Is there a larger purpose to the Chinese government’s recent actions against the country’s largest corporations, and does its clean-up of the financial sector fit into its economic strategy?

China has sought for at least 15 years to rebalance its growth from exports and fixed-asset investment to greater domestic consumption — efforts that have assumed a new urgency, owing to conflicts with the US and other countries. As long as its domestic market expands, China will be able to reduce the strategic vulnerabilities its dependence on exports implies, and foreign firms will become more dependent on the Chinese market, giving China new sources of strategic leverage. But there are serious impediments to this strategy.

For Chinese domestic consumption to increase, both wages and household incomes from invested savings must grow. And for that to happen, China must depart from a growth model that has hitherto relied on significant repression to keep workers’ wages and returns paid to savers low. That means moving towards higher-skill industries that pay workers more, with investment intermediated by a sophisticated financial sector that can generate reasonable returns even without access to cheap capital.

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