There are good reasons why China’s reforms will disappoint
In Noël Coward’s play Private Lives, when asked about the Middle Kingdom, one the characters, Elyot Chase, replies: “Very big, China.” China’s size and complexity frequently obscures its reality. Over the past 35 years, it has emerged as a major global economy, with average annual growth rates of 9.7 per cent, which have been pivotal in helping to raise up to 600 million Chinese out of poverty. But China’s growth is not unprecedented. Japan, Germany and many emerging countries, especially in Asia, experienced similar growth rates and better living standards after the Second World War. Like others, China’s growth model was predicated on exports and investment financed by domestic savings created by suppressing consumption and restricting income growth.
Under Deng Xiaoping, Beijing embarked on investment to improve its industrial capacity, infrastructure and capital stock, which was severely under-developed. Following the collapse in global demand during the financial crisis, China became more dependent on ever-increasing amounts of investment, financed by borrowing from state-controlled banks, as net exports diminished in importance as a source of growth. This has created several problems.
The investment, which converted China’s capital stock from one of the poorest to one of the best, is now creating overcapacity. Many projects will not generate sufficient income or earnings to repay the funds used to finance them. The economic and financial imbalances resulting from a need to maintain rapid growth are paralleled by major societal disequilibrium. The rapid development of China strengthened the role of the state and increased social inequality, allowing the elites to capture a disproportionate share of the gains from growth. China’s long-term future depends upon its ability to address these imbalances.
A central need is a shift from investment-led growth to a greater role for domestic consumption. It necessitates reform of stateowned enterprises (SOEs) and a greater role for private small and medium-sized enterprises (SMEs). It needs major financial reforms, broadening and deepening markets, transitioning to marketdriven interest rates and reducing controls on the currency and capital flows. It requires reforms in land ownership, fiscal arrangements, regional development and the balance between central and local government. It needs greater innovation and labour productivity. It requires social reforms, especially of welfare, education and healthcare. It is necessary to deal with deepseated inequality and corruption.
China’s leaders recognise the need for change. In May 2013, the central government announced changes, reiterated and extended at the Third Plenum in early 2014, which formalised the new leadership team of President Xi Jinping and Premier Li Keqiang. In 2015, China again committed to reform.
The policies involve three key elements: improving the market system, transforming the role of government and building an innovative corporate sector. These are to be supported by eight areas of major reform: government, monopoly sectors such as the SOEs, the land system, financial sector, tax system, management of state assets, innovation and further opening up of the economy. The final “three” refers to three breakthrough areas: further opening up the economy, social security reform and land reform.
Chinese leaders called for markets to play a “decisive” rather than a “basic” role in the allocation of resources. They reaffirmed the correctness of the reforms of the past 35 years, announcing the launch of “a new magnificent revolution”.
Western reaction to the proposal ranged from enthusiastic to ecstatic. In the opinion of one economist, the reform package “met 100 per cent of our already extremely bullish expectations”. It was, said another, the “most ambitious top-down economic reform initiative in the history of the People’s Republic”. The consensus was that the reforms would simultaneously lift China’s economic growth and reduce risk. The “analysis” reflected a trend that General George Patton feared: “If everyone is thinking alike, then somebody isn’t thinking.”
Many of these reforms have been discussed for years. Implementation has always proved practically and politically difficult. In the latest version, the exact meaning of “the three represents”, “the six tightly revolve-arounds”, “ecological development civilisation” or “socialist modernisation construction” remains obscure. There are good reasons, other than linguistic ones, to believe that the reform process will disappoint.
Implementation of reforms has always proved practically and politically difficult