Putting sys­tem re­form to stress test

China Daily - - VIEWS -

His­to­rian Wang Gungwu re­cently ob­served that, whereas the West thinks in terms of ide­olo­gies, China has long thought in terms of sys­tems. In to­day’s age of rapid and pro­found change — char­ac­ter­ized, in par­tic­u­lar, by a fun­da­men­tal shift in the United States’ at­ti­tude to­ward the rest of the world — China’s sys­tem re­form ap­proach is be­ing put to the test.

Un­der Pres­i­dent Don­ald Trump, the US seems to have aban­doned its seven-decade-old com­mit­ment to the rules-based mul­ti­lat­eral or­der, em­brac­ing bi­lat­eral deal-mak­ing in­stead, guided by its “Amer­ica First” agenda. This in­cludes a will­ing­ness to make just about any ex­cuse for uni­lat­eral ac­tion, such as large trade tar­iffs, against other coun­tries, in or­der to please do­mes­tic con­stituen­cies.

This ap­proach adds a new layer of un­cer­tainty to any ne­go­ti­a­tion, not least be­cause the Trump ad­min­is­tra­tion’s de­ci­sion to change the global rules of the game is not par­tic­u­larly promis­ing for the US it­self. Af­ter all, US-owned com­pa­nies, which have long ex­tracted the most value from global supply chains, will be the big­gest ca­su­al­ties of a trade con­flict.

More­over, as the US has dis­cov­ered dur­ing its long his­tory as the world’s big­gest mar­ket, con­sump­tion and soft power go hand in hand. Yet, to­day, the US faces se­vere con­straints when it comes to stim­u­lat­ing do­mes­tic con­sump­tion, rooted in fac­tors such as mas­sive in­equal­ity, fis­cal and debt con­straints, po­lit­i­cal po­lar­iza­tion, and the im­per­a­tive to nor­mal­ize mon­e­tary pol­icy.

Pol­i­cy­mak­ers can over­come chal­lenges

For China, the sit­u­a­tion is also chal­leng­ing, not least be­cause the West now re­gards vir­tu­ally all of its do­mes­tic poli­cies as geostrate­gic machi­na­tions. But China’s lead­ers do have the tools to over­come the ob­sta­cles ahead. The most im­por­tant tool is pre­cisely the sys­temic mind­set that has shaped de­ci­sion-mak­ing for mil­len­nia, pro­tect­ing the coun­try’s com­plex eco­nomic, so­cial and po­lit­i­cal ar­range­ments from in­ter­nal cor­ro­sion and ex­ter­nal threats.

Con­sider the re­forms un­der­taken since 2012. At the Com­mu­nist Party of China’s 18th Na­tional Congress, China’s lead­ers rec­og­nized that the de­mo­graphic div­i­dend was fad­ing, ow­ing to pop­u­la­tion ag­ing, and that the “open­ing-up” div­i­dend (aris­ing from in­creased ex­ter­nal trade and in­vest­ment) was los­ing value as well.

Ad­dress­ing this chal­lenge re­quired al­low­ing the mar­ket to play a more de­ci­sive role in re­source al­lo­ca­tion. Af­ter all, ac­cord­ing to ne­olib­eral ide­ol­ogy, all other things be­ing equal, the mar­ket would nat­u­rally op­ti­mize eco­nomic pro­cesses. All the State had to do was en­sure that those other things were in­deed equal. This de­manded, first, the erad­i­ca­tion of sys­temic cor­rup­tion and, sec­ond, struc­tural re­forms to ad­dress so­cial im­bal­ances that threat­ened sta­bil­ity and growth.

So Pres­i­dent Xi Jin­ping launched an anti-cor­rup­tion cam­paign, and the gov­ern­ment in­vested in fields such as in­fra­struc­ture, re­search and de­vel­opcur­rent ment, tech­no­log­i­cal ed­u­ca­tion and re-skilling, and the so­cial safety net. Such re­forms were in­tended to pro­tect China’s own sys­temic sta­bil­ity, while con­tribut­ing to the growth of the en­tire global sys­tem.

Un­for­tu­nately, China’s ef­forts are now in­creas­ingly be­ing char­ac­ter­ized as “mer­can­tilist” and “preda­tory”, pro­vid­ing an ex­cuse for puni­tive mea­sures, like Trump’s tar­iffs. These new ex­ter­nal pres­sures prompted China to ad­just its re­form mo­men­tum in or­der to re­duce its econ­omy’s vul­ner­a­bil­ity to dis­rup­tions in the supply of crit­i­cal tech­nol­ogy, re­sources and fi­nance.

But China’s ad­just­ment faces a dilemma. A slow­down in re­form may neg­a­tively in­flu­ence the econ­omy and es­ca­late the loselose trade war. To with­stand the stress test, China may in­stead need to ac­cel­er­ate its re­form to re­duce in­ter­nal im­bal­ances, in­crease con­sump­tion, and con­trib­ute to global de­mand and sta­bil­ity.

This means elim­i­nat­ing ex­cess ca­pac­ity, clos­ing down pol­lut­ing in­dus­tries, and ad­dress­ing the large vol­ume of non-per­form­ing loans — while con­tin­u­ing the fight against cor­rup­tion. It also means tap­ping the mas­sive con­sump­tion po­ten­tial of China’s in­ter­nal mar­ket, which in­cludes the world’s largest and high­est­sav­ing mid­dle-in­come group.

Best-fit poli­cies not one-size fits all

Crit­i­cally, be­cause the ex­ter­nal trade chal­lenge af­fects the coastal ar­eas more than the in­land ar­eas, struc­tural ad­just­ment poli­cies need to be tai­lored to ac­com­mo­date dif­fer­ent lo­cal con­di­tions. Con­trary to the dic­tates of ne­olib­eral ide­ol­ogy, a one-size-fits-all “best prac­tice” ap­proach can­not bring bet­ter re­sults than lo­cal­ized “best-fit” poli­cies.

This is con­firmed by his­tory: glob­ally, the best-per­form­ing economies, like the US, Hong Kong, Sin­ga­pore, and many Scan­di­na­vian economies, have been those that adapted uni­ver­sal prin­ci­ples to de­velop poli­cies that re­flect na­tional, re­gional and lo­cal con­di­tions. This is also true of China dur­ing its re­form era, where de­vel­op­ment has been driven largely by lo­cal-level pol­icy in­no­va­tion and grad­ual adap­ta­tion to global stan­dards and rules.

Chi­nese prov­inces and cities have been em­pow­ered to ex­per­i­ment with di­verse ap­proaches to de­vel­op­ment and to ad­just bu­reau­cratic struc­tures and gov­ern­ment in­ter­ven­tions to ad­dress lo­cal and global mar­ket con­di­tions. Com­pe­ti­tion among fast-grow­ing cities tap­ping their own com­par­a­tive ad­van­tages — for ex­am­ple, those of Hong Kong and the Greater Bay Area, in­clud­ing Shen­zhen, Zhuhai, Guangzhou, Foshan and Dong­guan — has gen­er­ated sys­temwide re­sources in cap­i­tal stock, in­come flow, know-how and in­sti­tu­tional in­no­va­tion, which were used to ad­dress legacy prob­lems in the less-dy­namic re­gions.

In this age of com­plex and dy­namic change, China needs to sus­tain the sys­temic but lo­cal­ized ap­proach that has en­abled its un­prece­dented growth and de­vel­op­ment, and that means con­tin­u­ing to pro­mote con­stant adap­ta­tion at the na­tional, pro­vin­cial and mu­nic­i­pal lev­els. The one proven sys­temic re­sponse to de­vel­op­ment chal­lenges has been to al­low in­ter­nal com­pe­ti­tion across re­gions and en­ter­prises in or­der to boost ex­ter­nal com­pet­i­tive­ness. That will re­main true, no mat­ter how un­pre­dictable US pol­icy be­comes. An­drew Sheng is a dis­tin­guished fel­low at the Asia Global In­sti­tute at the Univer­sity of Hong Kong and a mem­ber of the UNEP Ad­vi­sory Coun­cil on Sus­tain­able Fi­nance. Xiao Geng, pres­i­dent of the Hong Kong In­sti­tu­tion for In­ter­na­tional Fi­nance, is a pro­fes­sor at Pek­ing Univer­sity HSBC Busi­ness School.

Project Syn­di­cate

To with­stand the cur­rent stress test, China may in­stead need to ac­cel­er­ate its re­form to re­duce in­ter­nal im­bal­ances, in­crease con­sump­tion, and con­trib­ute to global de­mand and sta­bil­ity.

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