The Mayor Economy

During​ the Covid lockdowns of 2020, an influx of central bank injections into Western capital markets sent stock indices soaring. A few listed companies became social media favourites, leading to frenzied buying on the part of mostly young, mostly male amateur investors, stuck at home trading equities on mobile apps such as Robinhood. These hyped-up stocks – ranging from GameStop to Tesla – became known as ‘meme stocks’ and this episode as the ‘meme stock craze’. A Chinese electric vehicle start-up called Nio, which had listed on the New York Stock Exchange in 2018, was among them. On the brink of bankruptcy in late 2019, with shares down to $1.4, Nio’s stock shot up in the second half of 2020, briefly surpassing $60 in January 2021. By that point, the company was worth more than $90 billion, making it the fourth most valuable car firm in the world after Tesla, Toyota and Volkswagen. (Nio still exists: its sales are steadily expanding and its stock is back down below $10.)

Nio’s wild stock market ride is an object lesson in the operation of speculative finance. What happened to the company in the early months of 2020, just before it became a meme stock, is an object lesson in something rather less run-of-the-mill: the Hefei Model. The city of Hefei, 250 miles west of Shanghai, is the capital of Anhui province and a prefecture-level city, an administrative rank held by around three hundred Chinese cities (more significant centres, such as Jinan or Ningbo, have vice-provincial rank). Hefei is also an economic success story: its GDP more than quadrupled between 2010 and 2022 while China’s merely doubled. This performance has been attributed to the city government’s economic strategy, which involves selectively deploying investment funds it controls to organise the growth of manufacturing supply chains in high-tech sectors. Having decided that electric vehicles should be a priority sector, the city government invested the equivalent of $1 billion in Nio in April 2020, at a time when the company was short of funding and its valuation was low. As part of the deal, Nio moved its headquarters from Shanghai to Hefei. Hefei profited handsomely from the operation, cashing out of most of its stake within a year – thanks, in part, to the lockdown meme stock traders.

The ingredients of the Hefei Model can be traced back several decades. Ever since the late Mao era, the city has benefited from the presence of one of China’s leading research institutions, the University of Science and Technology of China – which ranks among the top universities in the world in certain hard sciences and engineering sub-disciplines. Hefei’s foremost development zone – the Hefei National High-tech Industry Development Zone, to the west of the city centre – was set up in the early 1990s as part of the very first batch of national high-tech development zones in China.

Hefei isn’t a hedge fund. Its municipal bureaus and investment vehicles are concerned with jobs and industry, from securing land for manufacturing facilities to ensuring that supplier networks for major firms are, to the extent that this is possible, based in the city. This has sometimes come at a cost – at least in the short term. In the wake of the financial crisis of 2008, city officials saw an opportunity to invest in a struggling technology company called BOE. They pulled the funding for a new subway line and put it into BOE, on the condition that the company build a plant in Hefei. The relationship has been successful: the city has invested in further plants and BOE has created thousands of jobs there (it’s now the world’s leading manufacturer of TV screens). In 2020, a ‘supply chain boss system’ was introduced, allowing a high-ranking municipal official to assume responsibility over planning in each of sixteen key supply chains in the city. For instance, Hefei’s top official, party secretary Yu Aihua, has been charged with overseeing the semiconductor supply chain – a significant role given China’s rivalry with the US.

The city government uses a triumvirate of investment platforms – Hefei Jiantou, Hefei Chantou and Hefei Xingtai – to acquire minority stakes in privately owned companies. Their combined assets have already reached 780 billion yuan (more than $100 billion). Investments are often made in partnership with other actors – a provincial-level government fund, for instance, or a Chinese investment group. The city authorities don’t aim to take direct control of the firms they target for investment and the platforms impose a degree of separation between administrative bureaus and corporate decision-making. Divestment from a company is expected once the city’s objectives – defined in terms of supply chain development – are met. In March 2022, it completed its financial arsenal by launching the Hefei High-Quality Development Guidance Fund which, private equity-style, operates as a ‘fund of funds’, attracting outside capital into dozens of subordinate funds (47 had been set up as of March 2023) covering ‘seed, angel, scientific innovation and production’ investments. While Hefei’s investment funds are under the purview of the city government, they do not usually rely on money from the city budget. Being profitable across their investments is part of these funds’ mandate, and most of their profits are retained for further investment. In the event of financial vulnerability, the funds would turn first to capital markets, or banks, or other corporate entities for financial support – not to the city budget.

There is nothing exceptional in governments supporting industrial development. European states have always done so, if to a fluctuating degree. And state intervention is common in car manufacturing. Toyota was protected against foreign competition for decades until it finally broke into overseas markets in the 1960s. General Motors and Chrysler were dramatically bailed out by the US government in 2008. The involvement of sub-national jurisdictions isn’t unusual either: Lower Saxony currently holds 11.8 per cent of the stock (and 20 per cent of voting rights) in Volkswagen, Europe’s largest car maker.

