China’s rein on financial innovation shows it won’t give up manufacturing for a runaway services sector

It is unlikely Beijing will pursue the development of financial and other service sectors for its own sake, at the expense of industry
China is apparently keen to avoid the ascendancy of ‘moneymakers’ over ‘thing makers’ in Western economies that has helped create economic inequalities and social friction

Anthony Rowley

Published: 1:45pm, 17 Jan 2021

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Britain’s Lord Henry Pilkington of glassmaking fame once remarked proudly that he was a “thing maker” rather than a “moneymaker” – a comment that has reverberated as British industrial power declined in favour of finance and other services. His remark is relevant to the West-vs-China economic rivalry today.

Britain became a “post-industrial economy”, a term popularised in the 1970s, while the Pilkington Brothers glass empire was still thriving. But as other great names in British industry declined, a financial or moneymaking ethic became predominant in many Anglo-Saxon economies.

Post-industrial (or hollowed out) economies need to outsource the production of goods they no longer manufacture themselves. China has been a prime beneficiary of this, but it seems unlikely to make the same mistakes as Britain and the United States, among others, in becoming “post-industrial”.

Far from deindustrialising, China has consolidated its industrial power by securing raw materials worldwide to feed manufacturing while constructing a labyrinthine network of supply chains to provide the semi-manufactured goods needed to support its role as the “world’s factory”.

The Chinese have remained essentially thing makers but that does not mean they are ignoring the need to develop financial skills, though not so much those of the “moneymaking” variety seen in places that have elevated finance above all else, but of the “money management” type needed to serve a complex economy.

This distinction, or divergence, is important. It is not about a purist and naive theory of finance being a “handmaiden”, whose role in life is to humbly serve commerce and industry, but rather a question of the priorities accorded by a society to different elements in its economy.

Capital is essential to the development of trade and industry but when the use of it becomes more of an end in itself, rather than a means to an end, it begins to distort broader economic priorities – as experience in the US and Europe, Britain especially – has shown.

Finance has become a “glamorous” and lucrative profession in these places, with salaries and incentives far exceeding those in other professions. Some of the best and brightest have graduated to where the big financial rewards are under this apotheosis of market ideology.

It has come at a cost to engineering, science and technological education, and also to vocational or on-the-job training – a deficiency that will weigh heavily during attempts by the incoming Joe Biden administration to restore the erstwhile industrial skills and competitiveness of America.

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Biden’s attempts will at least be more constructive than the disastrously destructive efforts by the outgoing Donald Trump administration to hobble Chinese competition with tariffs and a panoply of other restraints on everything from imports of Chinese goods to the listing of Chinese stocks.

Having survived the Trump onslaught with its economy intact, China seems to be adopting a strategic approach towards developing its financial sector capabilities, rather than encouraging buccaneering behaviour of the kind seen in the US and Britain that contributed to the 2008 global financial crisis.

Recent comments by Ray Dalio, co-chairman of US investment management firm Bridgewater Associates, seem pertinent in this regard. Dalio has supported China’s decision to suspend a US$37 billion listing by the Jack Ma-controlled Ant Group, citing the need to curb risks from financial innovation. Ant is the financial technology arm of e-commerce giant Alibaba Group Holding, which owns the South China Morning Post.

This is not to suggest that Ma is a buccaneer but as Dalio has said, there is a risk of being “too loose” with financial innovation. China has so far avoided any systemic financial crisis despite its dramatic economic growth and there is a case for caution, as Dalio says.

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The decision by Chinese authorities to postpone Ant’s mega share offering is seen by some as a defining moment in China’s state-business relations. But it may come to be seen, like with the US monopoly probes into Facebook and others, as the moment when the rapid exercising of new power needs to be tempered.

Dalio is an unapologetic bull of China and his comments could be seen as self-serving. But the long catalogue of misfeasance and wrongdoing by rising or “shooting” financial stars in Western capitals suggests that China may be wise to be cautious about entrepreneurial overreach.

The Financial Times also reported Dalio as suggesting that Chinese financial centres will emerge as serious rivals to New York and London. “China already has the world’s second largest capital markets and I think they will eventually vie for having the world’s financial centre,” he said.

“Throughout history, the largest trading countries evolved into having the global financial centre and the global reserve currency,” he added. The transition from one trading and financial “empire” to the next – Dutch, British and then American – all point to a similar evolution in China, Dalio suggested.

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That may be so but China is evolving in a different (socialist) context to the more liberal Western empires that have risen and then declined in recent centuries. It seems unlikely that China will pursue the development of financial and other service sectors for its own sake at the expense of industry.

Trump has given democracy a bad name but the recent experience of Western economies in everything from imbalances between manufacturing and service sector development, to neglect of physical and human infrastructure, such as vocational training, does not provide any more of a shining example.

The ascendancy of moneymakers over thing makers in these Western economies has helped create economic inequalities and social friction. It has also eroded the sense of pride in acquiring skills that prioritise long-term achievement over short-term gain. Pilkington must be turning in his grave.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs