(Bloomberg) — Seeking to understand Beijing’s regulatory crackdown, some economists are looking over 4,500 miles away to an unlikely inspiration: Berlin.
China has turned from “the American way” to “the German way,” Chen Li, a senior strategist at brokerage Soochow Securities Co., wrote in a recent presentation that was widely shared on Chinese social media.
German-style regulation appeals to China in several ways, says Chris Leung, chief China economist at DBS Group Holdings Ltd. Germany has large state-owned banks, a strong manufacturing export sector, and it hasn’t experienced a financial crisis since World War II.
“The departure of Beijing from the Anglo-Saxon model has already begun,” Leung wrote in a note Monday. “The German model is a strong contender as a guiding development model.”
While the analogy with Germany has its limits, there are at least three areas of convergence worth pointing out: anti-trust rules, an emphasis on manufacturing over services and its approach to education.
Anti-Trust
Beijing is trying to shrink the market power of its largest private sector companies in technology and real estate, updating its anti-trust regulations to cover Internet services. Tech companies — including two of the biggest success stories of China’s private economy, Alibaba Group Holdings Ltd. and Tencent Holdings Ltd. — have lost hundreds of billions of dollars in market value since the push began last year.
Beijing last week vowed it will continue that project, with more regulations to ensure “healthy development of new business forms” related to the digital economy. While some economists say such rules cloud China’s economic outlook, Germany has demonstrated that it’s possible to build an advanced economy without consumer tech giants.
There’s a recognition that “companies like Facebook and Twitter don’t necessarily contribute to the common good and that the business model is about operating in a low regulation space,” said Rogier Creemers, a Chinese studies professor at Leiden University in the Netherlands. “That’s where the ‘we want to be like Germany’ idea comes from.”
China consulted German experts while writing its anti-monopoly regulations, said Peter Hefele, head of the Asia-Pacific department at Konrad-Adenauer-Stiftung, a foundation affiliated with Germany’s center-right Christian Democratic Union party. “They copied a lot from German law.”
Manufacturing Share
China wants to become a developed economy without losing its industrial base. Beijing’s five-year economic plan released in March contains no target for the consumption share of the economy, but it does pledge to keep the share generated by manufacturing “basically stable” at 25%.
That echoes the German model, where manufacturing accounts for about 18% of economic output, compared with about 11% in the U.S., according to the World Bank.
“The admiration comes from the idea that Germany has never given up its industrial core, and that it may be more important than the service industry,” said Doris Fischer, chair of China business and economics at the University of Würzburg.
Beijing’s “Made in China 2025” program, with its focus on increasing domestic manufacturing in tech sectors, was inspired by Germany’s Industry 4.0 blueprint. While Beijing has downplayed that program following a backlash led by Washington, the trade war with the U.S. has only accelerated its ambitions for more manufacturing self-reliance.
Recent statements suggest Beijing sees small- and medium-sized companies as more worthy of support than tech giants. The backbone of Germany’s economy are medium-sized manufacturers, known as ‘mittelstand companies,’ which have also been targets for Chinese acquisitions.
“Chinese people have a strong view that the basis of the German economy is not the large listed companies, but middle-sized businesses that are ahead in technology,” said Bernard Kemper, chief executive of EEW Energy from Waste GmbH, which was acquired by a Chinese company in 2016. “China wants to learn from that.”
Vocational Education
Beijing took a hammer to its for-profit tutoring sector last month, leading to the closure of companies that helped kids to cram abstract knowledge outside of schools. By contrast, the private sector is being welcomed to take part in vocational colleges that teach practical skills. Vocational education is emphasized in Beijing’s five-year plan and has “great potential as China journeys toward socialist modernization,” President Xi Jinping said in April.
“Strict regulations have largely put the brakes on China’s education sector,” HSBC Holdings Plc said in a report last week. “But for vocational education, it’s a different story as policy has been supportive.”
In a draft vocational education law issued this year, Beijing promised a “fusion of industry and education,” aping Germany’s system, where private companies provide paid internship opportunities.
“The only country where I’ve seen that imitated on a larger scale is China,” said Hermann Simon, chairman of German consultancy Simon-Kucher & Partners.
The Differences
Beijing also wants to avoid some key features of Germany’s model. It has no tolerance for independent trade unions. China has signaled it will maintain state investment at a higher rate than Germany, and wants to rely on domestic demand to drive economic growth rather than exports. While Beijing wants regulations to bind low-level officials, the top level of the ruling Communist Party has no independent check on its power.
China’s anti-monopoly efforts have mainly targeted the private sector, while it has promoted the ever-larger state-owned companies in sectors such as steel and railways.
“Market forces are being released in half the economy, and in the other half with national champions, it’s the opposite,” said Jacob Gunter, China economy analyst at Berlin-based think tank MERICS. “China wants to learn from Germany. That may be the case in areas dominated by the private sector. But elsewhere Beijing is keen to have a handful of large players because they are easier to direct.”
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