Executive Summary: Conclusions
In part six of the executive summary, Daniel H. Rosen describes the main conclusions from the analysis of China’s Third Plenum plans for economic reform program and of the evidence of reform to date. For more on this topic, read Chapter 4 of the full report.
We finish our exploration of China’s reforms with reactions to two questions. First, what broad conclusions can be drawn from the matrix of facts and inferences we amass? Second, what recommendations can be offered to foreign readers contemplating what these conclusions mean for them and their economies? China’s awakening over the past 35 years has already affected global workers, consumers, investors, and the environment in profound ways, and the shock that current reforms portend will greatly amplify this connection. It is incumbent upon business and policy leaders abroad to understand the economic overhaul underway in China.
We draw five conclusions.
1. A Game-Changing Reform Program
The program of economic reform President Xi and the Communist Party leadership issued in November 2013 is game changing — far more than a minor adjustment of business as usual or an attempt to stall for time. Foreign reaction to these developments so far has been fragmented, fractious, and divisive, with a good deal of the China-watching community still maintaining a wait-and-see attitude. This is not hard to understand: past reform commitments have often not come to fruition or have been implemented in a manner less consistent with advanced market economy norms than hoped. Ambiguous terms or counter-indications to market-oriented reform remain in the new Decisions on comprehensive reform. However, based on our analysis of the drivers behind China’s new approach, new imperatives laid out in the program, and initial indications of implementation following the Third Plenum announcement, we conclude that a decisive break in policy formation and the Chinese economic model is underway.
This new policy trajectory will have profound implications for the international economic system, and foreign officials and business leaders will need to adjust their expectations and responses accordingly. A firmer consensus in understanding these developments will be helpful, and it is hoped that this study contributes to the formation of such a consensus.
2. A Convergent Economic Picture — with Idiosyncrasies
Clearly, Beijing does not believe that different principles of market economics apply in China, any more than gravity applies differently in the Middle Kingdom. The governmental mission and regulatory priorities being pursued in China today are largely consistent with the prescriptions set out by the advanced-economy establishment. There is no Beijing consensus or other alternative economic theory at work here.
But this characterization must be qualified. Wide policy differences on market-oriented precepts exist among advanced economies, and China may be all the more idiosyncratic given its extreme population size, social and developmental challenges, low per capita income level, and political challenges. China’s reforms will make it both convergent with advanced economies and unique, and that contradiction will be discomforting, considering that China will likely be the largest economy in the world in a decade or so. If China hews to the more interventionist end of the advanced-economy policy spectrum, difficult questions will arise for other economies.
3. Plenty of Exceptions and Counter-indications
A related point is that with such a broad reform agenda, and so many conflicting pressures to be managed, China may require time to work through adjustments at different speeds in different areas, even without attempting to argue that certain exceptions to the overall reform effort are market friendly in the long term. Most nations reserve some sectors from the normal logic of regulation because of internal politics, despite their general principles to the contrary and the welfare losses entailed with taking such exceptions. The United States diverts from free trade when it comes to Mexican sugar because of politics, not economics. China will have its own sacred cows; we can only hope that the herd will be small. The most promising early sign of reform would be the release of a negative list explaining which industries are meant to be protected from competition; this would help show that Beijing is serious about ensuring that the market becomes the dominant, overriding factor governing economic activity.
4. A Notably Fast Start, and a Move to Transparency
The pace of reform and structural adjustment in China today is far faster than was expected a year ago, or than most people believe today. However, the evidence for this — less than one year after the kickoff — is necessarily partial, anecdotal, and contestable. The target of 2020 for completion is ambitious, and shorter timetables of one-to-two years in the cases of foundational elements such as interest rate liberalization and center-local fiscal reform are bold. Reform includes opening to the outside — in terms of foreign trade and investment — not just opening on the inside, and in some cases external liberalization is quickening compared to recent years. However, if the pace of internal adjustment is substantially faster than external opening over a prolonged period of time, then severe international economic tensions are likely to ensue. Foreign investors, for instance, have $2.35 trillion in operations running in China, much of it in the form of joint ventures they might like to restructure and buy out, just as Beijing and the provinces are proposing to permit changes to SOE ownership structures. It is important that they be allowed to do so and not be asked to sit by and wait for the second round. Similarly, reform means the advent of stepped-up competition policy enforcement, but the due process and evenhanded treatment promised to private Chinese firms in the Decisions are owed to foreign investors as well. Other than designated special cases, there should be no reason why “private” should not include “foreign private” firms today, as reflected in the national treatment principle Beijing embraced for policy going forward.
5. A Real Prospect for Political Adjustment?
Many analysts assume that China’s economic overhaul is simply designed to sustain the Communist Party’s authority. If the Party is to endure, then indeed achieving potential economic growth is necessary — China’s leaders state this unambiguously. But Xi’s economic program entails significant devolution of regulatory authority to lower officials with pro- competitive missions. We see four drivers of political evolution in this. First, as the ongoing anti-corruption campaign makes plain, abuse of political power to use state assets and state regulatory authorities for private gains was endemic in the old model of vested interest economics. Xi has disrupted that on a scale great enough to change politics. Second, reform will require a different — though not necessarily Western — approach to separation of powers and checks and balances: these are in the policy mix, and they too change the political equation. Third, public information disclosure registries are proliferating for government fees, administrative powers, real estate property, financial securities, land title and use rights, environmental impacts and pollution emissions, employment levels, and other domains. While the upper echelons of the Party have no interest in using sunshine as a disinfectant, the political implications of this transparency campaign will be hard to reverse, as the public availability of air pollution data has proven. Finally, reform is bolstering GDP growth and thus building the ranks of the middle class. While the small pool of bourgeois Chinese in the past was apt to be conservative and apolitical, the relationship between per capita wealth and political expectations is strong, even in China. So, ironically, accelerating growth also speeds expectations of individual protection from arbitrary political behavior.
But finally, despite signs of economic liberalism driven by necessity, the Party clearly does not intend for China’s political system to converge with Western norms. President Xi has demonstrably tightened the reins on civil society, embraced opportunities to show China’s teeth abroad, and doused expectations that due process would play a significant part in his administration. These moves might be seen as necessary to suppress resistance to economic reform during this critical early period, but there are no guarantees that the Party will reverse course and reestablish a modicum of civil liberties once adjustment has passed. One is hard pressed to find historical examples of single-party, uncontestable political systems that were able to build market-oriented economic systems. It is reasonable to worry that implementation of the Third Plenum economic reforms could fall short or diverge from expectations, including Beijing’s own expectations.