If you are lucky enough to enter into a conversation with Li Keqiang, China’s Prime Minister,
you may find him talking about Adam Smith. Adam Smith, who we in the West know as the founder of the free market economy, if you as a government let the market go, ‘the invisible hand of the market’ ensures that everything runs smoothly. You only need to intervene when the market fails.
In China, Li will tell you, we have a market economy also based on the teachings of Adam Smith. I know his teachings very well, he may continue. And look at our market: the private sector accounts for 60% of the economy, 80% of jobs in major cities and 70% of innovations. As a state, like you in the West, e also act when the market fails.
But you know, he adds, it seems that you in the West have only read one book by Adam Smith, the famous ‘the Wealth of Nations’. And it is precisely that other book ‘ Moral Sentiments ‘ that is very important to us here in China.
In this second book, Adam Smith argues that people usually do the right thing by themselves. Why? Because when they act, they act as if there is an invisible impartial spectator sitting on their shoulder watching what they are doing. That’s keeps them honest.
According to Adam Smith, however, there is an important but. The power of the invisible hand of the market and the invisible spectator on people’s shoulders only works well when people have a moral compass. And here in China we believe that the government is responsible for the moral compass in our society. That is why we believe in China that we as a state must not only intervene when the free market fails, but we must also intervene when the moral sense of the players in the free market falls short of expectations.
What does this mean in practice? For example, the Chinese government acts as master of the free market when it intervenes because of Evergrande’s crisis and as master of morality when it intervenes for example, in the online game sectors to limit the players’ access per day.
When online games make China’s youngsters addicted, when big tech algorithms are bad for people, when people get to much fake information, when companies become too eager like when Alibaba wanted to become like a real bank, it is in such situations that China’s government may intervene in the marktet as the master of morality. If necessary, by tackling one company or banning an entire sector from giving access to online gaming for more than a few hours a day. Even though the laws governing the market are not ready yet. In Evergrande’s case, China is acting as the master of a failing free market. It’s a shame that stock market traders panicked at first because they thought they were dealing with another Lehman Brothers. But it wasn’t.Evergrande’s failure has to do with a gigantic bubble in the real estate market. A bubble that China was already busy slowly deflating. For example, project developers were allowed to borrow less money and the advance payments of future homeowners were put in custody in the bank accounts of cities and that money also does not go to the real estate parties. Evergrande did not anticipate this well and got into big trouble as a result. Everything is now being done to ensure that this runs smoothly. Buyers are already popping up for Evergrande parts, in the city of Harbin, developers suffering from Evergrande’s problems are getting prepayments deposited into their accounts to have more cash to meet their obligations. It’s complicated, more complicated than the above, but no doubt it will work out.