China’s Economic Reforms Get Another Chance

Re-Blogged From https://worldview.stratfor.com

Editor’s Note

The 19th Chinese Communist Party Congress runs Oct. 18-24. The convention marks the start of a transition as delegates name new members to lead China’s most powerful political institutions. But the change in personnel is only part of a larger transformation underway in the Party and in the country — a process that began long before the party congress kicked off and will continue long after it ends. This is the third installment in a four-part series examining how far China has come in its transition, and how far it has yet to go.

For years, China has tried to better balance the wealth in Qingdao and other coastal areas with inland areas that have languished.

(STR/AFP/Getty Images)

 

The global financial crisis in 2008 was the last straw for the Chinese economy. After years of rapid growth, China had finally reached the limits of its economic model, centered on exports of low-end manufactured goods. The ensuing slump revealed the glaring inequality that still divided the country’s coastal regions from its inland, its wealthiest citizens from its poorest. To get back on track, Beijing would have to break with the socio-economic paradigm that it had maintained for the preceding three decades and introduce a new one.

Today, the transformation is far from complete. The balanced and homogenous society the central government had imagined — and the sustainable, consumption-based economy that would support it — are still little more than a decadeslong dream. China’s socio-economic disparities are as stark as ever, and the legacy of past growth models continues to haunt the country’s economy. What’s more, Beijing’s attempts at change have unleashed numerous social pressures that China’s growing material wealth had previously kept at bay. For Chinese leaders, the transition poses a dilemma. On the one hand, they understand that reform is necessary to sustain the country in the coming decades. But on the other, they know the difficulties inherent to the transformation could jeopardize their positions, and that of the Communist Party. President Xi Jinping spent his first term in office struggling to reconcile these conflicting concerns, and he’ll spend his second term in much the same way.

Hu’s Legacy Is This

When Xi took office in 2012, he inherited a socio-economic situation in China far different from the one that had greeted his predecessor, Hu Jintao. Hu came to office in 2002, just as China was emerging from the Asian financial crisis and as the dust was settling from reforms to the state sector that had caused massive unemployment. Having survived the crucible, China was ready to resume double-digit economic growth with help from a capital stimulus initiative, a booming private sector and its recent accession to the World Trade Organization. Social and regional inequality, along with rampant bureaucratic corruption, were beginning to take their toll on the country, giving rise to unrest. Still, the government could manage the brewing discontent so long as the economy was strong enough to uphold the Communist Party’s legitimacy.

To that end, Hu focused on growth. But because China’s economic model had already reached its limit, and its workforce was nearing its peak, Beijing had to find new ways to stimulate the economy. Hu and his administration launched a host of measures to try to retool the economy, including efforts to develop China’s inland regions, fiscal incentives to encourage manufacturers to relocate their operations from the coast and reforms aimed at cultivating a domestic consumer base. As it worked to promote these endeavors, however, the government had to contend with resistance from bureaucratic patronage networks and extensive business interests concentrated on the coast, not to mention the global financial crisis that hit in 2008. To keep the economy afloat, the government radically expanded access to credit while also funneling state money into infrastructure projects, particularly in the property sector, through state-owned enterprises and banks.

 

China's Outstanding Debt to GDP

Thanks to these policies, Xi arrived in office to find a precariously swelling real estate bubble, massive overcapacity in China’s industries, severe environmental degradation and a staggering level of debt awaiting him. The government is still dealing with the fallout five years later. Xi’s administration has accepted comparatively sluggish growth as the new normal for China and has adapted its policies and rhetoric to temper expectations for a more robust recovery. Structural reforms to reinvigorate the economy, for instance by phasing out inefficient heavy industrial and low-end manufacturers, and initiatives to curb pollution have made little headway, constrained by Beijing’s core imperative to maintain employment levels. China’s debts, meanwhile, have continued to pile up, reaching an equivalent of 250 percent of the country’s gross domestic product. (Corporate debt alone accounts for 165 percent of GDP, of which state-owned enterprises — mainly in the sectors that most benefited from the credit expansion, such as real estate and steel — hold more than half.) To make matters worse, China’s real estate market is starting to correct itself. The decline in property sales, coupled with the efforts to consolidate China’s unwieldy steel and coal sectors, could bring the simmering debt crisis to its boiling point.

