Xi walks the line between reform and revolution

Fixing the problems in China’s economy entails risks to the Communist Party’s power that the president simply isn’t willing to take

China celebrated the 40th anniversary of its reform and opening era on Tuesday. Hopes were high that President Xi Jinping would use the occasion to prepare the Communist Party of China, and the public, for the painful market reforms that the U.S. administration, foreign investors and Chinese economists are demanding. After all, economic pressure has mounted from inside and out over the past few months, exposing shortcomings in China’s state-directed financial system.

International opinion about the threat posed by Chinese economic policies has changed and now could cut China off from the foreign capital and technology that fueled its rise. Besides, Beijing has been taking small steps to ease international pressure and sustain its trade truce with the U.S. by, for example, lifting foreign ownership caps in some sectors. Senior officials, including Premier Li Keqiang, repeatedly pledged more such measures in the weeks leading up to the event.

In his much-anticipated speech commemorating the anniversary, however, Xi didn’t sound like a chastened leader under withering pressure to return to the liberalisation Deng Xiaoping set in motion in 1978. Instead, his core message was defiant: The CPC is the reason for China’s success, and its tight control – over the economy and whatever else it deems necessary – will be the country’s salvation. Reform and opening, Xi made clear, will mean only what the party needs it to mean. Chinese stock markets plummeted even as the president spoke.

But beneath its bravado, the speech underscored the deeper reality that Xi and the country he leads are trapped between conflicting and unforgiving demands. When forced to choose between bad options, the CPC will pick the one that poses the least risk to its power.

Grappling With Contradiction

Xi’s speech was rife with apparent paradoxes. He decried the Mao-era “shackles of Leftism” and other “wrong policies of the Cultural Revolution,” while also calling for revitalising Marxist-Leninist doctrine. He signaled his intention to devolve some powers to lower levels of the government after five years of doing the opposite, then declared that the party must control “all tasks.” The private sector will be the priority, he promised, but so will the bloated state-owned enterprises that are currently depriving it of liquidity.

The CPC has long embraced contradiction as a rhetorical device for explaining the forces weighing on China and to justify its plans to handle them. Maoist theory held that China’s principal contradiction lies in the irreconcilable demands of the proletariat and the bourgeoisie. Under Deng, it became “the ever-growing material and cultural needs of the people and backward social production.” (In other words, China needed to get rich to emerge from the mess Mao left behind.)

Xi shifted focus once again at the epochal 19th Party Congress in 2017, homing in on the “contradiction between unbalanced and inadequate development and the people’s ever-growing needs for a better life.” Baked into both changes since Mao is deep anxiety about the Communist Party’s survival. As a result, reform and opening has never been linear, and rarely has it been liberal in any traditional sense. It’s always been about letting go just enough to unleash China’s latent dynamism and rebuild what was lost in the chaos of Mao’s reign – but not so much that everyone starts wondering why the party calls all the shots in the first place.

Xi, more than any of his predecessors, embodies this balance. He’s the son of a high-ranking party member whom Mao purged during the Cultural Revolution, and whom Deng later resuscitated and tasked with spearheading the pilot special economic zones in Shenzhen. Xi is no Mao-style collectivist. But neither is he blind to the risks of unfettered marketisation. As he rose to power, the excesses of reform and opening had become an existential threat to the party, which had grown sclerotic, corrupt, deeply factionalised and, in Xi’s view, bereft of a guiding ideology beyond the almighty yuan.

Meanwhile, China’s rising prosperity brought with it rising expectations for quality of life factors that economic growth alone can’t fix, such as clean air and water, social safety nets and more transparent governance. China’s rapid industrialisation since 1978 had undermined these goals, and the party had become unresponsive and ill-equipped to deliver them. Xi’s rendition of China’s principal contradiction reflects these pressures. And so does the meaning of reform in China today – something hardly synonymous with economic liberalisation.

Reform, With Chinese Characteristics

Marketisation has been a major component of Xi’s reform agenda, at least as an aspiration. His inaugural economic plan at the 2013 third plenum focused heavily on giving market forces a more decisive role in the economy. The plan’s myriad goals included boosting competition among domestic firms (while still largely shielding them from foreign rivals), more efficiently allocating capital and resources and spurring innovation by lowering barriers to entry for entrepreneurs. Since then, however, progress on these initiatives has largely stalled or even reversed, beyond a few isolated sectors. Over the past half year, state sector profits have soared more than 28%, while the private sector has gone the opposite direction just as fast.

The main obstacle for Xi’s proposed economic reforms is the enduring fragility of the CPC-led political system. Forcing Chinese companies to live and die by market forces would risk a surge in unemployment that could lead to mass protests. Forcing state-owned enterprises to compete on a level playing field – whether with private Chinese companies or with foreign ones – would disrupt the patronage networks Xi has carefully cultivated. At the same time, it would deprive the state of tools it needs to soak up excess labour, absorb unprofitable “zombie firms” and engage in economic statecraft abroad in the service of Beijing’s strategic aims in the streets. Enacting these changes would be exceedingly difficult even in prosperous times. China’s unavoidable slowdown in growth and the ticking financial time bomb its response to the 2008 financial crisis created have made rapid liberalisation all the more dangerous.

Xi’s CPC often tries to have it both ways, selectively introducing market concepts while also expanding the state’s role in the economy. For example, Beijing is experimenting with “mixed-ownership reforms” to state-owned enterprises, in which private investors take on greater stakes and managerial authority in some failing companies in hopes of making these firms more efficient even in the absence of competition. It’s also installing CPC members on the boards of private conglomerates to mind them, tightening control over lending channels and subsidising bigger, bolder “national champion” state-owned firms to try to acquire better technology and more market share overseas.

The problem is that the U.S. and like-minded countries aren’t going to stop pushing China to change its ways. And their pressure will threaten Xi’s best-laid plans for finding a path to sustainable growth. True, China has repeatedly chosen isolation over conceding to foreign demands for a rapid opening in the past, but usually only after the collapse of a dynasty. Mao, for example, managed to impose economic self-reliance to unify China because the country was then emerging from a century of war and foreign occupation, not 40 years of dazzling growth and soaring public expectations. It’s easier to take an action that will make everyone poor when everyone is poor as it is. In its current position, by contrast, the CPC can reverse reform and opening only so much before it loses the country. And so, Xi is stuck asking the Chinese people to trust in the party to figure things out on the fly. www.GeopoliticalFutures.com