A few months ago, a friend of mine, who’s an impressive investor working in a multi-billion-dollar fund management company, introduced me to the book, China’s Crisis of Success. The book, published in 2018, is written by William Overholt, Senior Research Fellow at Harvard University.
Overholt correctly foresaw the rise of China over the past two-plus decades in his aptly-titled 1993 book, The Rise of China. I have investments in a number of Chinese companies, so I was curious to know what I can learn about the potential future of China from Overholt’s 2018 book. Below are the key takeaways I have from his work:
- There are a number of Asian countries – including South Korea, Taiwan, and a few others – that experienced decades of remarkable economic growth beginning in the 1960s. This growth helped to lift large swathes of their populations from poverty and made the countries prosperous.
- These countries, collectively termed the “Asia Miracles” by Overholt, all had a number of similar traits near the start of their growth spurt. Their respective governments: (a) ruled with an iron fist, with an emphasis on tough implementations of radical economic and social reforms; (b) deeply feared their country’s collapse, a fear shared by their citizens who also harboured a strong sense of shared national identity; and (c) partook in strong central planning of their respective economies.
- As the economies of the Asia Miracles grew over the years, the countries reached an inflection point. The collective fear of societal collapse that gripped their citizenry dissipated. The citizens, now wealthier, more knowledgeable, and more confident of their country’s future, also grew increasingly frustrated with the “rule with an iron fist” approach by their respective governments. The economies meanwhile, became too complex for the governments to control via central planning.
- Upon reaching their inflection points, the Asia Miracles started liberalising, both politically and economically. Not liberalising would have been a major risk to the Asia Miracles’ future prosperity and continued development. Within the Asia Miracles, a style of governance with much stronger democratic elements emerged, while their economies were increasingly allowed to develop from the bottom-up through the private sector.
- Beginning from Deng Xiaoping’s regime that started in the late 1970s, China embarked on a path of economic and political development that was similar to the Asia Miracles at the start of their growth spurts. As a result, a significant majority of China’s citizens were elevated from the sufferings of poverty in the next few subsequent decades, and the country’s economy grew to become a global behemoth.
- But as China grew over the years, it started reaching its inflection point around a decade or so ago, coinciding with Xi Jinping’s ascension to the foremost political leadership role in the country. Xi’s administration has a well thought-out plan for economic reform that emphasises market allocation of resources, but there’s still a really strong element of central-control. On political liberalisation, there does not seem to be much signs that Xi’s administration is loosening its grip. How Xi’s administration reacts to China’s need for both political and economic liberalisation will have a heavy influence on how bright or dim China’s future is.
I’m not taking China’s Crisis of Success as the authoritative framework for analysing China’s past successes and future growth. The framework may well turn out to be inaccurate. But I think it is a well-written book with thought-provoking ideas that I find to be logical.
Since the publication of China’s Crisis of Success, there are signs that Xi’s administration has moved in the opposite direction of allowing the market to allocate resources. A good example, in my view, would be the well-documented crackdowns on the Chinese technology sector seen over the past year or so. Meanwhile, on the political front, Xi’s administration does not seem to have introduced any substantial measures to enable a relatively less-repressive political environment to develop (do note: I am far from being well-informed on politics!). Using the framework presented in China’s Crisis of Success and the developments in China that I just mentioned, the country’s long run future seems less bright to me than before I had read the book.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Ser Jing does not own shares in any of the companies mentioned.
