Chinese reform is coming, but not the political kind

By Ian Bremmer
November 1, 2013

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

7 comments

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‘of the 70 Chinese countries that made the cut, 65 of them are state-owned.’….. Where is the editor on this op-ed piece….. Where is the proof-reader?….

Posted by edgyinchina | Report as abusive

Article cites 2012 Global 500: China 73 (btw USA has 132 companies on this list).
A new 2013 Global 500 is available at the moment: China 89 companies(16 more than in 2012), USA 132 (the same as in 2012).
The world is changing, isn’t it ?

Posted by Wantunbiasednew | Report as abusive

The task of Xi Jinping, current paramount leader (which will be continued by his heir in the 2023-2032 period) is mainly economic development of China. They trace Japan and South Korea path. Chinese stated goal is to become developed country till 2030 and thus achieve then Japanese 1990 GDP per capita level , that means 60%-75% of United States per capita GDP. The goal is ambitious, but real with about 6-7% yearly GDP growth. But because China is huge this internal goal suddenly becomes the interesting issue for many Earth dwellers.
1. First of all because China is 10 million square km, 1.4 billion citizens country it has to be, and because Chinese authorities are both competent and cautious, it is developed gradually, province by province not like Japan and South Korea. (South Korea-Japan, 50-120 million people is an average size of 1 of 22 Chinese provinces). The common race and language identity really helps.
2. Why 2030 goal of becoming a “rich country” is achievable ? Constant, high investment/GDP level of about 40% (official Chinese statistics underestimates share of consumption in GDP). Fast building of first-class infrastructure of modern, developed urban society: transport infrastructure (highways, railways, high-speed railways, mass public transport, airports, sea ports), energy infrastructure (ultra high voltage power grid, thousands of miles of pipelines etc.), public goods infrastructure (mass residential real estate development, health care and education net). Each kind is on different level of development: state of the art sea ports but just starting with metro systems (but in total they are already longest in the world).
There are many obstacles on Chinese development path. They are of two main kinds: 3. resources and 4. political.
3. Resources. We are already used to ROW acronym. In many areas like consumption of raw materials like coal or copper, or production of basic industrial goods like steel it is China and Rest Of the World. China used more coal last year and will produce more steel this year than ROW.
So because China is and will be the largest consumer and importer of any raw material by high margin the planet resources constraint will become more and more visible.
4. Political. Internal task to become developed country till 2030 (60-75% of US GDP per capita level) because Chinese population is 4,3 times larger than US means its economy will be 2,4-3 times larger than US in about 2030. There are consequences. I’m pretty sure author of this article had an opportunity to glimpse at strategic games “Chinese development implication” etc. constructed in many D.C. buildings. The problem of them is the outcome is always the same: you can’t compete in economic terms with developed China, 35-40% of world GDP. Not as US, UE or Japan alone.
To sum all of this up: because China is a country, with stated goal of economic development and a few obstacles on its path: its size, different level of development of provinces, resources, external political factors it has to be immune to the highest extent possible to internal and external shocks. So: no real reform of closed current account, no external competition for Chinese savings, no convertibility of RMB, not significant changes to hukou system, not going green till nuclear plus huydropower becomes main electricity output sources. A lot of micro market reforms to enhance efficiency and boost innovation, always with tight grip of power.

Posted by Wantunbiasednew | Report as abusive

We always should keep in mind that China doesn’t have liceses/patents and the technology for virtually all export-worthy goods and services.
In fact, The U.S. owns ca. 70% of all world licenses and patents.
The absolute dependency of China on the foreign technology is a very tight spot for The Great Chinese Expanse.

The urban population share in 1990 was 26%; now it is 52%. This change is truly amazing. However, the further economic growth will require much more efforts. From now on, each additional per cent of the labor force moved to the East will cost more.

There is a serious problem in inequality. The GINI coefficient is ca. 45%. But the trend of social polarization, and the pace of it, in particular, is quite disturbing.

The issue of the cost of labor was discussed for many times. So I am just mentioning it.

Posted by OUTPOST2012.NET | Report as abusive

“We always should keep in mind that China doesn’t have liceses/patents and the technology for virtually all export-worthy goods and services.”-outpost2012.

You must live in a half century ago. Have your heard “Huawei” and “Haier”? They produce Chinese brands and export to whole of the world. Do you guys in the west have license to use gun powder which was invented by Chinese? Come on, don’t be smart-axxx.

Posted by davidake | Report as abusive

> But somehow they’ll have to get more efficient, and less
> corrupt, for China to stay competitive internationally.
China owns the US congress. That’s all they have ever needed.

Posted by UScitizentoo | Report as abusive

@davidake

You’d better pay attention to international patent law.
Virtually all computer brands were sold to China/Taiwan. The exception is HP/Compaq and Dell (talking of desktops.)

However, “producing Chinese brands and export to whole of the world” has nothing to do with patent/license rights used in the goods manufactured in China/Taiwan.

Just a decision of Intel – and the whole industry halts.

Posted by OUTPOST2012.NET | Report as abusive