A Central Bank With Chinese Characteristics (iv)

Is China’s Economy Stable Because It’s Authoritarian? Yes. But also, no!

Hi again, and I’m back with a new and unplanned addition to my China central banking series! (You can blame long-haul flights for facilitating the expansion of this incredibly exciting (ha) mini-series…)

If you recall:

• Part One: What does the People’s Bank of China do?

• Part Two: What tools does it have to do this?

• Part Three: What does the People’s Bank of China do if/when the Chinese economy collapses?

• Part Four: How do the US, European and Chinese economies actually collapse?

After the last part, a fantastic reader (Andreas) asked a fantastic question! He pointed out that in my analysis of China’s crisis management, several patterns kept reappearing:

• Administrative coordination

• Rapid response time

• Centralised control over key levers

• Distinctive capacity for managed failure

And so, his question:

Is this level of systemic coordination only possible in an authoritarian system? Or is there a democratic configuration that could achieve similar resilience without sacrificing political values?

“China 04” by Marija Orlovic

In other words, he wasn’t asking about interest rates or credit channels but about governance.

His question went further. From the series so far, he noted correctly that China is able to:

• Absorb economic pressure

• Reroute crises away from vulnerable points

• Prevent financial contagion

• Regulate destabilising flows with unusual precision

Thus his deeper, more structural question is:

Are there political–economic systems that can perform this kind of pressure absorption without relying on centralised (un-democratic) authority?

That naturally led him to compare China with the European Union and the US, before he reached the hardest question of all.

(It is also a question that moves this conversation from economics and monetary policy (i.e. central banks) into political theory and institutional engineering and system-level design!):

• How do you design a system that can transition without destabilising?

• How does a political economy evolve without collapsing its own architecture?

• What principles allow for non-chaotic transitions?

• And how do you maintain legitimacy while intervening in the way the PBoC does?

These are, in fact, the core questions of state capacity! They are also the core questions of my own research around designing institutions capable of steering complex economies!

So in this article, I want to discuss the architecture of the political economy in China, Europe and the US, and why they function the way they do.

Because while China is nearly always compared to Europe, and the US on ideological terms, I want to flip the narrative and compare it on structural terms! By:

• Examining the institutional foundations of resilience: state capacity, coordination mechanisms, legal frameworks, and competition.

• Introducing the concept of transition stability, which is the real differentiator between these systems.

• Showing why resilience is not a regime trait (“authoritarian vs democratic”), but a design question.

• Connect China’s crisis management to broader questions of institutional adaptation, legitimacy, and power.

So instead of just asking how China moves money or how China manages crises, now I want to discuss:

Can China govern transitions when other systems cannot? In what ways is Europe somewhat capable of transitions? And why can the United States not?

Stability Is Easy. Transition Stability Is Hard.

One of the most important things Andreas’s question forces us to question openly is whether any political–economic system can appear stable in equilibrium.

Because stability, taken at just face value, is often just the natural flow of a system that has not yet been disturbed; it is not proof of competence in any domain, but of mere existence.

This distinction is critical because it turns out that equilibrium stability tells you next to nothing about adaptive capacity, or about what a system can do if the environment shifts, the constraints tighten, or the underlying assumptions stop holding.

You can think of it the same way you’d think about dating someone!

A relationship can feel perfectly stable when everything is easy and nothing significant is being asked of either partner (e.g. the honeymoon phase!). Because most relationships look “stable” and dizzyingly happy in equilibrium. The real test comes when something changes. Consider the couples that break up when a job is lost, someone gets ill, one partner grows faster or slower than the other, etc.

That is the moment you discover whether the relationship has the tools to adapt. Before this period, “success” is often conflated with “untested”!

Political economies work in exactly the same way. They can look functional and predictable during calm conditions, but that tells you nothing about how they will behave when they are forced into transition.

Hence: the difference between stability and adaptive capacity is the difference between ease and resilience, in countries and in relationships alike.

