4. China's Political Economy Into 2020
Total Page：16
File Type：pdf, Size：1020Kb
4. China’s Political Economy into 2020: Pressures on Growth, Pressures on Reform Conference on China’s Economic Future: Emerging Challenges at Home and Abroad Chatham House, London July 11, 2019 Chinese President Xi Jinping applauds during the 40th anniversary of China's reform and opening-up at the Great Hall of the People in Beijing, China. Xie Huanchi. Xinhua. Getty Images. 2018. 52 | ASIA SOCIETY POLICY INSTITUTE THE AVOIDABLE WAR: THE CASE FOR MANAGED STRATEGIC COMPETITION TO UNDERSTAND WHERE CHINA’S ECONOMY IS HEADED IN THE 18 MONTHS AHEAD, leading up to the centennial of the Chinese Communist Party in 2021, it is important to understand the wider context in which China’s current debates on the future of its political economy have been conducted in the period since Xi Jinping became China’s paramount leader in 2012. e year 2021 is the rst weigh station for the Party and the country to evaluate progress in the realization of Xi Jinping’s “China Dream.” Xi promised in 2013 that by the centennial of the Party’s founding, China will have eliminated poverty and achieved “moderate prosperity,” usually interpreted in the ocial Chinese literature as middle-income status. Whatever the actual numbers might be, let’s be clear that the Party will proclaim that China has passed both these tests with ying colors. at is because it is central to Xi Jinping’s legitimacy that China do so. But the truth is that the 2021 target does apply additional pressures in the meantime on China’s economic managers not to allow the country’s growth rate to slow too much, whatever the downside factors may be, either foreign or domestic. ere has been much discussion of why President Trump needs to bed down the U.S.-China trade war, as well as have accommodating monetary policy settings, to support his reelection campaign in 2020 with as robust an American economy as possible. But President Xi also faces his own reelection challenge at the 20th Party Congress in 2022, the year following the Party’s centennial celebrations, where, despite constitutional change abolishing term limits for the Chinese presidency, he, too, will face political pressures of his own. e most important of these pressures will be his government’s ability to sustain economic growth above 6 percent in order to guarantee continuing increases in living standards and to avoid unemployment. To stumble on the economy, particularly at this most critical of political junctures, would be deeply problematic for Xi Jinping, and, indeed, potentially destabilizing. The Enduring Dilemma of China’s Political Economy Against this background, my argument is that China is now at a crossroads in the history of its post-1978 political economy. In part, this has to do with the U.S.-China trade war, together with the risk of a wider economic decoupling between the two countries, which is bringing new pressures to bear on China’s domestic economic policy debate. In part, however, and perhaps in larger part, it has to do with the type of China that Xi Jinping wants for the future, and how much he is prepared to allow market forces to shape that future at the cost of absolute Party control—in particular, the future role of private rms. For China’s post-Mao leadership, the central and continuing dilemma, or what the Party would describe as its “dialectic,” has been there since the beginning. is is the tension within a Marxist-Leninist party, between a deep predilection for political control, on the one hand, and the need for a successful economy which increasingly must yield to the disciplines of a free market, on the other. ASIA SOCIETY POLICY INSTITUTE THE AVOIDABLE WAR: THE CASE FOR MANAGED STRATEGIC COMPETITION | 53 Indeed, for the Party to succeed in its national mission, it must achieve two fundamental economic objectives: rst, to generate sucient growth, increased living standards and employment opportunities to entrench the Party’s long-term legitimacy in the eyes of its people, and second, through that growth, to enhance China’s national economic capacity to enable the Chinese state to defend its core interests and increase its global power, inuence, and international standing. Neither of these is possible without a fully functioning market economy. And virtually every single Chinese economist knows it. For the Party to succeed in its national mission, it must...generate e implementation of market economic reforms, therefore, has always been an uncomfortable process sufficient growth [through] for the Chinese Communist Party. increased living standards and at is because it has usually meant a relative loss of employment opportunities to political control, as the Party’s ideological apparatus has had to yield the political ground to a growing phalanx entrench the Party’s long-term of professional economic and nancial technocrats legitimacy in the eyes of its