Xi Needs a Lesson in History

According to a Wall Street Journal report, Xi Jinping is undertaking a campaign to eradicate “capitalist excess” from the country’s financial system by replacing internationally-experienced Western financiers and bankers with party loyalists. According to the report, “Xi believes the finance industry has focused too much on its own profits, and should serve the Communist Party and the nation’s needs rather than the interests of bankers and their clients.” In the words of Xi, “Serving the economy is the duty of finance. If finance is focused on self-circulation and self-expansion, it becomes water without source, a tree without roots, and a crisis will brew sooner or later.” The party has opened over 500 investigations into financial sector workers since 2022, leading to frequent disappearances and expulsions. 

This strategy is consistent with Xi’s “common prosperity” campaign, as he continues to exert greater control over economic development and his idea of the “China dream,” which includes significant wealth redistribution. State-owned bank executive pay was capped and some executives were forced to return past wages while attending training sessions hosted by the Communist Party. According to the report, the deputy dean of the finance department at Shanghai Jiao Tong University “cited what he characterized as a growing perception in China that the financial industry doesn’t have value.” 

Pulling from recent history, the report notes that it was Wall Street talent brought in by China that was responsible for modernizing its financial industry and creating its asset-backed securities industry—essential prerequisites for any advanced economic development. Since 1995, the China International Capital Corporation has had Western-trained executives in senior management until today, where party loyalty is now prioritized over knowledge and competence.

The implications for the ideology behind these policies are enormous and reflect a very ignorant understanding of what fuels economic development. The banking and finance industry is essential, as it is responsible for managing risk and pooling capital on a scale that can allow for investors to take risks on new ventures. Does Xi think that technological advancement happens magically? It happens by way of an efficient financial system that allocates resources towards sectors that will bring the most returns in the future, which is exactly what Xi seeks. Otherwise, current industries will merely stagnate and further consolidate, as economic growth slows and the standard of living declines. An efficient financial system then requires very skilled executives, whose skills must come from either experience or other efficient financial systems, both of which are concentrated predominantly among Western banks. 

However, these developments are a tale as old as time. A minority that is more skilled in a particular area infiltrates a native majority who lacks such skills. Throughout history, these examples have included the Chinese in Southeast Asia, the Jews in the West, Germans in South America, and so on. When the minority begins to outperform the majority, political leaders from the majority target the sector dominated by the minority. Oftentimes, the skills in particular are indeed within finance, as, similar to China today, it is difficult for the poorer population to perceive how such a sector adds anything at all to the economy. Rather, it merely extracts. Such words could be taken directly from a Xi Jinping speech. Yet, as has been noted, that is not true: 

It is well documented how the Jews were viewed in Europe for centuries as a result of their financial skills. Yet, it was the Jews’ knowledge of finance spreading to London and New York that was able to create the modern world. In the words of Dr. Thomas Sowell in his book Basic Economics, “Like so many other things, banking looks easy from the outside - simply take in deposits and lend much of it out… Yet we do not want to repeat the mistake that Lenin made in grossly under-estimating the complexity of business in general.” Sowell cites an article from The Economist, observing that post-Communist republics were unable to operate their banking systems without knowledge of how to lend out money in a way that maximizes returns and minimizes losses.” As of 2006, according to Sowell, foreigners owned more than half the banking assets in the Czech Republic, Slovakia, Romania, Estonia, Lithuania, Hungary, Bulgaria, Poland, and Latvia. He even describes how in China, 90 percent of personal savings are deposited in state-owned banks, which lend at low interest rates with little risk to subsidize other government-owned enterprises rather than the most creative or efficient enterprises. If government-owned banks did take more risks on new ideas to earn higher returns, they would also risk bankruptcy, which would be punishing for party leaders; while in a free market, financial institutions would be forced to learn how to maximize returns while minimizing risks to survive. 

Much digression could occur on any of these points, but it is clear that Xi’s campaign falls into some very predictable patterns involving authoritarian government, central economic planning, and nativism, and none of these patterns ever lead to advanced economic growth or the realization of a “China dream.”