In 2013, the Chinese government laid out a policy agenda that promised reforms to an economy laden with debt and distorted by the influence of the country’s large state-owned enterprise (SOE) sector. Instead of following 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 data across 10 critical spheres of the country’s economy, we find that China’s reforms have been tepid to non-existent over the past three years.
The Chinese government’s failure to deliver on its promise to open the economy has undermined its credibility and fueled today’s growing global backlash.
Illustration: Mountain People
Even before COVID-19, 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.
Now, China is at a crossroads. The COVID-19 crisis sent its economy plunging by a reported 6.8 percent in the first three months this year — China’s first acknowledged quarterly contraction on record. For the first time in more than 25 years, Beijing is not publishing a growth target.
Moreover, because debt is now an even bigger problem for China than it was in 2013, the government does not have the option to pursue a massive-scale stimulus, as it did during and after the 2008 global financial crisis.
Piling on more debt would only aggravate the current risks to the economy, which include a property-market bubble and a swollen banking sector that, after a quadrupling of loan portfolios over the past decade, is sitting on mountains of shaky debt.
Faced with these limitations, China’s government has put reform back on the agenda.
On April 9, it issued a plan to improve the “market-based allocation of factors of production,” following up on May 18 with a broad-spectrum manifesto that elevates “employment-first” policies to the level of traditional fiscal and monetary policy.
The agenda acknowledges the importance of competition, and proposes better protections for private firms, intellectual property and business secrets. The government has also made pronouncements about strengthening market pricing mechanisms, formalizing property rights and restricting administrative interference in market activities.
This is all well and good, but can the world believe China this time?
The government has yet to explain why the 2013 reform plan was not implemented and the new reform pledges remain short on detail — wherein the devil lies.
Meanwhile, after being shaken by China’s initial missteps to contain COVID-19, foreign firms are increasingly alarmed by rising US-China tensions and are seeking to diversify their investments across other countries.
At the same time, private Chinese firms are holding back on further capital expenditures. If these business shifts continue, China’s ability to recover from the crisis would be hampered.
Moreover, China’s decision to impose security legislation 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. If the territory descends into violence again and if Bejing responds with extreme forms of repression under the new legislation, international firms have less incentive to stay, further clouding the Chinese economy’s prospects.
The coming months will be crucial.
If China wants to prove that its reform intentions are serious, it could privatize or break up some SOEs. It could abolish the remaining joint-venture requirements. It could relax foreign equity limits, thereby opening up a wider range of industries to foreign direct investment.
The EU is already pressing China for some of these changes in ongoing negotiations for a comprehensive bilateral investment agreement. We should know in the second half of the year whether China is prepared to assume the risks of genuine reform.
Yet even if China does take a liberal turn on the economy, it is hard to see how it can reverse the “promise fatigue” that has already set in among it’s international economic partners. Officials in many market economies will likely insist that China do more to adjust to international market norms, rather than expecting others to adjust to its own party-led economic system.
Significant economic reforms are the key to leveling the global playing field, and preventing many foreign players from packing up and leaving.
COVID-19 is the greatest economic test China has faced in decades. The silver lining for its leaders is that the crisis affords them an opportunity to reorient the economy for sustained long-term growth through marketization.
Will Chinese President Xi Jinping (習近平) 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?
Kevin Rudd, a former prime minister of Australia, is president of the Asia Society Policy Institute in New York. Daniel Rosen is a founding partner of the Rhodium Group.
Copyright: Project Syndicate
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