Information Asymmetry and the Reverse Selection

Information Asymmetry and the Reverse Selection of Chinese Society

Peter Lee

Contemporary Chinese society is trapped in multiple unsolved predicaments.

At the root of these crises lies information asymmetry — a condition where distorted or incomplete information misleads national decision-making, resulting in a series of reverse selections. These misguided choices have harmed China’s economy, diplomacy, and foreign trade, placing the nation in a cycle of self-inflicted difficulties.

1. Economic Reality: False Prosperity and Hidden Decline

In recent years, there has been a widening gap between China’s reported economic figures and its on-the-ground reality.

Official statistics claim an annual growth rate of around 5%, yet the truth is starkly different: private enterprises are shutting down or relocating abroad, foreign capital is fleeing, and millions of university graduates struggle to find jobs.

The real estate sector exemplifies the damage caused by distorted information.

Once-celebrated property giants like Wanda and Evergrande—once symbols of the “Chinese Dream”—are now insolvent. Their founders are under restriction or in prison, while countless middle-class families, misled by experts and inflated narratives, bought homes at peak prices only to face financial ruin. Local governments, heavily dependent on land revenue, now carry unbearable debt burdens.

The stock market fares no better—retail investors are trapped, trust has collapsed, and the illusion of stability has evaporated.

In short, information asymmetry has distorted the market’s feedback mechanism, turning nearly every participant—government, enterprise, and citizen—into a loser.

2. Diplomatic Misjudgment: Choosing the Wrong Friends

Information asymmetry has also produced severe miscalculations in foreign policy.

A nation’s choice of friends largely determines its developmental path. In earlier decades, China pursued constructive relations with the United States, Europe, and Japan, signaling an aspiration toward openness, constitutionalism, and economic progress.

However, in recent years, certain domestic “experts” have fueled hostility toward the West, asserting that “a China–US war is inevitable.” At the same time, they have framed regimes such as North Korea, Russia, the Taliban, Iran, and Yemen’s Houthis as China’s “natural allies.”

In reality, these entities offer little economic or technological benefit to China and, instead, isolate it further from global systems.

China’s stance on the Russia–Ukraine war—declaring a “no-limits partnership” with Moscow—has left the country in a diplomatic dilemma. Whether the conflict ends in peace or continues indefinitely, China stands to gain little and lose much.

3. Trade and Technology: False Confidence and Strategic Missteps

The ongoing China–US trade war is another manifestation of information asymmetry.

Certain scholars and media figures, eager to please the political climate, have exaggerated China’s global position—claiming that “China’s technology leads the world,” that “the world cannot function without China’s supply chains,” and that “the yuan can replace the dollar.”

Such overconfidence has led to policy misjudgments and the escalation of trade conflicts.

Now, China not only faces mounting frictions with the United States but also with Japan and the European Union, leaving its external environment increasingly hostile.

This situation is reminiscent of the late Qing dynasty a century ago, when misleading propaganda from the Shuntian Times pushed the empire into simultaneous conflicts with multiple world powers. History, it seems, is repeating itself.

4. The Solution: Independent Media and Transparent Information

The greatest victims of information asymmetry are the state and its people.

The remedy lies in establishing independent media capable of restoring information transparency.

All successful modern nations share one essential trait: the presence of an independent press that exposes errors, corrects policies, and keeps power accountable.

Independent media act as society’s sensory organs — perceiving truth, detecting mistakes, and guiding self-correction.

Without them, a country loses its ability to recognize reality.

In the absence of truth, decision-making becomes blind, diplomacy drifts, and society repeatedly walks into the traps of its own illusions — paying a price that history has already warned us about.