But the state involvement in market activity in present-day China is unparalleled in major countries. Not only is the state’s capacity to influence economic outcomes stronger than has ever been the case in the West (except for periods of war), the breadth of China’s statist panoply is remarkable: from corporate behemoths answering to Beijing to minority equity stakes in start-ups as in Hefei; from regulatory practices so fine-grained that they are closer to direction than regulation, to the sui generis role of the CCP hierarchy, which extends from party departments in government offices to party committees inside enterprises. China’s sheer size, and the revival of decentralised decision-making since the early post-Mao decades, means that a great deal of economic statecraft occurs at lower levels: provinces, cities, districts, counties, townships and so on.

Not all local authorities are as successful as Hefei. There have been cases of deteriorating competitiveness and deindustrialisation, as well as debt crises in a number of places. Corporate investment in the country is finite and local governments are vying to attract as much of it as they can. All the while, Beijing presides over the nation’s multi-scalar economy, preserving its monopoly over what is commonly referred to as ‘top-level design’. This expression, a favourite of the Xi era, affirms the supreme prerogative of China’s political centre and assigns to it an overarching ‘design’ function. Implementation happens locally, with municipal governments called on to fill out the blanks in Beijing’s blueprints.

The Hefei Model is only the most recent Chinese regional development model; earlier models include the Sunan Model in the 1980s, the Pudong Model in the 1990s and the ill-fated Chongqing Model in the 2000s – each of which had its own distinctive form of local-level statism. The Hefei Model updates statism for an age in which an overarching emphasis on technology and innovation meets the expansive logic of financialisation, which is reshaping modes of state involvement in the economy. In The New China Playbook, Keyu Jin characterises Hefei as an exemplar of the ‘mayor economy’. Jin doesn’t explain the source of the phrase, though Wang Minzheng, an official of Yunnan’s provincial government and a former mayor of the prefecture-level city of Zhaotong, wrote a well-received treatise called Mayor Economics in 2010. ‘In the mayor economy,’ Jin writes, ‘local governments have strong incentives to help promising businesses overcome barriers and to foster innovation in their locality. Adam Smith’s concept of invisible hands working behind the scenes is, in the case of China, replaced by the thousand-arm Buddha’s extended and very visible hands.’ (Her book relies heavily on allegories and similes of this sort.)

Jin argues that, in contradistinction to the West’s free market economy, China has a ‘hybrid economy’ combining the multi-scalar statism of the ‘mayor economy’ and elements of the market economy. She claims that a new political-economic model is taking shape under Xi Jinping, replacing the ‘old playbook’ that defined the post-Mao reform era up to the 2010s. In order to catch up with Western countries, Chinese leaders took ‘short cuts’, focusing on GDP growth even when it meant bending the rules, wasting resources and degrading the environment. The ‘new playbook’, by contrast, involves less cronyism (she cites Xi’s anti-corruption campaign) and better regulation. It also prioritises technological innovation and environmental sustainability, while seeking to respond to the demand of younger people for a better quality of life.

‘In China,’ Jin writes, ‘the mayor economy rivals the market economy in importance.’ But does any such rivalry exist? Political discourse tends to frame policy issues as a matter of state v. market. This can be misleading, however, because it conflates two distinct spheres of economic reality: the mechanism for allocating resources and the identity of the resources’ owners. A state-owned enterprise can respond to market signals – in fact, it usually does – and conversely a privately owned firm may choose, or be compelled, to make hires, purchases and sales via non-market channels. For instance, China’s largest car manufacturer, SAIC, a state-owned firm, competes with both private and government-controlled firms to sell its vehicles. In Western countries, it’s not unheard of for governments to impose operational decisions on private enterprises, though this power is usually employed only in times of war or other emergencies, and is made possible by legal instruments such as the US’s Defence Production Act.

Until the early 1990s, China’s planning apparatus still set prices for the products of most industrial firms. In the 1980s, market prices existed alongside government-mandated prices in a ‘dual-track pricing system’. That system disappeared around the time the Fourteenth Congress, held in 1992, declared China a ‘socialist market economy’. The allocation mechanism for goods, services, labour and capital became, by default, the market. China has unambiguously been a market economy for three decades now, and it is on this basis that Chinese enterprises operate.

Far from the mayor economy running up against the market economy, the market economy is its foundation. Statism operates via the market. When, in April 2020, the Hefei government directed an investment fund under its control to purchase a minority stake in Nio, this was carried out as a financial transaction between two corporate entities. When the timing was right, the city cashed out of some of its shareholding. The market – or rather, the financial markets – acted as a conduit for state influence over the economy.

