Is China Ready for True Economic Reform?

Forty years ago, China officially launched the “reform and opening” policy that would transform the country from dire poverty to the world’s second-largest economy. The Third Plenum of the Chinese Communist Party’s (CCP’s) 11th Central Committee, held in Beijing from December 18 to 22, 1978, marked the country’s official scrapping of a Mao-era focus on class warfare in favor of a slow embrace of capitalist elements – albeit with the economy at large still under strong state control.

Five years ago, in November 2013, CCP General Secretary Xi Jinping oversaw his first third plenum since assuming his post. At the Third Plenum of the CCP’s 18th Central Committee, economic reform was once again the major theme. The Party meeting set up a dedicated small group, led by Xi himself, on “comprehensively deepening reform” – the catchphrase of the plenum. The post-plenum communique promised to lift market barriers and improve “efficiency and fairness” in allocating resources – taken by many to be a pledge to play down the government’s use of subsidies to keep state-owned enterprises (SOEs) afloat while private firms struggle to access funds. There were also vague references to strengthening the role of market forces in guiding China’s economy.

With Xi still relatively new to his positions both as CCP general secretary and China’s president at the time, hopes were high that he might be willing to take “reform and opening” to the next level, overcoming roadblocks that had hampered growth under previous leader Hu Jintao. As one 2013 analysis by Brookings gushed, the Third Plenum “reform program reveals Xi Jinping as a leader far more powerful and visionary than his predecessor Hu Jintao. He aims to redefine the basic functions of market and government.”

True, the 2013 Third Plenum promises were vague – but so were the outcomes of the 1978 Third Plenum. In China, the proof is always in the implementation.

Five years later, it’s clear that Xi has not moved to enact even the amorphous tenets of 2013’s economic reform – at least not in the way that more liberal-minded reformers at home and abroad had hoped. Instead, what reforms there have been – “supply-side” reform, meant to curb overcapacity, and attempts to address a potential debt crisis – have largely impacted the private sector, only reinforcing the dominance of SOEs. As Minxin Pei noted in a September 2018 article for Nikkei Asian Review, the environment for Chinese private firms (to say nothing of foreign companies) has only deteriorated under Xi.

Xi’s economic approach fits in with what we now know about his priorities. His main concern is tightening Party control over aspects of Chinese life where it had been ebbing away. Rather than true marketization, or even baby steps toward that end, Xi wants to see the government – and thus the CCP – control more, not less, of the Chinese economy. As the CCP Central Committee put it in March 2018, using an alternative acronym for the Party, “A primary task of deepening reform of the party and state institutions is to strengthen the CPC’s leadership in every sector.”

To use a more colorful phrase from the Mao era, which was added into the CCP charter in fall 2017, “east, west, south, north, and center – the party leads everything.”  And yet, there are some tantalizing signs that Xi may be rethinking this heavy-handed approach to the economy.

For months, there have been rumors of pushback against Xi’s leadership, particularly as U.S. tariffs begin to take a toll. Critics complain that Xi pushed too aggressively, too quickly against the United States and provoked the massive anti-China backlash currently dominating in Washington. There are also more domestic-focused concerns from Chinese loath to see the Party return to its Mao-era form – particularly as two great tragedies of China’s modern history, the mass famine of the early 1960s and the Cultural Revolution, occurred during this period.

A potential path out of both these conundrums is to tackle the difficult, foundational economic issues of excessive state control and interference. Doing so would seem to go counter to Xi’s inclinations, but domestic and foreign pressure just might be forcing him to move in this direction.

For one thing, it appears “Made in China 2025,” the blueprint for Chinese technological dominance that so enraged the Trump administration, is being phased out. As South China Morning Post reported in December, citing the latest guidelines from the State Council, “China has stopped requiring local governments to work on the ‘Made in China 2025’ strategy.” That meshes with a Wall Street Journal report that Chinese leaders are currently drafting an entirely new policy instead – one that “would play down China’s bid to dominate manufacturing and be more open to participation by foreign companies.” The new policy would, not coincidentally, allow more room for market forces, not government policy, to determine the future of the manufacturing sector.

Backing away from a high-profile government initiative would be a rare form of political crow-eating for Xi. “However,” SCMP cautioned, “China will continue to pursue its ambition of becoming an industrial and technological power, with the [State Council] directive making clear that the initiative has been dropped in name only.” That was reinforced at a Politburo meeting on December 13, which emphasized that pushing forward “advanced manufacturing” will remain a priority in 2019.

Still, in mid-December, as China celebrated the 40th anniversary of “reform and opening,” Party and government leaders were eager to underline China’s commitment to continuing to reform and open its markets. The Politburo promised to “persist in deepening marketization reform” and raised hopes of more government support – including funding – for private companies.

Yet at the same time as Chinese leaders were promising to continue reform efforts, the propaganda blitz accompanying the anniversary made it clear that the CCP, at least, sees no problems with the way economic reform has been handled so far. Articles in state-owned media outlets extolled Xi for his “reputation as a reformer.” As one typically fawning article in Xinhua put it, “Xi's resolve to carry on the reform could not be more obvious… Xi brought China's opening up to a new level.”

China then is poised between declaring that reform is not finished – “China is still facing an unbalanced industrial structure, weak innovation and financial risks,” the Xinhua article admitted – and insisting that the Party’s previous decisions have been “completely correct.” There was, of course, no mention of the fact that many of the promises Xi made about reform turned out to be empty. He was given all the credit for bold proclamations, and none of the blame for failure to follow through. That makes it impossible to know if the enthusiastic resurrection of Xi’s old reform pledges is proof that he is recommitted to that process, or merely one more example of hagiography at work.

Unfortunately, all signs at the moment point toward the latter. In a speech on December 18, the exact anniversary of the 1978 Third Plenum, Xi boiled down 40 years of “reform and opening” into one lesson: that the CCP must retain absolute control “over all tasks.” Given that ultimate priority, his vague promises to continue “opening up” the economy rang hollow.

“We will resolutely reform what should and can be reformed, and make no change where there should not and can not be any reform,” Xi said. Everything we’ve seen about his leadership so far argues that the latter category is far bigger than the former.