Thu, Feb 20, 2014 - Page 8 News List

Reforms in China bring great risk

By Ian Bremmer and David Gordon

When it comes to economic reform, China’s leaders no longer believe that time is on their side. With a new sense of urgency, Chinese President Xi Jinping (習近平) and his inner circle are attempting one of the most ambitious economic and social-policy reform plans in history.

In any authoritarian country, change creates risk. Consider the scale of the proposed plans. For China to reach the next stage of its development, a much larger share of Chinese-made products now destined for Europe, the US and Japan must be sold to consumers inside China. This shift will require a big increase in local purchasing power and, therefore, an enormous transfer of wealth from large domestic companies to Chinese households.

In addition, Chinese leaders appear to be on the verge of approving 12 new regional free-trade zones, which will drive competition and efficiency on a new scale in many economic sectors. They also recognize the need for further liberalization of the country’s financial system, a move that will require tolerance for outright defaults on bad loans and the anxiety and anger that comes with them.

Here — as in other areas of the reform plan — change is dangerous, but Xi has come to believe that pressing ahead is vitally important if China is to take the next crucial steps toward building a middle-class, digital-age economy. Moreover, the reforms are crucial for the Chinese Communist Party’s (CCP) long-term hold on power.

The leadership will also try to increase state-owned enterprises’ efficiency by withholding support and money from those that underperform, potentially putting large numbers of workers out on the streets. And the Chinese government’s steps to tackle heavily polluted air and water, a problem that officials can no longer ignore or explain away, will weigh on short-term growth as well.

In the past, the CCP has responded to slowing growth with a surge in state spending meant to create jobs and keep the system humming. This time, the authorities are allowing growth to slow at a measured pace, partly because the slowdown is a precondition for the kind of growth that does not depend on the state and partly because the slowdown helps sustain demand for reform.

To accomplish these goals, Xi is centralizing power, launching a charm offensive and cracking down on corruption and extravagance among officials. He is also using anti-corruption and re-education efforts to intimidate real and potential reform opponents within the CCP. Finally, the leadership has created new party institutions, answerable directly to top officials, to ensure that all changes are implemented as planned.

Nonetheless, while the reforms are crucial to China’s future, they are certain to produce a backlash. Some of the losers have the means to defend their interests: purged officials, companies and industries that face new regulatory scrutiny, as well as firms forced out of business, have well-placed friends within China’s enormous bureaucracy. Moreover, free-trade zones bring greater competition, including from foreign firms, which raises risks of increased unemployment and capital flight.

Chinese leaders have long feared publicly visible divisions within the elite, given the risk that infighting could expose sensitive secrets. Xi’s proposed reforms are just the sort of changes that might have this effect.

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