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China’s Economic Crossroads

Jun 19, 2020 Kevin Rudd , Daniel Rosen

Given China's failure to follow through on the marketization policies that it announced seven years ago, it is reasonable to be suspicious of the government's latest reform push. Much will depend on what Chinese leaders fear more: disruptive change, or a creeping malaise of their own making.

BRISBANE/NEW YORK – Back in 2013, the Chinese government laid out a policy agenda that promised real reforms to an economy laden with debt and distorted by the influence of the country’s large state-owned enterprise (SOE) sector. But instead of seeing that agenda through, China chose to dodge the risks entailed by marketization, and has since reverted to what it knows best: state control over the economy and the semblance of stability that comes with it.

Since 2017, The China Dashboard, a joint project of the Asia Society Policy Institute and the Rhodium Group, has been tracking China’s economic policies. Having analyzed objective data across ten critical spheres of the country’s economy, we find that China’s reforms have been tepid to nonexistent over the past three years.

The Chinese government’s failure to deliver on its promise of a more open economy has undermined its credibility, and fueled the growing global backlash that it is experiencing today. Even before COVID-19 arrived, the lack of reform had sapped China’s economic performance and made it persistently over-reliant on debt, leaving its domestic private sector increasingly disheartened.

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Kevin Rudd

Writing for PS since 2012
17 Commentaries

Kevin Rudd, a former prime minister of Australia (2007-10, and 2013), is a member of the International Monetary Fund’s External Advisory Group, Chair of the United Nation’s Global Partnership on Sanitation and Water for All, and President of the Asia Society Policy Institute.

Daniel Rosen

1 Commentary

Daniel Rosen is a founding partner of Rhodium Group.

The Lonesome Death of Hong Kong PS OnPoint
Isaac Lawrence/AFP via Getty Images

The Lonesome Death of Hong Kong

Chris Patten shows why the city's struggle with China's government matters for liberal democracies everywhere.

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Peter Austin Jul 18, 2020

The basic DNA of the CCP-led economic sysyem will not allow adjustment. Overseas investors must adjust, it's the price you must pay for doing business here. The primary focus of the leadership is avoiding a USSR type breakup. Compliance is valued over economic prospects. I am now living under the new security law in Hong Kong. Adjustments will be made by others, not by the CCP leadership.
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Matthew Hall Jun 21, 2020

This comment was removed by a moderator. Replies to this comment may also be deleted. Please note that we moderate comments to ensure the conversation remains topically relevant. We appreciate well-informed comments and welcome your criticism and insight. Please be civil and avoid name-calling and ad hominem remarks.
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j. von Hettlingen Jun 20, 2020

Kevin Rudd and Daniel Rosen say Covid-19 should offer Xi Jinping the moment to revisit his 2013 plan to reform China’s economy, which is facing the greatest challenge in decades. The country has failed to pursue “marketization policies” that were announced seven years ago. They were essential to ensure “sustained long-term growth.” Will Xi “grasp this reality and seize the moment? Or will he double down on the failed approach of the post-2013 period, when many promised reforms were sacrificed for fear of the change and instability they entailed?”
In 2013 it was the big question for China: would the world's second biggest economy undertake a serious policy of reform under its new leadership? It had “laid out a policy agenda that promised real reforms to an economy laden with debt and distorted by the influence of the country’s large state-owned enterprise (SOE) sector.” Yet hopes were dashed by the communiqué issued by the Communist Party (CPC), which was long on intentions but short on detailed policy proposal.
The authors say: “instead of seeing that agenda through, China chose to dodge the risks entailed by marketization, and has since reverted to what it knows best: state control over the economy and the semblance of stability that comes with it.” Not only has Xi failed “to explain why the 2013 reform plan was not implemented, and the new reform pledges remain short on detail (wherein the devil lies).” After seven years of inaction, it is reasonable to doubt the leadership’s latest effort to push for reform.
Any big changes would have serious implications for China, which relies for much of its growth on a hybrid economy – state capitalism. For Xi, the most powerful Chinese figure since Mao Zedong, his prime concern is to cement the Party’s power, which he saw as having been sapped by elitism and corruption in the past. As a loyal communist, he puts political power first and knows that the structural economic reforms his country needs, would compromise the growth the regime needs. He has in mind a cautious course to avoid shocks to the system.
Xi’s worldview and vision for China had been shaped by two historic traumas. The first was his personal trauma of the Cultural Revolution, when Mao used the people to tear his own party to shreds. Xi, as a young boy in the 1960s, was caught up in the chaos. His father, a senior party functionary, was purged, and the family spent seven years in internal exile. Xi lost a sister during the hardship and even his mother was allegedly forced to denounce him. Since 2013 he has amassed Mao-like power, and abolished his term limit in 2018, allowing him to rule until his death, like Mao.
The second was the trauma of the collapse of the Soviet Union under Mikhail Gorbachev in 1991. The once-mighty Soviet Union had fallen, largely due to the great number of radical reforms – the policies of glasnost (“openness”) and perestroika (“restructuring”) – Gorbachev initiated. He was stymied by opposition from within the Soviet bureaucracy, and China mostly faulted him as a weak and foolish leader. Xi believes Western values played a crucial role in the failure of Gorbachev’s reform effort, and he constantly warns cadres not to make the same mistake as Gorbachev.
The Soviet collapse – blamed in part in China on corruption – still haunts the CPC. Xi’s anti-corruption crusade aims to rid the Party of corruption and assert supremacy over it. He has urged the cadres to draw lessons from the collapse of the Soviet Union. Xi sees ideological controls on sectors like the news media and the military as essential, resisting forces that he thinks brought the Soviet regime to its knees. It explains his war on Western values – democracy, free press, constitutional separation of powers – which he sees as an insidious threat to China’s one-party rule.
Apart from the Covid-19 induced recession and tensions with the US, the authors say the new security law on Hong Kong “has further exacerbated its economic challenges. Apparently, the government is willing to accept high economic costs and a barrage of foreign outrage in pursuit of a more compliant Hong Kong. But if Hong Kong descends into violence again, and if China responds with extreme forms of repression under the new law, international firms will have less incentive to stay, further clouding the Chinese economy’s prospects.”
It is time for China “to prove that its reform intentions are serious this time.” But it takes political will and efforts “to privatize or break up some SOEs… abolish the remaining joint-venture requirements… relax foreign equity limits, thereby opening up a wider range of industries to foreign direct investment.” Having enough, the EU has been “pressing China for some of these changes in ongoing negotiations for a comprehensive bilateral investment agreement.”
Casting himself as the leader to save the Communist party, Xi is obsessively determined to retain full control of any reform process, in ways that Mao and Gorbachev did not do. Hence it is most likely that he fears disruptive change more than the malaise of his own making, kicking the can down the road again.
- 💧Der Geist Jun 22, 2020
  
  Nicely said.
  And great to see Kevin continuing to keeping the ‘light on the hill’ glowing through the turmoil of the current era.
  
  One addition I would like to see addressed is China’s position in the coming age of dependance in batteries and especially the electric vehicle.
  
  My observations on the lithium mining sector suggest that China is an adept at suffocating its own rising industries to place incredible pressure on upstream rAw material resources in order to compromise ownership and acquire or strangle the negotiating power of the non-Chinese owners while buying time for technological developments, in batteries and EVs to play catch up. Because this is one key industry China could dominate and topple the ‘gasoline car’ monopoly with. The EU engagement though is a fascinating one to watch as it takes climate change seriously and is particular on standards that China needs to adopt and or steal to flourish in this new market.
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