China's SOE Problem

Taking Control of the Situation

Under the circumstances, Xi has no choice but to try to push forward with structural economic reforms. His attempts to do so have put him on a different course from those followed by predecessors Deng Xiaoping, Jiang Zemin and even Hu. To overcome the many obstacles standing in the way of change, Xi dispensed with the devolved power structure that for some 30 years had given localities, bureaucracies and industries considerable political sway as a way to drive growth. In its place, a more cohesive central government emerged and with it, a more unified Communist Party.

Xi and the Party undertook a sweeping campaign to streamline China’s key economic sectors and bring them and the country’s provinces more firmly under their control. Since taking office, the president has largely consolidated his power over economic decisions while cracking down on Beijing’s disparate political factions, including the array of powerful state-owned industries and the regional cliques of Chongqing, Sichuan and Shanxi. Under the guise of an anti-corruption drive, Xi’s administration has overhauled the Chinese bureaucracy. Not even the country’s entrenched financial and banking sectors have escaped the shake-up. At the same time, Beijing has refrained from stepping in to weaken the state economy, despite its promises of reform in the public sector, preferring mergers and consolidations to rehabilitate ailing state-owned enterprises. It has also apparently reinforced its role in the private sector. By adopting more stringent regulations on outbound investment, for example, the central government aims to increase its oversight of private companies at home — and over its Belt and Road Initiative projects abroad.

Compared with Western economies, China’s has always been subject to greater state control. However, the Xi administration’s recent moves don’t necessarily signal a return to a command economy in China, nor do they suggest that the Party even aspires to gain total control of economic affairs. Instead, the president is trying to move away from the devolved system that, from his perspective, empowered competing factions whose interests conflicted with, and thereby threatened, those of the central government. With a more unified Communist Party at the helm of China’s economic policy, Xi hopes to bring his vision for the country to fruition.

Falling Into a Familiar Pattern

Of course, whether he can achieve that goal is hardly certain. Beijing can’t prevent provincial and local governments from bucking its orders, given China’s sheer size and complexity. Nor can it keep strategically important sectors from challenging its policies, as many of the country’s high-tech companies have demonstrated. This predicament isn’t unique to Xi’s administration, either; Chinese rulers throughout history have struggled against the forces pulling the country apart to form a coherent political entity. Campaigns to consolidate power inevitably follow stretches of decentralization as new leaders take over, or as tenured rulers encounter new problems.

And so, Xi will likely continue his quest to concentrate control under his office, though the aim of his endeavors will be increasingly unclear. The president outlined an ambitious reform agenda in 2013 in which he called for the market to “play a decisive role” in charting the course of China’s economy. Yet his administration’s apparent return to economic statism, its push for political conformity among the economy’s various sectors and its efforts to give the Party enhanced authority over the state have all undermined or contradicted that goal. Beyond small steps toward liberalizing China’s currency and stock market, Beijing has kept its reforms to the financial system limited to regulatory and bureaucratic changes. Its bids to restructure state-owned enterprises, likewise, have focused on staving off their collapse by bringing them more closely under the Party’s control. Furthermore, the central government’s policies to expand key strategic sectors abroad have only invited pushback from foreign powers, including the United States and the European Union. Xi’s efforts to reform China’s heavy industries have produced uneven results at best — to say nothing of his initiatives to kick-start the country’s languid services sector or to improve conditions for private businesses.

Even so, he could turn things around in the coming years. The steps Xi took during his first term in office to consolidate power could ease the way for deeper and more politically challenging structural reforms in his next term. Otherwise, the president and the Communist leadership may find themselves in a tricky position when the next party congress rolls around in 2022.

CONTINUE READING –>

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