In complexity theory, this distinction is foundational. A system can be robust (stable under normal conditions) yet utterly brittle (unable to adjust when conditions change). It can also be ordered, yet incapable of self-correction.

Seen through that lens, the real test of a political economy is not whether it holds still, but whether it can change course without breaking. And just like relationships, transitions expose the underlying architecture of that system: the dynamics of power, information, and coordination.

When it comes to economies, you see, surviving a crisis is one thing. Important, yes- of course. However what we ultimately care about long term is whether the economy is capable of restructuring the fundamentals that produced the crises, which is something else entirely.

Or in relationship terms: you are guaranteed to fight (no couple doesn’t!), but long-term success is dependent on whether or not you can repair after the inevitable rupture!

And this is precisely where China, Europe, and the United States diverge.

China can stabilize itself with an almost unsettling speed. Not because it is authoritarian, it turns out, but because its institutions are designed for directed adaptation. So when the Chinese system needs to turn, it turns like a speedboat. When it needs to suppress contagion, it stops the spread instantly. Or when it needs to reallocate credit or shut down a sector, it does so with coherence.

Europe governs transitions through deliberate negotiation: a coordination-heavy model rooted in high legitimacy, institutional ballast (because Europe loves a good institution), and technocratic mediation (I am restraining myself here…). It is slow, obviously, but… It rarely loses control. In comparison, Europe moves like an oil tanker: costly to turn, but very difficult to sink.

And then there’s the United States which does something altogether different. It grows dynamically and does cool things like inventing new equilibria constantly through competition and decentralised autonomy, but… Its system really struggles with coordinated transitions. Change occurs, but usually through rupture (e.g. through crisis, improvisation, and institutional shock rather) than through pre-emptive adjustment.

And this gives us the central insight about structural comparisons:

Stability is not the meaningful metric we should care about. Transition stability is.

Hence, the real question is not whether a system can remain intact under normal conditions but whether it can move into a new equilibrium without triggering internal fracture, political breakdown, institutional paralysis, or uncontrolled cascade effects. I.e. without shit hitting fans in supremely bad ways.

T is for Transition

But before I go any further, it’s worth me being very clear about what I mean by a “transition.”

A transition is any moment when a political–economic system must shift its underlying model, most often because the status quo stops working and the system has to reconfigure itself structurally.

A transition is not just tweaking interest rates or adjusting budgets (cough, Rachel Reeves, today), issuing the millionth bailout or releasing a policy paper.

A transition is when an industrial model becomes obsolete, or a demographic shift becomes undeniable, or a geopolitical environment changes shape, or a financial imbalance can no longer be rolled over, or a technological frontier forces rearrangement, or a… (insert summary of today’s macro climate).

Thus, a system in transition is the act of rebuilding the very logic that used to hold an economy together.

One concrete example was the shift from a manufacturing-led economy to a high-tech, services-led economy in the US, circa 1970s and 80s (with deindustrialisation, regional collapse and long-term wage stagnation).

Contrast this with China’s transition from export-led growth to domestic consumption (by redirecting credit, forcing local governments to absorb shocks, tightly controlling capital and preventing unemployment spikes by any means).

And in Europe, the attempted transition to decarbonisation and energy independence. (Ugh: slow, negotiated, heavily cushioned by social policy, etc).

So when I talk about “transition stability,” I am talking about a system’s ability to, in this order:

1. Recognise that its old equilibrium no longer works,

2. Accept the political pain of restructuring,

3. Reallocate resources and power,

4. Maintain legitimacy while doing so,

5. Avoid the catastrophic spirals that occur when systems resist change until it is too late.

So this is what a “good” transition looks like. It’s never going to be painless or simple, but it could be non-destructive. (Again, a useful analogy is breaking up with your long-term partner!).

The question therefore that Andreas is circling is whether any system can truly achieve this?

I mean, transitions are uniquely difficult because they force systems to turn inward on themselves. They become their own monsters. Self-cannabilizing demons. They push against entrenched coalitions, outdated institutional arrangements, and governance philosophies that were built for a previous era.

