MARCH 2015 1616 Rhode Island Avenue NW Washington, DC 20036 202-887-0200 | www.csis.org Lanham • Boulder • New York • London 4501 Forbes Boulevard Lanham, MD 20706 Navigating 301- 459- 3366 | www.rowman.com Cover photo: https://www.flickr.com/photos/ stevecadman/117962067/sizes/l/in/photostream/. Choppy Waters China’s Economic Decisionmaking at a Time of Transition ISBN 978-1-4422-4078-0 1616 Rhode Island Avenue NW AUTHORS Washington, DC 20036 Matthew P. Goodman Ë|xHSLEOCy240780z v*:+:!:+:! A Report of the CSIS Simon Chair 202-887-0200 | www.csis.org David A. Parker in Political Economy Blank Navigating Choppy Waters China’s Economic Decisionmaking at a Time of Transition AUTHORS Matthew P. Goodman David A. Parker A Report of the CSIS Simon Chair in Po liti cal Economy March 2015 Lanham • Boulder • New York • London 594-61179_ch00_4P.indd 1 3/21/15 8:16 AM hn hk io il sy SY ek eh About CSIS hn hk io il sy SY ek eh For over 50 years, the Center for Strategic and International Studies (CSIS) has worked hn hk io il sy SY ek eh to develop solutions to the world’s greatest policy challenges. Today, CSIS scholars are hn hk io il sy SY ek eh providing strategic insights and bipartisan policy solutions to help decisionmakers chart hn hk io il sy SY ek eh a course toward a better world. CSIS is a nonprofit or ga ni za tion headquartered in Washington, D.C. The Center’s 220 full- time staff and large network of affiliated scholars conduct research and analy sis and develop policy initiatives that look into the future and anticipate change. Founded at the height of the Cold War by David M. Abshire and Admiral Arleigh Burke, CSIS was dedicated to finding ways to sustain American prominence and prosperity as a force for good in the world. Since 1962, CSIS has become one of the world’s preeminent international institutions focused on defense and security; regional stability; and transnational challenges ranging from energy and climate to global health and economic integration. Former U.S. senator Sam Nunn has chaired the CSIS Board of Trustees since 1999. Former deputy secretary of defense John J. Hamre became the Center’s president and chief executive officer in 2000. CSIS does not take specific policy positions; accordingly, all views expressed herein should be understood to be solely those of the author(s). © 2015 by the Center for Strategic and International Studies. All rights reserved. ISBN: 978-1-4422-4078-0 (pb); 978-1-4422-4079-7 (eBook) Center for Strategic & International Studies Rowman & Littlefield 1616 Rhode Island Ave nue, NW 4501 Forbes Boulevard Washington, DC 20036 Lanham, MD 2 0706 202-887-0200 | www . csis . org 301 - 459 - 3366 | www . rowman . com 594-61179_ch00_4P.indd 2 3/21/15 8:16 AM Contents List of Acronyms v A c k n o w l e d g m e n t s v i i Executive Summary viii 1. Introduction: China’s New Economic Navigators 1 2. China’s Economy at an Inflection Point 5 The Chinese Economic Miracle 5 The Need for a New Growth Model 9 The Third Plenum Reform Agenda 11 3. China’s Economic Policymaking Apparatus 13 The Communist Party 14 The State Council 16 Operational Consequences 19 Structural Changes under Xi Jinping 20 4. Traditional Characteristics of Chinese Economic Policymaking 22 Coordination Challenges 22 Center- Local Relations 24 Experimentation 25 External Pressure 26 5. Decisionmaking in the Financial Sector 28 Introduction 28 The Evolution of China’s Financial System 32 China’s Financial Regulatory Institutions 39 Case Studies 44 The Xi Administration’s Approach to Financial Reform 63 6. Assessing Policymaking u nder Xi Jinping 68 Centralized Economic Decisionmaking 68 Fragmented Policy Implementation 70 Comprehensive, Inconclusive 73 | III 594-61179_ch00_4P.indd 3 3/21/15 8:16 AM hn hk io il sy SY ek eh 7. Implications for Chinese Economic Reform 76 hn hk io il sy SY ek eh China’s Economic Challenges and the Imperative of Reform 76 hn hk io il sy SY ek eh Implications of the Xi Administration’s Policymaking Style 78 hn hk io il sy SY ek eh Obstacles to Successful Implementation 80 hn hk io il sy SY ek eh Progress Likely, but Risks Abound 82 8. Recommendations for the U.S. Government 84 Engaging with China 85 Or ga niz ing the U.S. Government 92 Appendix I: The Comprehensively Deepening Reform Leading Small Group 95 Appendix II: The Central Finance and Economics Leading Small Group 97 Appendix III: China’s Formal Government Structure 99 Appendix Iv: Major Regular Events in the CCP Po liti cal Cycle and the National Five- Year Plan 101 Appendix v: key Meetings in China’s Policymaking Calendar 103 About the Authors 107 I v | MATTHEW P. GOODMAN and DAvID A. PARkER 