For decades now,​ the CCP has focused its efforts on shaping, rather than replacing, the market economy. Western commentators often characterise this economic paradigm as a matter of ‘regime survival’: in order to escape the fate of the Eastern Bloc, China’s leaders harness strategic resources, co-opting supporters and denying access to potential opponents, while creating the economic growth necessary to mollify the broader population. But this interpretation can hardly account for what’s happening in Hefei.

Jin sidesteps the ‘regime survival’ thesis. Instead, she offers two alternative explanations. ‘In China,’ she writes, ‘an interventionist state is rooted in paternalism, a hallmark of government in China since Confucian times … it is based on the conviction that intervention by a senior person is justified if it benefits a junior person.’ Like an authoritarian parent (the ‘Tiger Mom’ gets a mention), the Chinese Communist Party believes it should clamp down on inappropriate behaviour in economic life in the name of individual morality as well as collective stability. Confucianism aside, Jin argues that the government is well placed to correct China’s ‘weak institutions’, by which she means a less robust legal system than in Western countries and a ‘primitive financial system’ unable to match the sophistication of US capital markets. ‘A powerful state,’ she argues, ‘is especially effective in an economy’s infancy, when market institutions are still a work in progress.’ This is a line of reasoning familiar to students of orthodox institutional economics; even neoclassical doctrinaires will accept that government intervention can be called on to address market failures and ‘institutional flaws and loopholes’.

While there may be a measure of truth in this account, there is another explanation for economic statism in today’s China. It has to do with the self-propelling dynamic of capital accumulation. The most recent data from China’s National Bureau of Statistics put the number of state-controlled enterprises at 362,000 in 2022 (up from 227,000 in 2013). A recent study cited in Jin’s work, led by an economist at Tsinghua University, estimated that there are also more than a hundred thousand privately owned enterprises that have minority equity investments from the state. Only a tiny fraction of state-connected firms in China have a direct link to the central government in Beijing. The more typical arrangement involves degrees of separation at a sub-national level: a medium-sized firm based in a prefecture-level city, say, could be the subsidiary of another firm, which could in turn be partly owned by a city-controlled investment vehicle.

The directive to accumulate capital for the state is reflected in the guidelines produced by the central government’s State-owned Assets Supervision and Administration Commission (SASAC) which detail how to manage state-owned corporate assets and advocate completing the transition from the old statist method of ‘managing enterprises’ to the new one of ‘managing capital’. The phrase ‘managing capital’ implies that government bureaus overseeing state-invested firms should not take direct charge of business operations. Instead, they should assume the role of an asset manager overseeing a portfolio of corporate investments and focus on expanding the value of the capital under their watch. Since its creation two decades ago, SASAC has been pushing the ‘rate of preservation and growth of state-owned capital’ as a central performance metric in the state sector. In the Chinese system, state-owned capital may be sustaining its own expansionary momentum.

Jin accepts as given a significant change in the Chinese economic system since Xi Jinping came to power in 2012. Students of Chinese economic policy have certainly witnessed their fair share of declarations about things being ‘new’ in the last twelve years. We have seen the advent of the ‘new normal’ (新常态), the ‘new era’ (新时代), the ‘new type of whole-state system for breakthroughs in core technologies’ (关键核心技术攻关的新型举国体制) and, more recently, the ‘new development pattern’ (新发展格局) in tandem with the ‘new security pattern’ (新安全格局). Taken together, these reflect a gradual reordering of priorities: from export and investment-driven growth to a slower growth rate increasingly driven by innovation and consumption. At the same time, a heightened emphasis on national security under Xi, coupled with the expanding sanctions and export controls imposed by the Trump and Biden administrations, has produced an unprecedented emphasis on technological self-reliance in critical areas such as semiconductors.

Jin’s claim that there is a ‘new playbook’ might be overstated, but it’s true enough that there is an upgraded economic strategy. At the same time, the underlying structures of the PRC economy have never felt so stable, or so consolidated, as during the last two decades. In the 1980s, Deng Xiaoping oversaw the end of collective agriculture, the emergence of small private businesses, the rapid growth of market exchange for goods and services alongside central planning and the introduction of foreign investment. In the 1990s, government-mandated prices were phased out; large-scale private companies entered the scene; the fiscal, monetary and financial systems were overhauled; and the entire public sector was dramatically restructured, with the loss of millions of jobs. The last two decades have seen nothing like the structural transformations of those years. For all the talk of ‘rebalancing’ China’s economy, relative levels of investment and consumption have remained steady since the mid-2000s. The contributions of the public and private sectors to economic activity have also been stable, if with an increased intermingling as a result of minority shareholding. Any significant breakthrough, whether planned or unforeseen, will occur in the context of an ensconced economic system.