert opinions and knowledge to be reflected in key decision making? I think that is the big challenge. And there is no sign that these things will be realized, at least not yet. 

One can argue that political development and economic development go hand in hand, and that without the former, the latter will be restrained. That’s certainly a possibility going forward, especially when we’re talking about an innovation-driven economy. 

At the same time, the Chinese government is eminently practical, and we don’t want to just read too much into the top-level messages — certainly, that sets the tone and the strategic objectives, but what’s happening on the ground is more important. The people, businesses and the local chiefs really determine economic outcomes. And very often they find practical solutions to problems. We’ve seen this for the last 40 years, and that hasn’t diminished. You mentioned Party representation at the company level. But how much does that really change things? Is it more of a nominal thing, or does it have real implications? From what I understand, it’s more the former, it’s a little bit costly but it’s not weighing down businesses in practical terms. 

From an economic point of view, very simply, you need to be able to tolerate some people getting very rich, to have as innovative a society as China would like to be. 

You seem to be hinting at a need for greater democratic representation in China. Is that feasible or achievable? Or do you think there is still a residual feeling in Chinese society that paternalism works, that people trust the top-down approach?

I’m not a political scientist; political scientists will give you more nuanced answers as to how democratic elements have improved within Chinese society at various levels; I believe that to be the case. 

From an economic point of view, very simply, you need to be able to tolerate some people getting very rich, to have as innovative a society as China would like to be. You need strong intellectual property protection laws, you need to cede the desire to control and to meddle. And that is difficult for a government which still carries a fair amount of paternalism, the notion that they are protecting consumers and investors, and that they know what’s good for them. And that is a general notion that is not just between the state and the people, but also between parents and their children, and teachers and students. It’s just a general cultural trait, which most people still tend to accept. But we also have evidence that the new generation is less paternalistic than older generations, and more open minded. 

Does China have enough strength in innovation when it comes to making technological breakthroughs in areas like health, or chipmaking, the sort of things that are going to drive productivity improvements?

China has been extremely successful, perhaps even the world’s best, in terms of applications of existing technologies, whether that’s business models or processes that lower costs. When we look at the most useful technologies for developing countries, those that are good quality and low cost, whether it’s in renewables or cell phones or EVs, mainland China is really a dominant player. But in terms of groundbreaking technologies, China still faces quite important challenges, including the lack of basic research, or an innovation ecosystem.

But that doesn’t mean that China can’t master high tech; lots of high tech is not rocket science, there are things that require skill and the accumulation of knowledge. China has, for instance, conducted the first quantum video call, launched the first drone that can carry a person in the air — with China’s talent pool, with China’s large amount of financing available for innovation, China can go toe-to-toe with the U.S.. 

The U.S.’s export controls and restrictions of various sorts may have hobbled China’s semiconductor sector in the short run. But on the other hand, it is also pushing China to accelerate its development much faster than it would have if it could comfortably import cheap chips. 

If you look at Japan’s case, because Japanese electronics were so dominant [in the 1980s], it really gave its domestic semiconductor sector a boost in terms of innovation and profits. I believe it will be the same in China; all the chips China imported will now go to domestic players, that’s going to stimulate innovation, the domestic supply chain will be located around these companies. Chinese companies are finding different chip design ideas to circumvent these restrictions, so that could lead to a leapfrogging of the competition. 

Rarely do we find successful technical progress in geographic isolation. But China also has a massive domestic market, and the need for supply chains to locate themselves domestically close to these Chinese companies, in EVs or AI or autonomous vehicles, will help with its technological self-reliance.

There are several stories around now about Chinese entrepreneurs who are leaving China, and setting up in other parts of the world: But you write that for every billionaire who’s unhappy with government intervention and regulation, there are plenty of up and coming entrepreneurs who are still ambitious to become successful inside China. What led you to that conclusion?

First of all, we have to ask how many Chinese entrepreneurs can truly be as successful internationally as they could be domestically. There are cultural barriers, and now there are geopolitical barriers which have added to the difficulty. And China’s market is so vast, if you have a good idea, you can become a millionaire or even a billionaire in a very short period of time. It’s tougher to do outside of China, although the other side is that there’s now such fierce domestic competition, that many of them can potentially make their good ideas work better abroad. Both of these arguments can coexist. 

That said, I’m also optimistic about the global relevance of Chinese technologies, particularly in developing countries which account for 80 percent of the population. For them, affordability, reliability and accessibility is most important, and Chinese technologies are particularly suitable. Interestingly enough, recently, four out of the five most downloaded apps in the U.S. are Chinese! So it goes to show that Chinese technologies and business models can make their way to the rest of the world, but it will take scale, funds, and cultural barrier-breaking creativity, and these opportunities are not available to the majority of companies in China.