594-61179_ch00_4P.indd 4 3/21/15 8:16 AM List of Acronyms AIIB Asian Infrastructure Investment Bank AML Anti- Mono poly Law APEC Asia- Pacific Economic Cooperation BIT Bilateral Investment Treaty CBRC China Banking Regulatory Commission CCOD Central Committee Or ga ni za tion Department CCP Chinese Communist Party CDIC Central Discipline Inspection Commission CDRLSG Comprehensively Deepening Reform Leading Small Group CFELSG Central Finance and Economics Leading Small Group CFIUS Committee on Foreign Investment in the United States CFWC Central Financial Work Commission CIRC China Insurance Regulatory Commission CSRC China Securities Regulatory Commission CPPCC Chinese Pe ople’s Po liti cal Consultative Conference FDI Foreign Direct Investment FTAAP ­Free- Trade Area of the Asia- Pacific FTZ ­Free- Trade Zone G20 Group of 20 GDP Gross Domestic Product IMF International Monetary Fund ISDS Investor- State Dispute Settlement JCCT Joint Commission on Commerce and Trade LSG Leading Small Group LGFv Local Government Financing vehicle MIIT Ministry of Industry and Information Technology MOF Ministry of Finance MOFCOM Ministry of Commerce NDRC National Development and Reform Commission NSA National Security Adviser NSC National Security Council PBOC ­People’s Bank of China PBSC Politburo Standing Committee RMB Renminbi | V 594-61179_ch00_4P.indd 5 3/21/15 8:16 AM hn hk io il sy SY ek eh S&ED Strategic and Economic Dialogue SAFE State Administration of Foreign Exchange hn hk io il sy SY ek eh SHIBOR Shanghai Interbank Offer Rate hn hk io il sy SY ek eh SLF Standing Lending Fac ility hn hk io il sy SY ek eh SLO Standing Liquidity Operations hn hk io il sy SY ek eh SMEs Small and Medium- Sized Enterprises SOE State- Owned Enterprise TPP Trans- Pacific Partnership UNFCCC United Nations Framework Convention on Climate Change WTO World Trade Or ga ni za tion v I | MATTHEW P. GOODMAN and DAvID A. PARkER 594-61179_ch00_4P.indd 6 3/21/15 8:16 AM Ac know ledg ments his report is the result of a two- year pro ject by the CSIS Simon Chair in Po liti cal Econ- T omy, with assistance from the CSIS Freeman Chair in China Studies. Through inten- sive research drawing on primary and secondary materials in Chinese and En glish, as well as numerous research trips to Beijing, Shanghai, and Hong kong, roundtables, public events, and over 100 interviews with current and former economic policymakers, academ- ics, think- tank experts, journalists, and other analysts both within and outside China, we sought to analyze and assess the institutions and pro cesses of economic decisionmaking in China at a time of challenging economic and po liti cal transition. The authors are extremely grateful for the invaluable time and insights we received from all of our interlocutors. Special thanks go to the following individuals who met with us several times over the course of the two years and provided critical insights: kenneth Lieberthal Barry Naughton He Fan Nicholas Lardy Kevin Nealer David Dollar Olin Wethington Simon Rabinovitch Jamil Anderlini Dan Wright Dinny McMahon Li Xinxin Zhang Bin Ye Yu William A. Reinsch Jin Ligang Zhang Haibing Claire Reade We would like to thank the Smith Richardson Foundation for providing the generous funding that first enabled this pro ject, as well as Alcoa Foundation, the Japan External Trade Relations Or ga ni za tion, and the GE Foundation, whose additional support helped see it through to completion. The authors would like to acknowledge with appreciation the invaluable assistance of our colleagues at CSIS: Chris Johnson, Freeman Chair in China Studies, for his ever- sharp insights into the dynamics of China’s new leadership; Grace Hearty, Simon Chair program manager, for her tireless administrative support; Amy Studdart, Simon Chair deputy director, for her assistance in structuring and reviewing the final report; and Bonnie Glaser and Scott kennedy of the Freeman Chair for their assistance in its final review; as well as our colleagues in the CSIS Publications Department, led by James Dunton and Alison Bours, for their editing and design work. Any errors that remain are our own. We would also like to thank CSIS Simon Chair interns Xinyi Yang, Daniel Sofio, Daniel Remler, Alyssa Briggs, Ted Liu, Mikael Lindfors, Zheng Zhu, Laiyin Yuan, and Curtis Yibing Che, all of whom provided able research assistance throughout this pro ject. |II V 594-61179_ch00_4P.indd 7 3/21/15 8:16 AM hn hk io il sy SY ek eh hn hk io il sy SY ek eh hn hk io il sy SY ek eh hn hk io il sy SY ek eh hn hk io il sy SY ek eh Executive Summary fter 35 years of spectacular growth, the Chinese economy is in a challenging transi- A tion.