A fascinating conundrum embroiled the top leaders of China’s Communist Party in response to the protests that escalated on Tiananmen Square in the summer of 1989. Could the country’s nascent free-market reform succeed without matching political freedom? Deng Xiaoping, the grandfather of Chinese reform, argued that political opening would undermine the economic progress China had made.
If the protests were not quelled, he warned (according to The Tiananmen Papers), “all our gains will evaporate, and China will take a historic step backward.”
Zhao Ziyang, the party general secretary, thought otherwise. Soon after the troubling events, he made the case that political and economic change were inseparable. “Political reform has to be a priority,” Zhao said, and if it wasn’t, “not only will economic problems get harder to handle, but all kinds of social and political problems will only get worse.”
We all know who won the debate. And still today, nearly a quarter century later, the decision taken by Deng in 1989 effectively holds. While the Chinese have a lot more freedom — to travel, communicate, study — than they did in the earlier decades of Communist rule, the mighty party reigns supreme, and the realms of political reform and economic liberalization remain more or less distinct.
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But the underlying issue has never really gone away. The party still believes that China can be increasingly innovative and competitive without the sort of political liberalization that many in the West would consider necessary to a modern economy. Based on the results so far — 30 years of nonstop growth and industrial expansion — it is easy to think Beijing might be right on this score. However, the more the Chinese economy advances, the more the needed reforms undercut the party’s ability to control the nation. Here, then, we find the central challenge to the future of China’s economy: Will the Communist Party be willing to implement reforms that force its own power to recede?
That question sits at the heart of China’s most recent slate of pledged reforms. A party plenum in early November promised a wide range of bold reforms, from an easing of the controversial one-child policy to the dismantling of some state monopolies. Many of the reforms are targeted directly at what many economists believe the economy needs most urgently — strengthening the financial sector, liberalizing prices and interest rates and improving the management of state-owned enterprises.
Now, though, we’ll have to see how much China’s leaders actually get done, and when. They conveniently left themselves a lot of room to maneuver, since they failed to promise any clear time frames.
Translating such a wide range of intensive reforms into reality would be a tough task under any circumstances. To introduce them, the party will need to take on politically powerful interests and reshape a corrupt and overbearing bureaucracy. The postplenum announcement “is but the first step in a long and arduous process,” noted IHS Global Insight’s China economist Brian Jackson. “Reforms across so many parts of China’s economic and regulatory systems will be challenging to implement, not only due to powerful vested interests that may oppose such changes, but also simply in determining the best feasible sequencing and speed.”
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But the real hurdle might be that unresolved tension between political and economic reform. The policies pledged at the plenum, if they are to work, inherently will bring a reduced role of the state. In order to have properly functioning banks, for instance, the government has to stay clear of lending decisions. For the private sector to flourish, state companies must be forced to compete fairly, and their management allowed to operate without political interference. Liberalizing prices and capital flows means policymakers will have to sit back and watch the market allocate resources. All of these steps are necessary for China to build its competitiveness and alleviate some of the economy’s most threatening problems — excess capacity and rising debt, dependence on investment, and a lack of rule of law. In other words, for China to advance, the party has to let go of the reins of control.
Will Beijing be willing? The indications are mixed. As part of the announced reforms, the government said it would relax the household-registration, or hukou, system to allow freer movement of people and labor, a clear sign that the party is loosening up the micromanagement of its populace for economic necessity.
On the other hand, China’s leaders are much more into big-bang announcements than big-bang reform, and the rollout of many of these new policies is expected to be slow. Officials have indicated that even the long overdue change of the one-child policy is not going to be rushed. Perhaps most importantly, the promise of a more liberal, market-oriented economy came paired with signs that President Xi Jinping may be tightening the party’s grip on the Internet and free expression. Xi is also setting up a new national security superagency that some analysts see as a method of further centralizing power.
So it appears that Xi is holding fast to the Deng approach — liberalizing the economy while keeping politics in lockdown. Perhaps he can strengthen and advance the economy while maintaining the political status quo. Or perhaps his reforms will fail because of an unwillingness to cede political authority to economic need. Which way this critical question turns will likely determine the future of China.