China’s Leaders Miss Chance to Make Economic History

The results of a critical party conference show Beijing doesn’t see the need for major economic change

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Kim Kyung-Hoo / Reuters

Chinese President Xi Jinping

Back in 1978, Deng Xiaoping, the grandfather of China’s market reform, delivered a speech at a Communist Party plenum that signaled the country would be set in an entirely new direction. The aging cadre spoke of breaking with a violent and impoverished past by replacing the Maoist radicalism that had dominated national politics with a pragmatism that could end poverty and strengthen the nation.

“To make revolution and build socialism,” Deng told the party’s elite, “we need large numbers of pathfinders who dare to think, explore new ways and generate new ideas. Otherwise, we won’t be able to rid our country of poverty and backwardness or to catch up with — still less surpass — the advanced countries.”

The rest, as we say, was history. What followed over the next several years was a long series of intensive reforms that launched the country on its spectacular economic miracle and forever altered the global economy.

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This week, President Xi Jinping had his own opportunity to chart a new course for China that would ensure the success of what Deng started more than three decades ago. Xi and his top comrades at the Communist Party met at a plenum in Beijing to set the nation’s economic agenda for the coming years. Did Xi, like Deng, make some history of his own?

Not really.

The big meeting ended with a big whimper, a declaration of reform that had some bright spots but overall showed that China’s leaders don’t believe their economic system is in need of drastic repair or reformation.

To be fair, the initial statements that come out of such plenums are usually sparse in details, and more meaty documents should emerge in the coming weeks and months. And some important reforms were pledged. For instance, Xi promised — in the communiqué issued after the plenum — to grant farmers more property rights so that they can “equally participate in the modernization drive and share its fruits.” Boosting the welfare of farmers is critical to China’s efforts to “rebalance” its growth away from its heavy reliance on investment and toward greater consumption.

The communiqué also pledged the expansion of free-trade zones, deregulation of investment, fiscal reforms, the strengthening of the nation’s social-security net and a more independent judiciary. All of these, if implemented, are much needed to support further Chinese growth. Barclays economist Jian Chang commented that the results of the plenum support “our long-held positive view on the new leadership’s determination and ability to push through reforms.”

Yet what wasn’t mentioned in the plenum results is perhaps more important. There was no clear promise to reform China’s bloated, subsidized and overprotected state-owned enterprises, which are crowding out the more competitive private sector. Nor was there any serious discussion on reforming a financial system badly in need of more commercially oriented banks and liberalization. The fact is that Xi has dodged, at least so far, most of the reforms that require the political will to take on entrenched interests in the public sector.

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“The leaders still seem to emphasize stability over decisive actions,” wrote Bank of America Merrill Lynch strategist David Cui. “This has strengthened our opinion that many of the tough reforms … may prove difficult to implement.”

More broadly, the outcome of the plenum indicates that Xi and his top policymakers don’t intend to radically overhaul China’s “state capitalist” system. Though the communiqué committed to giving the market a “decisive” role in allocating resources — an upgrade in language from the usual “basic” role, which suggests Xi will allow market forces greater power — it at the same time reiterated that “the public sector remains the important pillar” of the economy, while private enterprise is to merely be encouraged. What we’re seeing from Xi is a continuation of the slow, incremental reforms the party leadership has discussed for many years, not a break with the past or a fundamental shift in China’s economic model of the kind that Deng initiated 30 years ago.

You could say there is good reason for this. While the more free-market economies of the U.S. and Europe have struggled, China’s state-led system has continued to thrive, and apparently China’s top brass see no immediate need to alter that model. But the fact is that China’s economic model is broken, and the economy won’t progress without fundamental reform.

Xi and his team are downplaying the major problems China’s system is spawning. The economy is plagued with excess capacity and is poor at supporting entrepreneurship. Rule of law is practically nonexistent and bureaucratic interference heavy-handed. Debt is rising to dangerous levels. Fitch figures that total credit will surge to 216% of GDP this year from 129% in 2008. That’s scary. And as China’s costs rise, the economy needs a major upgrade in order to compete with the U.S. and other rich economies.

The Chinese economy requires more professional bankers and corporate executives, greater innovation, more rational prices and a level playing field for private and foreign companies. None of that can happen without a dramatic withdrawal of the state from the economy. But Xi left us little indication that he intends to tackle any of these difficult and critical issues.

“What is emerging [from the plenum] suggests the party leadership is either unwilling to take decisive action or, at least as likely, does not see the need,” wrote Derek Scissors of the American Enterprise Institute.

Perhaps economists will look back on this plenum as another major turning point in global economic history. The question remains, however, as to what direction China will turn.

MORE: How China Sees the World

24 comments
driftor
driftor

The reporter here judges the reform in China not going the way he want to see. Why not share with us what reform China need to take in his mind?

driftor
driftor

The photo of Xi is horrible... Who else agree?

VIncent77
VIncent77

这么多中国人在这里,咱说中文吧..

