A bit of background on China and the middle income trap

 

PLANTING CHINA’S FLAG IN HONG KONG WAS A TERRIBLE MISTAKE

China imported its dynamism

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China’s economic success has long been something of a mystery, says Yasheng Huang. In their best-selling 2009 book Start-up Nation, Dan Senor and Saul Singer showed how a culture of informality and egalitarianism that is unafraid to challenge hierarchies helped to make Israel a global entrepreneurial success story. China, by contrast, is hierarchical, repressive and stifling of individual initiative, and lacks a culture of democracy, the rule of law, market-based finance or private property rights. And yet entrepreneurship seems to have flourished there too. How so?

THERE IS NO THIRD WAY

Some argue that it is because China found a “third way” that harnesses the efficiency of the market economy to the power of the state without having to rely on liberal institutions. They are mistaken. In my new book, The Rise and Fall of the EAST, I show that the answer to this conundrum has long been “hidden in plain sight”: Hong Kong. At least until very recently, it was the source of the rule of law and market finance for entrepreneurs in China. 

China in effect “outsourced” those functions to Hong Kong in the Deng Xiaoping era. Hong Kong was still a British colony in 1994, and between 1997 and 2019 it operated with relative autonomy from China, preserving its laissez-faire economy and market-orientated financial system, rule of law and secure property rights. Deng’s reforms linked China’s entrepreneurs with global venture capital and allowed some Chinese citizens and businesses to exit. China’s success, in short, had “less to do with creating efficient institutions than with providing access to efficient institutions elsewhere”. 

This is why Chinese high-tech companies, for example, have tended to register their assets outside China’s legal system. There are nine Chinese firms among the world’s top-20 biggest tech companies. Only three of them are fully domiciled domestically. The others all have domicile connections to establishments registered in Hong Kong or other overseas territories.

Since the imposition of the 2020 national security law, Hong Kong has been dragged away from the rule of law towards China’s “rule by law”. New safe harbours have emerged, such as Singapore, but they are hosting economic refugees more than performing Hong Kong’s historic role. It won’t be long before China feels the effect of its policies, which will strangle innovation-driven growth. China will “pay a steep price for getting basic economics so egregiously wrong”.