China Can No Longer Afford an Indecisive Approach to Economic Reform

Beijing’s muddled response to a tumultuous 2018 exposed the myths of an ultra-powerful president running an economy inexorably destined for unstoppable growth.

Expert comment Published 2 January 2019 Updated 13 May 2019 2 minute READ
People watch Xi Jinping's opening speech at a gathering to celebrate the 40th anniversary of reform and opening up. Photo: Getty Images.

People watch Xi Jinping’s opening speech at a gathering to celebrate the 40th anniversary of reform and opening up. Photo: Getty Images.

On 18 December, President Xi Jinping summoned a grand gathering for the 40th anniversary of Deng Xiaoping’s landmark reform and opening up, attended by the most important Communist Party cadres, entrepreneurs and Olympic champions, to reveal China’s next steps in its reform agenda for the coming decades.

The event took place after a tumultuous 2018, where China found itself fighting an economic slowdown coupled with an unexpected and enduring trade war with Beijing’s most important economic and strategic partner – the United States. Those two difficulties are intrinsically intertwined.

Xi’s one-and-a-half-hour speech offered little in the way of concrete solutions to these two imminent challenges, but he conveyed two clear messages. Firstly, a return to the Cultural Revolution will be resisted. Neither of his two predecessors openly denounced that decade-long trauma as Xi did, loudly, both as an affair of state and as a matter of personal tragedy for his family.

Secondly, China must continue to reform for its own sake. A more pluralistic China would be better prepared to handle the highs and lows of the economic development model the country has chosen.

However, what remains critically unclear is to what extent the party would intervene in the market to carry forward the reform which Xi has in mind. Instead, he dictated in his remarks that Deng’s ethos for reform – ‘crossing the river by feeling the stones’ – must be combined with ‘top-level design’; in other words, the party decides everything.

The centrality of the party causes confusion and is reflected in domestic economic adjustments. Xi advocates supply-side reforms but invites the party to interfere in the market. He campaigns for reform of state-owned enterprises but strengthens party committees’ control of business decisions in both state and private enterprises.

China must be fully aware that, in terms of reform, its deeds matter more than words. Most of the audacious reform programmes Xi wanted to deliver have so far not materialized. He should use this occasion to push for urgent implementation of economic reforms. In this day and age, how things are done matters as much as what is being done.

Faced with a dilemma between strident reform and sluggish growth, or rapid growth and incremental reform, he promises both speedy growth and expeditious reform. In some ways, Xi looks like British Prime Minister Theresa May, trying to reconcile irreconcilable ends through her frail Brexit deals.

Xi cannot afford to delay much-needed reform. It is essential for him and his politburo comrades to prevent a perception of failure from becoming widespread among the Chinese population.

Meanwhile, Donald Trump’s administration is currently on a wild journey that will not only exacerbate America’s problems with China but return to enmity with Beijing – something Deng worked hard to avoid 40 years ago.

Washington’s political elite have made it clear they view China not just as a ‘revisionist’ power but as the world’s principal champion of an alternative political system and a threat to the sensitive technologies monopoly of the US. And the muddled response from Beijing exposes the myths of an ultra-powerful president running an economy inexorably destined for unstoppable growth.

Forty years ago, China and the US established a formal diplomatic relationship for distinct and parallel purposes. Deng saw the window of opportunity to reintroduce China to the world and formally break with the Soviet Union. The US believed that integrating China into the world economy and the liberal international order of the ‘Washington consensus’ would fundamentally shape China to be more like the West.

China is now the world’s second-largest economy and remains the engine of global growth, but politically it is farther from the US than Washington had hoped. It is almost impossible to separate the two economies, given their sheer size and depth of integration into the global economy, but restoring mutual political confidence is unlikely.

The rest of the world still has a profound interest in a reform-oriented China. While many of the leadership’s recent decisions have disappointed some democratic purists, it is important to realize that China is still finding its own way and quite often it is about finding the path of least resistance. Even many of China’s most vocal critics appear to recognize that a more turbulent China may not be an easier or more cooperative partner.

One can only hope that, going forward, Xi’s policies will be based on an innovative reading of Deng’s principle of ‘seeking truth from facts’ in 1978; and a belief that shared prosperity and continuous economic reform are not only essential for China’s future development but, more importantly for Xi, are the only means to hold together the party’s legitimacy and ensure its survival.

This article was originally published in the South China Morning Post.