Market reform in China: Should we believe it?

By Derek Scissors
February 24, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The first step in solving a problem is admitting it. For years, the Chinese government and their defenders overseas insisted first that China was still reforming, then that state-led economic development was superior to market-led development. Evidence to the contrary came as news to many.

There has always been a reform camp in China; it just happened to lose every major political battle in the past nine years. Now the reform camp is trying again.

They’re not going to succeed this year or next, but they at least have a chance — for the first time in a decade.

The current Chinese government, led by Communist Party General Secretary Hu Jintao, took office in late 2002. At that time, China had been pursuing genuine market reform for 23 years, was growing at a sustainable 8-9 percent, and had a balanced economy.

At some disputable point under Hu’s regime, but no later than 2006, the market was shunted aside in favour of the state. Chinese growth actually became a bit more rapid but also wildly imbalanced and, with the financial crisis, dependent on unsustainable levels of stimulus.

It took some time for this to be recognised as a problem, but that was actually the easy part. The hard part will be actual change. Hu Jintao’s government took China off the market-reform path; fine words aside, this government is not going to reverse nine years of policy choices and return to the market in 2012. No chance.

But this year marks a political transition for the PRC: In the fall, a new Communist Party leadership will be selected, and a new government takes over in February/March 2013. That’s why the reform camp, including senior economic decision makers, is chirping louder now. They’re hoping that incoming Communist Party Secretary Xi Jinping and his cabinet will be ready to listen in a way Hu Jintao’s cabinet never was.

Unfortunately, Xi Jinping comes from a group, known as princelings, benefiting greatly from the state’s leading role in the economy — for example, by being named CEOs of giant state enterprises. The safe bet is therefore that the state will remain pre-eminent.

But it’s at least possible that, given time in office, Xi will come to accept that China is off course. Not today, not tomorrow, but (perhaps) soon. This is what the reform camp is aiming at. The rest of the world should remain sceptical, but it should be cheering them on.

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