FayeFaye
FayeFaye

The new policies of China are created for the best interest of China and Chinese people, not for appeasing America.  GOT THAT ?

lpc1998
lpc1998

The Third Plenum upholds China’s “socialism with Chinese characteristics” and “socialist market economy”. Those who could not understand or refuse to understand these two concepts would not understand the achievements of the Third Plenum. It also upholds the Deng Wisdom of “crossing the river by feeling for the stones” meaning there will not be any “Big Bang” economic reforms.

Those who were hoping for hasty Gorbachev Reforms (meaning reforms that cause short-term pain and long-term maim) for the Chinese economy are terribly disappointed.

The pledge to allow the market [forces] to play a 'decisive role' in the allocation of resources is consistent with a market economy. The socialist market economy is also a market economy. However, this does not mean that state plays no role in the economy. That would be the morphing of China’s socialist market economy into a capitalist market economy and China’s “socialism with Chinese characteristics” into capitalism as practised in the West where the top 1% could perpetually maximize profits at the expense of the rest of the people.

In the socialist market economy, the state plays not only a leading role in the development of the economy, but also in mitigating the capitalist excesses and chaos in the market.

In 1978, China discarded soviet communism in favour of a socialist market economy. The brilliance of Deng Xiaoping is that, after studying the “miracle” economies of the East Asian tigers, he concluded that socialism and capitalism are not mutually exclusive. He termed the economy in which socialist SOEs and capitalist enterprises function together as a socialist market economy. Unlike the capitalist enterprises, the focus of the socialist SOEs, within the country, is national development and not maximization of profits. Therefore, when capitalist market economists diagnose the socialist SOEs as “inefficient” because the socialist SOEs do not make as much profits as the capitalist enterprises, they do not know what they are talking about.

Shenzhen is an example of how the state with its socialist SOEs transformed a piece of almost empty land into a very successful economic story. The socialist SOEs created the infrastructure and other necessary conditions for the capitalist enterprises to blossom. And Deng could declare “to get rich is glorious” in his socialist market economy without contradiction as it is legitimate for the capitalists, within the law and without serious harm to society, to maximize profit, create employment and pay taxes so long as the government remains socialist.

Reforms will be introduced gradually and carefully, guided by the Deng Wisdom “of crossing the river by feeling for the stones”. Stability, especially financial stability, is of paramount important, without which it is impossible to implement any reform without risking disaster and social chaos. China’s economy is healthy and not in a state of emergency like in the West. She will not be threatened or scared into economic self-castration like what had happened to Japan.

Financial stability requires a ceiling on deposit and lending rates, a stable USD-CNY exchange rate (until China’s foreign trade and investments are primarily in RMB) and certain capital controls.

Of course, China has many problems; some of them are serious and urgent. A major problem is whether China’s socialist market economy would morph into state capitalism like the tiger economies before her with her socialist SOEs turning into or becoming capitalist SOEs, focusing on maximizing profits from the people just like any other capitalist enterprise. And what to do with the existing capitalist SOEs owned by the local governments that are hurting the capitalist enterprises in China’s socialist market economy instead of supporting them.

btt1943
btt1943

A pertinent observation and analysis, Mr Schuman.

Last week I commented in WSJ that Beijing would want to maintain the nation's status quo, no major change or reform to be expected from the plenum since China's economy continues to perform reasonably well. Apparently, the closing speech by president Xi was an anticlimax to western media.     (boonteetan)

kafantaris2
kafantaris2

“The leaders still seem to emphasize stability over decisive actions,” says David Cui.

“This has strengthened our opinion that many of the tough reforms…may prove difficult to implement.”

Actually, Dave, President Xi Jinping has just proved that "China’s bloated, subsidized and over-protected state-owned enterprises" will be impossible to undue. After all, a "more competitive private sector" also means a more politically independent private sector.

Why would China's party elite want to do that?

They are now snug like bugs in a rug, So what fool wants to be the first to talk about killing the goose that lays the golden egg?

Better leave things as they are. Economic stagnation and corruption are but the price tags for political survival --"stability" if you will.

duduong
duduong

The competition of formulating a better economic policy between the Chinese technocrats and the western economists has been going on for 35 years and the westerners have gotten their asses spanked at every turn. Somehow, these economists, whose free-market fundamentalism just cost their own economies trillions of dollars five years ago, still believe that the same prescription must be superior to China's pragmatic approach. Delusion of grandeur has rarely been so persistent in defiance of contradicting evidence.

adam_zhang
adam_zhang

the history will proof everything

BeeFarms
BeeFarms

and fwiw best wishes to the chinese . don't fear freedom and individuality. it can be a good thing.  hoping the best for Chinese.


BeeFarms
BeeFarms

the only thing that will ever free the chinese --- is something like the internet --- it won't come from within --- they aren't capable 

creativity, individuality, freedom etc

cmh5555
cmh5555

@lpc1998 There's nothing socialist about China's economic system. Nowhere in the economy or political framework is the average Chinese worker in control of anything. The SOE's are run by a bureaucracy which is itself comprised of the capitalist class (the congress' net worth alone is 565.8 billion yuan ($89.8 billion)) and the private enterprises have inordinate control over local politics through corruption. What this amounts to is merely greater cooperation among the capitalist class as opposed to a more competitive capitalist class in the West that doesn't see any reason why they shouldn't screw over other industries for short-term gain. Great wealth is being generated in China because of the immiseration of a big underclass. The socialist rhetoric is used for hegemonic purposes and to stave off organization and resistance of the working class.