And think of how they typically play out:

Uncertainty is created → expectations are destabilized → coordination is difficult and often fails→ leading to a loss of legitimacy → leading to disorder → which tests resiliency in the system → without resilience, the system breaks down.

Of course, I didn’t need to explain this to you, we’ve all been watching Fox News over the last few years.

Philosophically, we can therefore see that transitions are where a system must confront the gap between what it is and what it must become! Just like with humans, this is where political economies reveal their deepest limits. And is also why transition stability is the hardest problem in political economy, because it is where theory, power, legitimacy, and institutional design collide.

Transitions are not just shit shows, they are complex shit shows!

Why Transition Stability Is Rare

It’s useful to get into a little more detail here about what actually happens during a transition, because only then can we figure out how different systems handle them!

So: the moment a system must move from one equilibrium to another, it encounters three forms of resistance that almost no architecture is fully designed to manage.

One: transitions create winners and losers.
Any major shift (e.g. industrial, demographic, technological, fiscal) inevitably threatens someone’s position. Groups that benefited from the old model will fight to preserve it. Groups disadvantaged under the old model will push for change. And the institutions built around the previous equilibrium (regulatory agencies, fiscal systems, labour markets, even cultural norms) often end up defending the status quo by default. This is why the college shenanigans in the US are so damn complex. And this is also why China pushes through transitions with administrative force, Europe negotiates them through lengthy processes of compensation and social dialogue, and the United States often fails to act at all until a crisis makes inaction impossible.

Two: transitions require an exceptional degree of coordination.
To shift the trajectory of an entire system, fiscal policy, monetary tools, regulatory design, industrial strategy, political will, social expectations, and informational signals all have to move in some kind of alignment, right? As we saw during Covid, that is extremely rare! China manages it through centralised authority (lock everybody up); Europe manages it slowly, through technocratic frameworks and multilateral decision-making (which took too long to slow the spread); the United States, with its fragmented governance and multiple veto points, has almost no mechanism for aligning its levers until it is too late (hence people were still in nightclubs well into the pandemic).

Three: transitions involve a (temporary?) increase in disorder.
They are not linear processes. They fuck with our minds and expectations. They introduce noise into the system, unsettle coalitions, and create periods of peak uncertainty. Legitimacy wobbles; actors hedge, wait, or flee (classic Hirschman dynamics); and the future stops feeling predictable. The political philosopher Isaiah Berlin wrote that freedom is most destabilising at the moment it is exercised. Well, transitions behave the same way. And because democracies depend so heavily on legitimacy, they tend to avoid these periods of instability until they are forced into them by external pressure or internal breakdown.

This combination (distributional conflict, the need for coordination, and the inevitability of disorder) explains why transition stability is so rare, and why different systems handle it so differently.

How Different Systems Handle Transitions

If transitions expose the underlying architecture of a political economy, then how a system manages a transition tells you almost everything about how it is built!

China, Europe, and the United States each have distinct methods, shaped by things like institutional design, political culture, and structural constraints. And of course, each method produces its own strengths and weaknesses.

China: Coercive Coordination

China handles transitions through an approach best described as coercive coordination. As is probably clear, authority is concentrated at a single node (the Party) which can issue rules that move rapidly through ministries, banks, provincial governments, and state-owned enterprises. Administrative compliance is not optional (even the thought of this is lol). As I’ve mentioned already, this is what gives the state control over credit allocation, and simultaneous adjustment across multiple institutions.

This model has an obvious advantage: China can force transitions quickly! We saw this with Evergrande. It can shut down or reshape sectors, redirect capital, suppress contagion, and absorb shocks with a level of coherence most countries cannot match. And this is a phenomenal achievement.

