Opinion | Why China should allow different perspectives on its economy to avoid the risk of three biases

Fiscal support was also muted; The Chinese state remains stubbornly opposed to boosting consumption through cash transfers or improving social safety nets. It's quite surreal to hear Chinese leaders sound more like right-wing politicians in the US when they talk about the evils of animal welfare.

It was also recently reported that China's national health insurance system lost 19 million subscribers in 2022 as rising premiums and co-payments make the system unaffordable for many people. Premiums and co-payments have increased because local governments are under greater financial strain. When people need to save more for future needs – be it health or retirement – ​​that also means they have less disposable income to consume. This not only prevents the economy from recovering in the near term, but also hinders China's transition to a consumption-led growth model.

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The steps the Chinese government has actually taken to stimulate the domestic economy – for example, the 31-point policies to support the private sector announced in July and the 1 trillion yuan treasury bond issuance announced last month to finance infrastructure – and disaster relief efforts by local governments – have so far had limited impact on investor sentiment and consumer confidence.

A plea for different viewpoints

Although China's economy has faltered, the space for serious debate about it has been significantly reduced over the past year. Private sector analysts have been instructed not to make critical assessments or pessimistic forecasts about the Chinese economy. Since July, the authorities have stopped publishing some important economic data such as the youth unemployment rate. Recently, the Ministry of State Security warned ominously that “the talk of China's decline is essentially an attempt to create a 'narrative trap' or a 'cognitive distortion'.”

Just as pessimism about the U.S. economic outlook earlier this year served a useful function in forcing the Fed to deliver robust, credible policy responses, so too can a case be made for Chinese authorities to allow for differing viewpoints – including pessimistic and skeptical ones – about the country's economy. Markets work best when there is diversity rather than mimicry; This applies to the marketplace of ideas as well as markets for ordinary goods and services.

Chinese President Xi Jinping delivers a speech at the annual Central Economic Work Conference in Beijing. Photo: `

The case for cognitive diversity rests on the argument that without such diversity, policymakers are likely to be blindsided by certain biases and therefore fail to recognize emerging risks and dangers. Three such prejudices are worth highlighting.

The first is the optimism bias, which causes us to pay more attention to good news and ignore or devalue bad news. For example, in the years leading up to the global financial crisis, policymakers and mainstream economists in the United States not only failed to recognize the risks brewing in the financial industry, but some even fueled the asset bubble by optimistically proclaiming that real estate prices would never rise that rising real estate prices are evidence of sound economic fundamentals and that financial innovations such as securitization have made the financial system safer.

The global financial crisis demonstrated that the unquestioned and unchallenged belief in the benefits of financial liberalization was misplaced; It also became apparent that intellectual capture by the prevailing ideology can reduce cognitive diversity in policy making. This makes it all the more important for political decision-makers to give informed outsiders the opportunity to examine policies, warn about hidden risks and develop alternative scenarios and policy options.

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The second tendency, closely related to optimism, is the natural tendency to have too much confidence in ourselves and our abilities. This has become increasingly clear in recent years as officials have been instructed to instill confidence in China's culture and governance. Overconfidence has likely been a factor in regulators cracking down on several industries during the pandemic – many consumer-facing internet companies, the real estate sector, and the private education industry, to name a few. Not only were these raids unexpected and persistent, but officers may have overestimated their ability to deal with the consequences of their raids.

The authorities seem to have finally realized that their actions were excessive. The recently concluded Economic Work Conference issued a statement that included the following recognition: “Next year we must persistently pursue progress while maintaining stability, promote stability through progress, and establish the new before abolishing the old.” This is coming the closest thing to an admission by Chinese officials that their interventions in recent years have roiled markets and undermined confidence.

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Finally, the inaction or status quo bias explains why officials often err on the side of inaction (error of omission) rather than the side of action (error of commission). This, in turn, explains the inertia in which suboptimal policies are maintained for far too long simply because the risks of changing the status quo are perceived to be greater than sticking with it.

Nowhere was this bias more evident than in the zero-Covid policy, which has been elevated to an ideology. This made it impossible for officials to even consider the alternative strategy of living with Covid, let alone prepare the health system and the country for the inevitable policy change.

In an environment where expressing a contrary opinion can be punished, it is much more difficult for policymakers to find out the true state of the economy and develop a sufficient variety of policy options. Independent analysts and even critics are useful precisely because they help policymakers counteract the “natural” tendencies of optimism, overconfidence, and inaction. When alternative viewpoints are suppressed, policymakers are unlikely to have the will or even the ability to question themselves.

Donald Low is a lecturer and professor of practice in public policy and director of the Institute for Emerging Market Studies at the Hong Kong University of Science and Technology.