Chinese reform is coming, but not the political kind
In a western democracy like the United States, we assume that the best time for a leader to accomplish something is in the first year of his first term. The election has just ended, the opposition is still scattered, and the legislative mandate is intact. Everybody still talks about Franklin Delano Roosevelt’s first 100 Days for a reason.
In authoritarian governments, like China’s, it’s supposed to be different. Steering such a large bureaucracy takes time, as all the moving pieces catch up with one another. What matters is minimizing risk surrounding the transfer of power, and then engaging in a slow buildup of consensus. And yet, Xi Jinping is proving the conventional wisdom wrong. After just six months at the helm, Xi is already clearly on track to accomplish far more than his predecessor Hu Jintao.
The constellation of China’s leadership left Xi Jinping with more room to maneuver upon taking office: the Politburo Standing Committee, the top brass in China’s government, was consolidated from nine members to seven. Over the next few months, Xi built up a track record of successful reforms. He has worked at overhauling the banking system and shaking out its bad loans. Through his anti-corruption efforts, he has increased the accountability for the leaders of state-owned enterprises and provincial leaders. He improved product safety and the environment by changing the reward structure for the people in charge and implementing air pollution regulations. We’ve also seen the establishment of a free trade zone in Shanghai.
Despite all this progress, there is vastly more to do. But Xi seems up to the task — and he is eager to get started. Over the weekend, one of Xi’s allies, Yu Zhengsheng, a member of the Politburo Standing Committee, promised even further reforms at the upcoming Third Plenum meeting of party leadership from November 9-12th, declaring it will usher in “unprecedented” policy changes and reform.
What might those unprecedented reforms be? I would expect some tangible, public commitments to rectify financial issues — some combination of things like the deregulation of interest rates, currency convertibility, or the liberalization of capital accounts. On top of that, I anticipate that the party will announce changes to the house registration policy (called “hukou” in China), which facilitates the historic rural to urban transition that’s moving 250 million Chinese from the countryside and into cities. Elsewhere, a move toward tax reform, particularly at the local level, would be very significant. We’ve seen local Chinese governments running up huge debt burdens: tax reforms that improved their revenues could help rectify the situation and offset potential financial disaster. And finally, although air pollution regulation has already been announced, expect even more focus on the environment. Studies now show that Chinese coal pollution is cutting life expectancy by up to five years. I wouldn’t be surprised if Xi delivers a more pointed declaration that China needs to wean itself off of coal in exchange for environmentally cleaner alternatives. We may get a step in this direction with the announcement of an intended coal tax.
With all that said, it should be stressed that there’s one thing that is incredibly unlikely to be proposed at the Politburo meeting: political reform. If anything, we’ve seen China further crack down on political dissidents and outspoken media outlets (the Bo Xilai saga is just one example). Chinese leaders have appeared to take a cautionary lesson from Gorbachev: when engaging in radical economic reform, don’t try and do political reform at the same time. The Chinese are going to balance their newfound economic flexibility by staying rigid on dissent. Xi’s recent decision to reinstate “self-criticism sessions,” a practice with Maoist associations, has made it clear that, politically, Xi Jinping is no Western liberalizer, even as he liberalizes his economy. This is reform within the parameters of the existing Communist Party.
And it’s reform that’s badly needed, as China’s political elite are entangled with an overwhelming share of the economy. On the 2012 Fortune Global 500 list, of the 70 Chinese companies that made the cut, 65 of them are state-owned. The people who run the companies are some of the most influential political leaders in China, and so the government can’t just privatize the businesses — because the businesses are the government. But somehow they’ll have to get more efficient, and less corrupt, for China to stay competitive internationally.
Economic reform is challenging, and it will lead to demand for more of the political change that Xi is limiting right now. That’s the risk. But the reward is tangible: a more efficient, dynamic economy that can be sustainable even without the government fueling it. Xi has already done more for that cause than Hu and Wen Jiabao could, and in far less time. But he faces a Goldilocks challenge, where moving too slowly could produce an angry clamoring for more progress, but changes that come too rapidly could destabilize the economy altogether. The upcoming plenary will give us a hint as to where Xi wants to set the speed limit.
This column is based on a transcribed phone interview with Bremmer.
PHOTO: Chinese President Xi Jinping (2nd R) talks to Russian Prime Minister Dmitry Medvedev (not pictured) during a meeting at the Great Hall of the People in Beijing October 22, 2013. REUTERS/Kota Endo/Pool