PsyloGetti
PsyloGetti

@lpc1998 Looks like you recently read the Costa Rica article. I really agree with a different, successful economic paradigm that is different from the west.  We'll see, though.  I am rooting for a different way, but I am seeing the unabashed pollution from unregulated factories and abuse of workers rights as contradictions to the whole "National Development" thing.  

I get it though.  They are going through their own industrial revolution and we must observe them going through the growing pains therein.  It took the US 20+ years to adapt to the downside of industry.  (Monopolies, Trusts, child laborers, and all around Rascalism)

BingJou
BingJou

@adam_zhang 

Chinese Communist Party still believes Culture Revolution is its greatest achievement.  History proves only one thing - Chinese people have had no choice but rise in arms in a bloodletting struggle to get rid of a corrupt regime.

HYPSM
HYPSM

@nicole_xi @FayeFaye The point is that Westerners expect China to just suddenly go, "ah, yes, we were misguided, we see now that capitalism is the true light!!1" It presupposes that the same economic system that works for the American people and American culture would be equally as effective in generating prosperity for the Chinese people and the Chinese culture. Anyone with more than a superficial understanding of China realizes that this is trivially false.

See lpc1998's comment, it's informative.

lpc1998
lpc1998

@cmh5555

You are right to say there is nothing socialist about China's economic system, when “socialism” means the European kind of socialism where organized labour dictates national policy for the benefit of organized labour. That is why Deng Xiaoping did not term his system for China as socialism. He called it “socialism with Chinese characteristics”, a system for the benefit of the entire Chinese society including the peasants and the bourgeoisie. He recognized the strength of capitalism in generating economic growth, employment and state revenue, but capitalist excesses and chaos have to be managed under a Chinese socialist superstructure. So capitalism as a genuine free enterprise system as practised in the West is also true in China. It is legitimate for the capitalists, within the law and without serious harm to society, to maximize profit, create employment and pay taxes so long as the government remains socialist (in the Chinese version).

The congress net worth is high because not too long ago it admitted a number of billionaires into its rank to give representation to the entrepreneurs.

Yes, the SOEs are run by a bureaucracy, but they are the property of the Chinese people.

Yes, there are serious problems of corruption, abuse of power, incompetence and mismanagement in the SOEs and in the public sector. These are amongst the priority areas for reform for the Xi Administration. These problems would not disappear under capitalism. Some could be legalized and become problems no more.

Do you know that the Deng reforms enabled the peasants to earn 3 or 4 times more in the factories than working in the overcrowded fields? This was why hundreds of millions of peasants, leaving their families behind, flocked to the cities to work under conditions what people in the rich countries termed “slave labour”. It would make good sense, if China’s progress now is measured against the conditions most Chinese people were in just before the 1949 revolution and the progress year after year.

China is still a poor developing country. Her 2012 per capita of US$6,188 is just ahead of Namibia US$5,786 and behind war-torn Iraq US$6,455. Yes, she does compare favourably with the world largest democracy; India’s 2012 per capita GDP of US$1,499, especially considering India’s far more favourable conditions in 1947 at the time of her independence when China was still in the midst of military conflicts in the Chinese civil war.

http://data.worldbank.org/indicator/NY.GDP.PCAP.CD?order=wbapi_data_value_2012+wbapi_data_value+wbapi_data_value-last&sort=asc

lpc1998
lpc1998

@PsyloGetti

The out of control pollution and traffic congestion, corruption, abuse of power, incompetence, mismanagement, etc. are the manifestations of weaknesses and problems of Chinese society, the roots of which could go deep into thousands of years in Chinese history. However, they are not exclusively Chinese.

Moreover, the so-called China Model is neither unique nor mysterious. It is actually the sixth and the latest version of the East Asian economic “miracles” over a period of more than 60 years. During the first 20 to 30 years, each of these “miracle” economies is at its most socialist stage. It begins to morph into state capitalism (where its socialist SOEs transforming into capitalist SOEs) and then morphing further into capitalism when the SOEs are being privatized, transforming state monopolies into private monopolies.

prastagus
prastagus

what crap are you talking about? The CCP officially declared the Cultural Revolution is wrong. Deng himself said Mao made a mistake in starting the Cultural REvolution just as his mistake in Great Leap Forward.

lpc1998
lpc1998

@HYPSM

Thank you. Capitalism as a genuine free enterprise system as practised in the West is thriving in China too under a Chinese socialist superstructure. See paragraph 1 of my reply to cmh5555. At the moment, there is a strong current pushing China towards state capitalism. See paragraph 2 of my reply to PsyloGetti 5pts.

Under unrestraint capitalism including state capitalism, the 99% would suffer escalating costs of living as the profits maximized by the 1% have to come from them. The capitalist market economists tell you to trust the Invisible Hand that guides free markets and capitalism through competition for scarce resources, but these economists never tell you that the Invisible Hand also steals not only from your wallet and bank account, but also from your earnings and savings.