I’ve been thinking long and hard about the big ideological changes in China, and what they mean for investors. What’s prompted me to ponder this huge question is that much of the language coming out of China is wearily familiar, especially for someone like yours truly who has spent far too long lurking around the academic corridors of social science and humanities departments, increasingly dominated as they are by the “Left”.

What’s crucial here is that I also think we should take the Chinese at their word. They say they are committed socialists and they increasingly talk the language of modern socialism. The Wall Street Journal has a fantastic article on the subject HERE which I thoroughly recommend reading. As background I’d also suggest listening to SupChina’s fantastic podcast discussion of China’s Red New Deal. You can listen here: https://supchina.com/podcast/whats-the-deal-with-the-red-new-deal/

These and many other China watchers all take seriously the ideological thrust of President Xi’s push. That said we also shouldn’t dismiss those who think that we can overestimate ideology and under estimate local factors and bureaucratic activism.

In addition I’m also alive to the  debate around competing ideologies (nationalism, liberalism and fascism), ably outlined by conservative writer N S Lyons. But again, I keep returning to the point that these are socialists who say they are socialists– maybe many of the local officials aren’t remotely concerned with socialism but I think we should also recognise that the guys in the centre in Beijing definitely do believe in this stuff.

Which brings us back to that old chestnut which is what actually constitutes a practical socialist set of policies – and what that might mean for investors? At which point we need to go back to basics and recognise a divergence of thinking in the socialist world stretching from hardcore Stalinists in North Korea through to weak socialism in Vietnam at the state level. On the ideological level this takes us from Marxist Leninist purism through to democratic socialists emerging out of the New Left through to radical social democrats (socialists to the rest of us) such as Paul Mason who preach a form of millennial infused socialism

Despite this spectrum of views, some common elements emerge:

  • Common ownership of the means of production and an insistence on the state owning the commanding heights of the economy. Within this broad sweep there are varying currents with many democratic socialists pushing worker (and/or community) control at the enterprise level through to ambitious visions of an innovative, almost entrepreneurial state that can leapfrog different stages of development
  • A strong egalitarian vision bound up in a class analysis. This is the rallying cry but dig deeper and you discover that in fact what most socialists actually mean is that they want less inequality but probably not total equality of outcome. There will always, for instance, be a vanguard who will in all likelihood exercise more control and power. But what unites all these ideas is a populist desire to bash the rich
  • A deep suspicion of private property. This is a natural consequence of the idea of common ownership of the means of production but has varying outcomes. Many socialists are happy to allow private ownership of homes. Others are also happy to tolerate small to medium sized private enterprises as long as they are under strict control. Think Lenin’s New Economic Plan.
  • This worry about the evils of private property is bound up with a deep connecting thought amongst the Marxist inclined that respects the power of capitalism as a stage of development – that respect might even extend to allowing capitalism to die on the vine as we collectively move to a new economic model. In simple terms capitalism can co -exist with socialism for a limited period of time but that it WILL be superceded by a more advanced socialist state of modernisation
  • Some enthusiasm for extensive state control and the implementation of a more planned economy. Again, there exists a wide variety of views with some socialists subscribing to market socialist ideas popularised by Karl Polyani (amongst others) whilst others cling to the idea of total planning as in the Chilean model where there was a serious attempt to build a super computer that could rationally plan the entire economy. Of course, that particular idea failed miserably but arguably in the age of big data and AI this ‘dream’ might be more achievable

Many of these ideas sound eerily familiar to anyone listening to what’s happening in China at the moment and indicates to me that the Chinese have been listening to these debates within their extensive ideological training system.

The end state could be a socialist economy which could take many forms, some of which might end up looking more like a radical social democratic state perhaps with a strong market sector and a small SME sector and private ownership of residential homes. This might also feature a strong worker control element.

By contrast another version might look more Chinese with stronger state control, less worker control, and no democratic, worker focused elements.

If we take this analysis at face value, there are some important implications for investors.

  • More state control of the commanding heights of the economy. The key here is to use state power to a) take power away from oligarchs and private concentrations of power and b) use the state to kickstart innovation and restructuring key sectors. This is clearly happening in China as we speak.
  • Increasing socialisation of the key sectors even if they are in private control. Writers like Paul Mason in the West are interesting in this respect, especially around technology. They argue that internet data which is currently privately owned should be increasingly socialised over time. Let’s assume say that the cloud is important as a (data) sector, we might see a series of measures emerge that in effect socialise the processes behind the sector via intrusive regulation and then maybe cooperative ventures between the private sector and the state
  • Intensive supervision of the private SME sector with more state control through party committees.
  • A more innovative state, perhaps entrepreneurial, that pushes the development of the state in certain areas (Made in 2025). This could include private sector outfits at the beginning (Lenin’s New Economic Plan) of the process but over time they’d be pushed aside as that sector becomes more strategically important
  • More intrusive planning at the top level, based around the idea of using technology. This takes us back to the Chilean example where data is used to massively improve resource allocation through planning, slowly elbowing out the market for the next two decades

From my own personal point of view, I think these developments will prove to be utterly counterproductive and slow down economic growth, thus jeopardising the party’s legitimacy.

To understand what might go wrong, I think one only needs to read Hayek’s The Road to Serfdom to think through what will happen next: the state will overestimate its own ability to plan the economy and encourage innovation.  I also think we’ll have an outbreak of what I call the three Cs: increasingly poor coordination of resources within the national economy; increased corruption and state sanctioned nepotism despite top level campaigns and; decreasing consent as citizens see the grand bargain (more prosperity, more consent for state control) start to unravel.

As these three Cs impact the economy and wider society, its entirely reasonable to expect GDP growth to slow down – arguably the Party may even welcome that development. Maybe some of those strategic innovation policies designed around an entrepreneurial state will produce the goods and goose growth but my guess is that the party will increasingly turn to nationalism as a way of maintaining public consent, as most other socialist governments have done in the past – assuming of course that that nationalist impulse doesn’t backfire with a poorly thought through set of tactics. By this I mean that any attack on say Taiwan needs to be successful, if not it could be end game for the CCP.