In 2013, the Chinese government introduced a political program that promised the implementation of real economic reforms, overloaded with debts and distorted under the influence of a large sector of state enterprises in the country. But China did not begin to implement this program, but chose to dodge the risks arising from the transition to market relations (marketization). The country has returned to the methods that it knows best: state control over the economy and the semblance of stability it creates.
Since 2017, the monitoring of economic policy in China has been carried out as part of a joint project of the Asian Society Policy Institute and the Rhodium Group consulting firm, The China Dashboard. Analyzing objective data in ten important areas of the country’s economy, we found that over the past three years, Chinese reforms have been either sluggish or nonexistent.
The failure of the Chinese government to fulfill its promise and make the economy more open undermines its credibility. In addition, it causes growing global discontent, which China today feels. Even before the Covid-19 pandemic, the lack of reform weakened China’s economic performance, the country became too dependent on continuous debt growth, and its private sector was losing optimism.
Now China is at the crossroads. Due to the Covid-19 crisis, the country’s GDP fell by 6.8% in the first three months of the year – this is the first (officially recognized) quarterly decline in GDP in Chinese recent history. For the first time in over 25 years, China did not publish target figures for economic growth.
In addition, today debt has become an even bigger problem for China than in 2013, so the government cannot resort to large-scale stimulation of the economy, as was done during and after the global financial crisis of 2008. Debt build-up will only exacerbate existing risks in the economy, including a bubble in the real estate market and a bloated banking sector sitting on a mountain of doubtful debts (over the past decade, its loan portfolio has quadrupled).
Amid all these difficulties, the Chinese government has returned the topic of reform to the agenda. On April 9, it published a plan to improve the “market distribution of production factors.” And then, on May 18, it issued a broad manifesto in which decisions under the slogan “Employment First” are announced as part of the traditional budget and monetary policy. This new reform program recognizes the importance of competition and proposes to strengthen the protection of private firms, intellectual property rights and business secrets. The government also spoke out in favor of strengthening market pricing mechanisms, formalizing property rights and limiting administrative interference in market activity.
All this is very good. But can the world believe China this time? The government has not yet explained why its 2013 reform plan was not implemented. In addition, new promises of reforms were given without special details (and the devil is hiding in them, as you know).
Meanwhile, foreign companies were initially shocked by China’s initial mistakes in containing the Covid-19, and now they are increasingly worried about the growing Sino-American tension, so they are trying to diversify their investments by sending them to other countries. Meanwhile, private Chinese companies began to hold on to new capital expenditures. If all these business shifts continue, then China will be limited in its ability to recover from the crisis.
In addition, China’s economic problems are compounded by its recent decision to impose a new security law on Hong Kong. Apparently, the government is ready to put up with high economic costs and a surge of foreign indignation, trying to achieve greater subjugation of Hong Kong. But if Hong Kong slides back to violence, and China responds with extreme repressions in accordance with the new law, then foreign companies will have even less incentive to stay in the country, which will further cloud the prospects for the Chinese economy.
The coming months will be critical. If China wants to prove that its reform intentions are serious this time, it could privatize or crush some of the state-owned enterprises. He could abolish the continuing requirements for joint ventures. It could ease restrictions on the size of foreign shares in companies, opening up a wider range of industries to foreign direct investment. The European Union is already putting pressure on China, seeking to implement some of these changes in the ongoing negotiations on a comprehensive bilateral investment agreement. In the second half of this year, we will find out if China is ready to take the risks of genuine reform.
However, even if China does indeed make a liberal turn in the economy, it is hard to imagine how it will be able to cope with the “tired of promises” that the country’s international economic partners already feel. Officials in many market economies will insist that China more actively adapt to international market norms, rather than expecting other countries to adapt to its economic system under the leadership of the party. Significant economic reforms within China will become the key to leveling the global playing field and help prevent a massive exodus of foreign players.
Covid-19 is China’s most severe economic test in decades. But the country’s leadership has a ray of hope: this crisis gives them the opportunity to reorient the economy towards sustainable long-term growth through market reforms. Will President Xi Jinping understand these realities, and will he seize this moment? Or will he even more actively use the failed approaches observed after 2013, when many of the promised reforms were decided to be sacrificed for fear of instability and the changes associated with these reforms?