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I agree with you that the policies in the last few years have dramatically reduced confidence, not to mention the strict Covid policies, which have led to many very talented entrepreneurs seeking to set up shop elsewhere. But if you look at the new generation of entrepreneurs, their view is still overwhelmingly domestic, this is fertile land for them. As they embrace the new cosmopolitan way of life, different from their parents’ generation, this new generation is about solving problems in everyday life. They are also much more socially conscious and can act as a bridge between China and the world. But they are also facing present challenges, such as the burdens of high property prices and reduced expectations.

Is there a danger that as you move to a model where you’re more reliant on a handful of very smart, technologically advanced people, that the masses get left behind. 

In the book, I put more emphasis on the skills and education mismatch than on education, per se. Because the truth is that education has actually raced ahead of the economy, with more diplomas handed out than are actually needed. China is still very much a manufacturing based economy, and the service sector accounts for around 47 percent of employment, far below the 80 percent level in countries like the U.S. and Japan. But lots of young, highly educated students or graduates don’t opt for manufacturing jobs. They would rather stay out of employment, or they end up taking up jobs that don’t offer them great fulfillment and satisfaction, and they become disgruntled in the process. 

For rural migrant workers, what is really needed is better vocational training, to give them technical skills that actually suit China’s economic model. I agree with you that the quality of the education system is sometimes poor. That also has to do with the fact that the examination-based education system doesn’t meet the private sector’s need for mental acumen, flexibility, independence, creativity, etc. So I’d argue that there are many dimensions to the skills gap — an education mismatch that is more problematic than just increasing the level of education or the number of diplomas out there — that China needs to solve. And I think that this is the greatest challenge for the new generation, which is China’s hope. Unless they are able to find good jobs, and be able to afford real estate, they’re not going to get married and have children. One big problem in China today is the angst and anxiety of the new generation.

At the same time this new generation is more open minded, as many surveys show. They’re more interested in consumption and lifestyle, entertainment, they’re a more balanced generation. They’re no longer the generation of Foxconn workers that opted to do three shifts per night. In order to harness their positive energy, the government has to do more to reduce that skills and education mismatch and provide them with opportunities. Another way to solve this is to rapidly open up the service sector, which absorbs more highly educated labor. Data reveals that 30 percent of service workers have some sort of college degree, compared to only 12 percent in manufacturing sectors. 

Do you think China is open enough to foreign companies and foreign investment? 

A smart stratagem for China today would be to rapidly open up more to foreigners and let them make lots of money in China. Everyone will benefit, including the Chinese consumers. It is true that foreigners have started to hold back more on investment, not least because of the stringent COVID policies and the heightened geopolitical tensions. But if you look at the actual policies, it does suggest more openness, especially in the financial system: the Stock Connects, the Bond Connects, Swap connects, and the many licenses now handed out to foreign institutions or financial institutions, including allowing companies like Tesla to have a wholly owned foreign subsidiary. [All this] suggests that the intention is to welcome foreign companies and financial institutions, and to offer a more level playing field, especially now the Chinese economy is mature enough to withstand and even benefit from more foreign competition. 

Foreign companies actually tell me they still need to be in China, because it’s a fitness center, because of the competitiveness, and the very rapid feedback from customers makes them stronger and sharper. So I don’t think it is the old playbook of discrimination against foreign companies. In fact, local governments are actively courting foreign companies. 

A smart stratagem for China today would be to rapidly open up more to foreigners and let them make lots of money in China. Everyone will benefit, including the Chinese consumers.

I know you’re not a political scientist, but I do want to ask whether you think that Beijing is prepared to sacrifice all of China’s development, for some kind of conflict between itself and the U.S. over, say, Taiwan?

China is by and large a peace-loving country, not least because peace is what is needed for it to realize its aspirations to be the largest economy in the world. And I believe that most people are well-aware of this very basic fact. Also, like you said, there are 600 million people that haven’t even reached middle income status by international standards. A rational argument would suggest that no military conflict is desirable. But there are also certain conceivable circumstances where more international provocations could really push China into a corner where it is no longer rational economic calculations that will dominate the [leadership’s] thinking. Let’s hope that that will not happen. China’s premier recently said in the Boao Forum that China will not tolerate military conflicts and turmoil in the region. That may be a message. So — peace is more likely going to happen if the two parties across the Strait are left alone to work things out.

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