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.

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