But… The costs are equally clear. Think about the Covid lockdown. We see that coercive coordination can lead to over-correction when the Party misjudges a situation; to hidden debt when lower tiers mask problems (especially since so much spending is off-balance sheet!), to institutional brittleness when dissenting information is muted, and to demographic or social risks when short-term stability repeatedly takes precedence over long-term reform (one-child policy, anyone?). Dan Wang’s new book does a pretty decent job at summarizing all of this in a few hundred pages.

Europe: Consensus-Based Coordination

Anybody who’s dealt with the EU knows that Europe approaches transitions through consensus-based coordination. Change happens through tiring negotiations among member states, within domestic political coalitions, across supranational institutions, and any other places that people can find to delay decision-making. Here, “compensation” is a core tool: those who “lose” from transitions are cushioned through welfare states, subsidies, or regulatory protections. (Unfortunately, in the age of innovation, this means that European industry gets protection over competitive new entrants!). Further, technocratic oversight is huuuuge (via the European Commission, ECB, ESM, and other bodies) which gives structure and predictability. And treaty-based incrementalism ensures that change is sequenced and deliberative (read: never innovative).

This produces high legitimacy and low volatility. Europe does not panic easily, and nor does it allow crises to spiral. Its social contract is explicitly designed to contain the political fallout of transition.

But the trade-off as we’re all too aware is speed. Europe moves painfully slowly. Often too slowly for technological, geopolitical, or demographic shocks. Consensus is stabilising, yes, but it is also a brake. The system adapts, but rarely at the pace demanded by external pressures.

United States: Market-Led Chaos

In comparison, the US is really just fucking around and finding out. It transitions through what can only be described as market-led chaos. Instead of a coordinating centre, the US has a fragmented political structure with competing authorities, multiple veto points, and powerful private actors who often shape transitions more than public institutions ever will (hi, Elon!). In fact, reform historically only happens only when the old equilibrium collapses entirely! When political stalemate becomes intolerable, when markets force action, or when crisis shocks the system into improvisation.

This model has a real strength: it produces remarkable innovation and creativity. The US is extraordinarily good at generating new sectors, new equilibria, and new economic frontiers, largely because it does not try to coordinate them.

But as a transition model, oh my god it is deeply fragile. In the US, transitions often take the form of:

Collapse → improvisation → partial recovery

… with enormous social and political costs in between. There is no mechanism to align institutions ahead of a transition, so the system re-equilibrates only after suffering significant damage.

So… What Makes a System Transition-Stable?

If we step back for a moment and think about political economies the way complexity theorists think about ecosystems or engineered systems (i.e. the way I do), one thing becomes immediately obvious:

Systems fail at transition for structural reasons, not moral ones!

They fail because their architecture doesn’t support the coordination, flexibility, or information flow required when the environment changes.

In complexity theory, a system that can survive transitions (i.e. move from one equilibrium to another without collapse) must possess a certain set of structural features. However, no real-world economy has all of them (and arguably no real-world democracy could), but… Laying them out briefly helps us see what “transition stability” would actually require.

I’ll list them quickly, because understanding them makes it clear why China, Europe, and the US transition the way they do (and also what each would have to change to transition better in the future!)

1. Slack

In complexity systems, slack absorbs shocks. Without slack, stress propagates instantly. China has buffers in state-owned banks and administrative control. Europe has buffers in welfare systems and automatic monetary stabilisers. The US, optimised for efficiency rather than resilience, has very little slack at all.

Thus, a transition-stable system needs built-in excess capacity (not to waste resources, but to absorb stress).

2. Coordination Mechanisms

As I mentioned, complex transitions require multi-layer synchronisation. You cannot turn fiscal, monetary, regulatory, and industrial levers independently and hope the system self-corrects. China coordinates through a unified political centre. Europe coordinates through its endless supranational institutions (slowly but supposedly coherently). And… drumroll… the US has no equivalent coordinating authority.

Thus, a transition-stable system needs a mechanism (not necessarily authoritarian, but functionally strong) that can align actors when it matters.

3. Distributional Management

Transitions create losers, and in complex systems unmanaged losses create baaad feedback loops. (Like, uh, ending up with Trump as President…).