spawned across the various agencies of the Chinese state. Just as China’s lumbering, Leviathan-like state-owned people, and...through that enterprises (SOEs) have had to yield market share to growth...enhance China’s... an army of nimble, entrepreneurial private rms. And, perhaps most critically of all, the Party has had to economic capacity to enable the contend with the freer ow of information, ideas, and Chinese state to defend its core people as China has opened its economy to the world. interests and increase its global Over the rst 35 years of the reform process, imple- power, influence, and...standing. mentation, while uneven, has nonetheless produced spectacular economic results with which the world is now deeply familiar. It has also, however, produced a number of signicant nancial and economic vulnerabilities, of which the ineciency and indebtedness of China’s nancial system has perhaps been the most problematic. is has occurred together with a Party that, until the rise of Xi Jinping, had become deeply, perhaps terminally, corrupt. Nonetheless, the trend line was relatively clear, with an increasingly open economy producing a new generation of private rms at scale, gradually dominating the domestic market, and led by companies like Alibaba, beginning to take on the world. The Economy under Xi Jinping With Xi Jinping, the political economy compact between the Party and the market began to be rewritten. Once again, the process has been uneven, but the trend line has been observably dierent from what we have seen before. Driven by a range of ideological, political, and economic factors arising from China’s stock market crash of 2015, the core organizing principle under Xi Jinping has been the reassertion of the centrality of the Party. Over the last seven years since Xi’s emergence as paramount leader in 2012, this process has gone through three complex and largely unplanned phases. 54 | ASIA SOCIETY POLICY INSTITUTE THE AVOIDABLE WAR: THE CASE FOR MANAGED STRATEGIC COMPETITION e rst phase, from 2012 to 2015, was marked by two core decisions. e rst was launching the anticorruption campaign in 2013. is was the biggest in the Party’s 100-year history and resulted in the incarceration and disciplining of hundreds of thousands of Party members, accompanied by the purge of Xi’s principal political opponents. e other was the Party’s adoption of “e Decision” on the implementation of the next phase of China’s economic reform program, dened as China’s “new economic model.” After ferocious internal debate, the market was, for the rst time, explicitly nominated as the central organizing principle for the allocation of resources in the economy. China’s old model was characterized by labor-intensive, low-wage manufacturing for export; high levels of state investment in national infrastructure; and a signicant albeit reduced role for SOEs, all implemented with scant regard for the environmental consequences. China’s old model was e new model sought to accelerate the role of characterized by labor-intensive, domestic consumption as the principal new engine of economic growth, driven almost exclusively by a rapidly low-wage manufacturing expanding private sector, particularly in the services sector, and a more limited role for SOEs restricted to for export; high levels of a dened list of critical industries, all tempered by new state investment in national principles of environmental sustainability. infrastructure; and a significant e 2013 “Decision” was accompanied by a detailed blueprint of 66 specific reforms across the entire economy. albeit reduced role for SOEs, It was seen as Xi Jinping’s answer to what had generally all implemented with scant been called the “10 wasted years of economic reform” regard for the environmental under his predecessors, Hu Jintao and Wen Jiabao. consequences. e overall political and economic model that seemed to be emerging at the time was a Party strength- ened though the restoration of its moral integrity but fully in sync with a bold program of next generation economic reform. All this changed with the Chinese nancial crisis of 2015, which marks the beginning of the second phase in China’s unfolding political and economic debate in the Xi Jinping period. is was not just a crisis in the Chinese equities markets, as the authorities struggled with managing a stock market bubble driven by excessive liquidity and nancially illiterate investors who saw investing in shares as the next best thing to the gambling tables in Macao. It also became a wider nancial crisis given the proliferation of margin lending practices as consumers borrowed heavily from nancial institutions to make investments in what was seen then as a permanently booming economy. Both state and private institutions were directed, as part of what became known as the “national team,” to invest heavily to try to stabilize the market, although this resulted in even further losses.