The Yin-Yang of Chinese Regulation

Westerners think of China as highly regulated.  And at one level that’s true.  In important and surprising ways, however, the opposite is also true.  Compared to the U.S. and other Western countries it’s a veritable free-for-all here.

There are a few lines you just don’t cross.  Anything that challenges the security of the state is one of them.  Although I personally find that to be rather comforting in this day and age.

And the flow of foreign currency is another.  Even if you have foreign currency you can’t spend it without governmental approval.  But the Chinese have spent the last thirty years exporting their hard work in exchange for U.S. dollars so who can blame them for wanting to protect that accumulated equity.

Perhaps the biggest headache for foreign companies operating here is the fact that business licenses are very specific and often very narrow in their scope.  Most foreign companies are licensed to sell only what they make and even that may be spelled out in great detail in terms of processes and materials.  What are simple tasks to their Western brethren, like opening a factory outlet, buying a few trucks to haul your merchandise, or even expanding into a new line of products or services, can be quite problematic here.

Within those broad boundaries, however, both individuals and businesses have a lot of freedom – more, even, than in the West.

f you think China is a bastion of regulation you apparently haven't driven here.  I'm still not sure why they bother with traffic lights.
If you think China is a bastion of regulation you apparently haven’t driven here. I’m still not sure why they bother with traffic lights.

At the personal level you have to look no further than the motorways of China to verify my assertion.  If you even see a policeman on the highway – and it’s rare – it’s very unlikely he has pulled anyone over.  Chances are he is going somewhere and is likely to have a long line of cars literally drafting behind to take advantage of his ability to break through traffic.

Traffic signals exist only for – actually, I haven’t figured out why they bother with them.  And speed limits are routinely ignored except where electronic sensors and video cameras have been installed; and in those cases they have conveniently posted signs to allow you to slam on the brakes before actually entering the detector’s field of vision.

Trucks are pretty much unregulated here.  If you can get it to stay on there, and even if you can't, you're welcome to use the highway.
Trucks are pretty much unregulated here. If you can get it to stay on there, and even if you can’t, you can haul it on the highway.

Commercial trucks, for their part, are almost totally unregulated in practice.  I have yet to see a police weigh station along any highway.  I frequently see trucks carrying loads far beyond their designed capacity and sometimes wider than the width of a single lane.  And in the event traffic is stopped on a highway for any reason one of the biggest delays in getting things going again is that the police have to walk down the line of trucks to wake up sleeping drivers catching some much needed rest.

No Chinese parent or homeowner has ever gotten into trouble for failing to pay taxes for his or her nanny or housekeeper (called ayi’s here), although every modestly wealthy family has at least one.    While they would be easy for the tax authorities to find, having the poor housekeeper employed is far more important to the pragmatically minded government than the small amount of revenue lost by her or her employer not paying taxes.  (And the revenue will, of course, turn into expense when the housekeeper becomes unemployed and has to rely on government assistance to survive.)

There are minimum wage laws, of course.  And there’s the usual labyrinth of regulations relating to overtime and social insurance and all the rest.  And sometimes they’re not enforced.  And sometimes they’re not enforced for the wrong reasons.

The reality, however, is that those regulations apply only to a small portion of the population.  A huge part of the economy depends on independent contractors and day laborers and is essentially unregulated.  It’s one of the key reasons that the China price is as low as it is.

The unregulated economy is not underground.  It's right there on the street corner.
The unregulated economy is not underground. It’s right there on the street corner.

To be clear, this is not an underground economy.   It’s all very much above board.  Go to this street corner to rent a giant earth excavation machine by the hour or the job.  Go to that street corner for carpenters, electricians and other tradespeople.  And go here to pick from a dozen different trucks and drivers to move your load from A to B.  All cash.  No taxes.  No regulations.  And, for all intents and purposes, no liabilities.

The government knows that these small companies and individual contractors are there, of course.  Everyone knows they’re there.  That’s the whole point.  It’s all part of a system designed to deliver maximum economic growth while keeping everyone employed at whatever they’re capable of doing.

Tradesmen waiting for work.  They're obviously not hampered by red tape and paperwork.
Tradesmen waiting for work. They’re obviously not buried in red tape and paperwork.

But what’s even more critical to China’s economic success, in my opinion, is that even when there are regulations, and there can be a lot of them depending on the issue, the industry, and the company, every regulation is more of a guideline than a hard and fast rule.

Not for the taking, mind you.  If you’re an employer, for example, the labor laws are regulations for you.  You must follow them.  They’re guidelines, however, for the government officials who are tasked with enforcing them.  And they have both the authority and the willingness to interpret them in a way that maximizes the government’s key priorities of social stability and economic growth – i.e. socialism with Chinese characteristics.

There is a big downside to regulatory discretion, of course, when it comes to corruption.  But there is a big upside as well.  No regulation, no matter how carefully crafted or exhaustively detailed, can envision every circumstance to which the regulation will ultimately apply.  It is the Law of Unintended Consequences.  The only foreseeable reality is the reality of the unforeseen. 

The reality is that no regulation can sensibly accomodate every situation to which it must ultimately be applied.
The reality is that no regulation can sensibly accomodate every situation to which it must ultimately be applied.

It is, as a practical matter, the lack of discretion, more than the mere existence of regulation, which leads to crippling bureaucracy, regulatory gridlock, cost inflation, and, in the end, a lack of jobs.   And it is discretion, in a word, that has allowed the Chinese to economically succeed – to lift more than 300 million people out of poverty in less than a generation – where other highly regulated economies (e.g. the Soviets) were unsuccessful.

This is precisely why I believe the debate over government regulation in the West is ill-framed.  As the Chinese have so clearly demonstrated, regulation is not the problem.  They have one of the most highly regulated economies in the world but have, nonetheless, created a fertile environment for the small businesses and independent contractors that are the real job-engines of every economy in the world.

The problem plaguing the U.S. and other Western economies is not regulation, but its digital application.   It is the loss of discretion, or, as my long-deceased father would have said, the death of common sense, not the birth of regulation, that has sapped the vitality out of Western economic growth.

The litigious nature of the U.S. regulatory environment, of course, naturally squeezes discretion out of the system.  And there are some benefits to the resulting consistency.  Consistency, however, taken to the extreme, promotes rigidity, limits responsiveness, and ultimately weakens that segment of the economy – small business – that builds value by catering to micro needs through the ability to provide flexible services at low cost.

In the end, the Chinese once again have turned Western assumptions on their head.  Where we see the chains of regulation they have created a bastion of economic freedom.  And while we promote the value of rugged individualism, we have, in fact, spawned an environment of expensive and crippling regulatory rigidity.

The lesson, once again, is that in regulation, as in health, food, architecture, and – in all of life and business – the best solution is a balanced solution.  The yin-yang of regulation.  It’s how a political and economic system that is literally defined by regulation nonetheless thrives on its ability to nurture economic freedom.

As with most things in life and business, effective regulation comes down to balance and perspective - what my dad called common sense.
As with most things in life and business, effective regulation comes down to balance and perspective – what my dad called common sense.

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Notice:  The views expressed in this post are strictly those of the writer acting in a personal capacity.  They are not in any way endorsed or sanctioned by his employer or any other individual with which he may be personally or professionally affiliated.