Europe compensates losers formally through welfare. China absorbs losses through state balance sheets and forced compliance. The US largely leaves distributional fallout to markets, which amplifies losses and rewards a tiny number of winners.

Thus, a transition-stable system needs a way to cushion losses so that change does not trigger political revolt or social collapse! (please print this and stick it on your wall somewhere!).

4. Long-Term Legitimacy

Complex systems cannot transition if legitimacy collapses. People will not tolerate uncertainty without trust. This is a fact. Europe has legitimacy through social compacts, although they are loosening. China enforces compliance through political authority, which remains strong because of a lack of choice about another system. US legitimacy is… fragmenting under inequality and institutional decay … Anybody checked on Marjorie Taylor Greene recently?

Thus a transition-stable system requires a lot of legitimacy (democratic or otherwise) that allows the system to ask for sacrifice in the first place.

5. Adaptive Institutions

In complexity terms, systems fail when institutions fossilize and cannot update their internal rules. China’s institutions update constantly (sometimes chaotically, but nonetheless). Europe updates slowly through treaty reform and regulatory layering (gasp!). But, US institutions are increasingly frozen in design choices made decades ago.

Thus, a transition-stable system must have institutions capable of learning and adjusting.

6. Information Clarity

A system cannot transition effectively if it cannot see itself clearly. In complexity models, distorted signals create catastrophic cascades. China’s administrative data (whatever its flaws) creates a unified information picture, even if the West is not allowed to see that picture! Europe’s technocratic diagnostics offer high-quality signals (through four million policy papers published annually in lieu of any other progress). And of course, the US suffers from ideological noise, polarised narratives, and inconsistent data (or even fake data, under Trump).

Thus, a transition-stable system requires informational clarity (not propaganda! not politicised noise! but accurate feedback loops).

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If you combine these six features, you get (in pure theoretical terms only, of course), the outline of a political economy capable of transitioning without rupture.

But of course, no system has all of them, and no system ever will. Thus we live in a world of never-ending economic and political tradeoffs, just to make life more exciting! However, the list itself makes it clear why transitions fail:

The existing architecture does not support the new behaviour we are asking for.

And this, fundamentally, is the answer to Andreas’s question.

Drumroll… The Answer to The Question

One main takeaway from this complex question is that:

Economic stability has nothing to do with whether a state is authoritarian or democratic, even if there are hints of that!

That frame is far too blunt to be analytically useful. What determines whether a system can transition smoothly is both simpler and more complex than regime type.

China comes closest to the full complexity set. It has slack through state-owned buffers, strong coordination via a unified political centre, distributional management through state balance sheets, highly adaptive institutions, and relatively high information clarity. Its main weakness is bottom-up legitimacy, which makes its transitions rapid but potentially brittle over time.

Europe scores well on legitimacy, fairness, slack, and coordination, anchored by strong welfare states and technocratic institutions. It also has good information clarity. But its institutions are only moderately adaptive, and its consensus model slows transitions to a pace that often lags behind technological or geopolitical shocks.

The US has abundant dynamism but… little else: minimal slack, no effective coordination mechanism, weak distributional management, eroding legitimacy, limited institutional adaptiveness, and increasingly distorted information clarity. As a result, it transitions through total rupture, and only after crises force its hand.

And this reframes the picture entirely! China is not resilient because it is authoritarian. Europe is not slow because it is “socialist.” The United States is not dynamic because it is… free?

The answer to the overarching question is, in fact that:

These systems behave differently because their structural capacities differ: the architecture of slack, coordination, legitimacy, fairness, adaptiveness, and information clarity working (or failing) in distinct combinations. Not according to whether it holds elections or maintains a one-party state!

The (sad) US Case Study

To understand why the US struggles so profoundly with transitions, it helps to remember that its institutions were never designed for adaptation in the first place!

