Pranav—Understanding Chinese capitalism

Today, I’m reading a new blogpost by Scott Sumner, that takes a look at how Chinese capitalism works. Here’s everything it taught me.

At its heart, China’s economy works like economies anywhere else: through markets, entrepreneurs and tons of sweat. There’s no secret formula. Provinces with lots of entrepreneurs who start small businesses do well. Provinces with artificially inflated, state-sponsored construction booms don’t.

As evidence, Sumner points to the Zheijang province. That’s the place marked here in red:

Zhejiang_in_China

(Yeah, I get it, this map has Kashmir all wrong, but that’s all that Wikipedia has. Don’t come after me, please? Instead, we could just shake hands and rage about this assault on our territorial sovereignty together.)

Zheijang was early to embrace capitalism, and it reaped the rewards --- quickly becoming one of the richest provinces in China. It did so at a time when it wasn't entirely clear if China would stick the path on economic reforms. If they didn't, suddenly, anyone pushing for these reforms on the ground could be labelled a traitor. These people risked their lives for capitalism, taking a blood oath --- yes, a literal blood oath --- to protect their reformist experiment.

The rural reforms began in late 1978 in a single village in Anhui province. Each family in the commune was assigned their own plot of land. This decision was incredibly risky, so everyone took a blood oath to secrecy. Gradually other villages started to copy them. When the government saw that the reforms were successful, they eventually gave them their blessing. But it was not the sort of top-down change that is often portrayed in the West. It was the Chinese people that took the lead, and the leaders followed. In an earlier post I called this agricultural reform the single best thing that has ever happened in world history.

In fact, it was China's villages that led its spectacular growth, because it was in rural China that the Chinese government was willing to try out free enterprise.

Zheijang is still home to China's most innovative companies, including the world's latest tech darling, Deepseek. This, too, is for reasons no different from what you see elsewhere: population density, talent clusters, and business-friendly policies.

That this cluster would take shape in Hangzhou is no accident. Startups, especially in tech, tend to be located in the most economically developed, talent-rich, and densely populated regions of a country. Hangzhou is located in the Yangtze River Delta, not far from Shanghai. It boasts one of China’s top universities, Zhejiang University, and it’s surrounded by a region known for its entrepreneurial spirit, as well as strong norms around things like contracts. It’s also a hub for Chinese tech, home to firms like Alibaba that attract talent from across China.

Equally important is the city’s business environment. Hangzhou — and the surrounding province of Zhejiang more broadly — are known in China for their business-friendly policies and officials, an approach summed up by the catchphrase “non-interference when unnecessary, fast response when needed.” Hangzhou has also set up a number of funds to attract and incubate new tech firms. For example, its Yichuang Town neighborhood, where Game Science is based, offers full rent subsidies or exemptions for promising digital content enterprises, including gaming companies, which helped Feng Ji’s firm survive its first few years.

"Non-interference when unnecessary, fast response when needed." See that? Let that be a lesson to anyone here, in India, that thinks we need extreme and barbarian state coercion to taste China-like success.

There's no one China. They're a far more decentralised country than we are, and so, even though they're autocratic in theory, in reality power is dispersed far more widely than it is in India. In the realm of policy, this gives you more rolls of the dice --- it lets you try out more experiments, and replicate the ones that succeed.

The Chinese provinces that have won the economic race are their most humane, liberal, economically free ones. That is where the path to success lies. That’s where China’s polities are moving. Even a tyrant like Xi can't change that.

That's it for today. If you liked this, give us a shout by tagging us on Twitter.