The Madisonian system (named after James Madison, the architect of the US Constitution) was explicitly engineered to slow politics down through checks and balances. Its entire design is built around separating powers, multiplying veto points, and ensuring that no single actor or institution can redirect the system quickly or unilaterally.

The purpose was obviously to prevent rapid change, avoid concentrated power, filter political passions, and preserve continuity across generations.

So, in times of equilibrium, this architecture works well. It creates predictability, guards against executive overreach, and limits the risk of abrupt policy swings. But the very features that make the US stable under normal conditions make it extraordinarily poor at responding when the environment shifts. The system can hold a straight line; what it cannot do is turn.

Transitions require something the American system simply does not provide: coordination, resource centralisation, institutional flexibility, and clear strategic direction. Instead, the US political architecture offers the opposite. It outsources strategic direction to the so-called free market (on the assumption that markets will discover the optimal path) and busies itself with fragmented authority, overlapping jurisdictions, entrenched interests, and deep partisan polarisation.

The system is thus designed to prevent steering, not to enable it.

And this problem has been dramatically worsened by fifty years of institutional rot, which is what a lot of my research at MIT concerned itself with!

Since the late 1970s, the collapse of American antitrust enforcement has allowed industries to consolidate into oligopolies that are effectively immune to competitive pressure. Regulatory agencies have been hollowed out through budget cuts and basically just firing the staff. Lobbying power has concentrated to the point that legislators routinely defer to corporate actors on matters of public interest (uh, see here?).

So it turns out that:

Constitutional fragmentation + Institutional decay = Structural inertia

The US cannot coordinate transitions even if it wants to! Inertia isn’t just baked in, it’s now reinforced by concentrated private power, degraded regulatory capacity, and a political class structurally and financially dependent on the very industries it is supposed to discipline.

(In complexity terms: the system has lost the redundancy and signal clarity that once made it governable).

This is why American fragmentation is robust in steady state but lethal in transition. The historical record is extremely consistent with this thesis: major transformations expose a system that can only adjust under extreme duress, and only through improvisation. Adaptation does occur, but only after the previous equilibrium has already collapsed. Some examples:

• World War II mobilisation

• Cold War industrial and technological buildup

• The Great Depression

• 1970s stagflation and energy crisis

• 9/11 and the reorganisation of the national security state

• 2008 global financial crisis

• COVID-19 pandemic

• Supply-chain collapse and global logistics failures (2020–2022)

• Technological arms race with China

Unlike China, the United States cannot compel banks, provinces, or firms to reallocate resources in a coordinated fashion. Unlike Europe, it lacks technocratic institutions capable of negotiating orderly, consensual transitions. It relies instead on markets to process shocks (which they do, but only after the old order has failed and only after large segments of society have absorbed the damage).

In this sense, the US sits at the far end of the transition spectrum: not coercive like China, not consensual like Europe, but fundamentally reactive. It is stable in equilibrium because it was designed to be, and it is fragile in transition because it was never designed for anything else. (And, you know, the tools it once had to lessen the transition shock are now gone).

Finally…

If Part Four has shown anything, it is that the differences between China, Europe, and the United States have far less to do with regime type and far more to do with system design.

Each system manages transitions in its own way, and each pays a structural price for the path it has chosen.

China adapts by restricting autonomy, using centralised coordination to force transitions quickly and contain crises before they cascade.

Europe adapts slowly through democratic coordination, relying on negotiation, legitimacy, and technocratic ballast to manage change in increments rather than shocks.

The US adapts only through crisis, because its fragmented architecture cannot coordinate transitions pre-emptively; it evolves through rupture rather than through design.

This leads to the central insight of this piece, that:

Stability is not the most meaningful metric. What matters is transition stability, a system’s ability to move from one equilibrium to another without fracture, paralysis, or uncontrolled cascade effects. Some systems suppress pressure, some cushion it, and some simply absorb the blow and rebuild afterwards.

In the end, the decisive variable is architectural, such that system design determines how pressure is absorbed and whether the system breaks.