The implementation of economic reforms from the Third Plenary Session’s (TPS) will rely on the ability of President Xi Jingping and the Chinese Communist Party (CCP) to prevent entrenched interest groups from derailing reforms while maintaining social control under one-party rule. The TPS 60-point ‘Decision on Several Major Questions About Deepening Reform’ agenda will structurally reform China’s economy under 300 measures by allowing market forces to play a decisive role. While much of the talk after the TPS revolved around whether the reforms were deep or specific enough, less attention has been paid to whether President Xi Jingping has the political calculus to deliver. Xi must show that he has the power to coopt the powerful state owned enterprise (SOE) lobby and local government bosses while also implementing judicial reform and maintaining social stability.
When Deng Xiaoping famously opened up the Chinese economy in 1978, Deng fought ideological opponents who had little fortune at risk of subsequent reform. “Defeating them required building a winning coalition within the party, discrediting the communist ideology, and rallying public support, all of which Deng did”[i] The interest groups that Xi faces are much stronger than those faced by Deng Xiaoping or Zhu Rongji. Xi faces opponents with immense wealth at stake, while inheriting a weak central leadership from Hu Jintao. Hu’s reforms were paralyzed due to competing ministerial objectives and interference from security forces from former Central Political and Legislative Committee head Zhou Yongkang.[ii]
The compliance of influential SOEs will be critical to assessing whether the TPS reforms can be delivered. The TPS reforms call for SOEs to face more competition and regulation, while decreasing their reliance on state subsidies. However, the TPS also emphasized the main role of public ownership. Indeed, the Plenum stated that China must “adhere to the principal position of the public ownership system, give play to the dominant role of the public sector economy, and continually strengthen the vitality, control, and influence of the public sector.”[iii] This signals that Xi may not have the strength to assault the SOEs head on. There are over 114,000 SOEs in China with more than 110 large firms. SOEs collectively employ a mere 5% of China’s workforce but, in 2011, contributed 35% of state tax revenue, 27% of industrial output and 20% of fixed asset investment.[iv]
SOEs will likely fight any reform measure. SASAC, the government organization that looks after state owned assets, initiated a media promotion campaign praising the importance of SOEs to the public and the official Chinese news agency, Xinhua, has supported the SOEs’ public campaign.[v] Instead of engaging SOEs head on, Xi will need to implement reforms that require SOEs to adjust to a new economic environment; a stronger yuan, for instance, will force SOEs to become more efficient by competing with foreign rivals. Within the SOE universe, several competing factions exist that may support or block reform. Exporters, importers, defense and real estate firms all have different competitive landscapes that reforms will touch asymmetrically. SOEs will use their relationships (guanxi) to influence representation in the People’s Congress to block reform, absent a powerful bureaucratic machine to push reforms through.[vi]
Local provincial officials and political elites are also expected to resist TPS reforms. Smaller SOEs exposed to competitive pressures from the TPS reforms are overwhelmingly owned by local governments which help localities meet tax revenue, employment and GDP targets. Local governments also rely on land sales for much of their operating budgets, which are threatened by land reform from the TPS. Though Xi has the support of key figures such as Liu Hue, the deputy director of the National Development and Reform Commission, and Zhou Xiaochuan, the central bank governor, he must continue to consolidate his power by exercising the levers of the Politburo Standing Committee and by controlling local personnel appointments. Over the last year, Xi has created new bureaucracies and reshuffled leaders after the 17th Party Congress in order to assert his power.[vii] The TPS created the Central Lending Group (CLG) to grant Xi more power in supervising the reforms. The CLG and the upcoming 12th National People’s Congress in March will be critical in identifying whether Xi has the statecraft to advance the TPS reforms. If Xi is unable to appoint key allies and policymakers in the People’s Congress, the TPS reforms will be difficult to push through in its entirety.
While the TPS offers economic reform, it does little to change the way the country is governed, especially the judicial system which suffers from rampant corruption. Since coming into office, Xi has made combatting corruption a top priority as evidenced by the crackdown on Bo Xilai. However, even with Xi’s anti-corruption campaign in full swing, China still must improve its judicial system to curb local government officials’ ability to block reforms. An independent judiciary will prevent abuse of power and strengthens the rule of law. By reducing local protectionism and influence over verdicts, the reforms will stand a better chance of being successfully implemented.
In addition to undermining powerful interest groups, Xi must ensure that social stability is prioritized while reforms are taking place. Alexis de Tocqueville once famously said that the most unstable time for an authoritarian regime is when reforms are taking place.[viii] High inflation from economic reforms partially led to the unrest in Tiananmen Square in 1989, resulting in the ousting of Zhao Ziyang. After the incident, the Politburo Standing Committee fell under control of conservative leaders which nearly reversed Deng Xiaoping’s reforms. The TPS established a new security council to maintain the Party’s control over the country. The council will be a critical bureaucratic tool for Xi to oversee the implementation of the TPS reforms.
Social unrest may also originate from exogenous market forces. The Federal Reserve’s decision to taper its quantitative easing (QE) program has caused emerging market equity and currency values to depreciate while sovereign and corporate yield spreads have increased.[ix] Indeed, President Xi Jingping and Premier Li Keqiang both acknowledged the “downside risks” within China’s economy and called "for reform to be spread to every area of economic and social development" in the 2013 Central Economic Work Conference.[x] With many analysts expecting China to slow down over the next decade as it attempts to rebalance its economy towards domestic consumption, political uncertainty may ensue. “Legitimacy in [China] often depends on meeting sky-high expectations for economic success, while political checks and balances remain in their infancy”.[xi] Therefore, China faces 2 competing imperatives. One, the TPS reforms are likely to cause economic pain in the form of deregulated energy and financial controls, causing officials to cautiously implement reforms. At the same time, if China implements the reforms too slowly, market forces may pressure existing internal and external economic imbalances that may lead to social instability. In policy terms, China must find the right balance between implementing the reforms too slowly or too fast. In bureaucratic terms, Xi must continue tighten his grip over China’s security apparatus.
During the 1960s, Chen Yun proposed the famous ‘bird-cage’ economic theory; the bird represented the free market while the cage represented the CCP’s plan for the market. While the TPS reforms allow the bird more freedom, the widening of the cage will rely on the statecraft of Xi Jingping to implement judiciary reforms that undercut local governments, combat SOEs and maintain social control. 2014 will be a critical year to gauge whether Xi has the necessary tools to implement the TPS reforms. The 12th People’s Congress held in March will tell the world if Xi has accumulated enough power to appoint his allies while the reform leading units in local provinces will begin to direct TPS reforms. Moving forward, the success of the TPS reforms will rest on whether Xi Jingping has the political capital to navigate through China’s complex bureaucracy while maintaining control to prevent social unrest from disrupting the reform’s progress.
[i] Badkar, Mamta. "Why Reforms In China Today Are Much Harder Than They Were 35 Years Ago." Business Insider. N.p., 10 Nov. 2013. Web. 10 Feb. 2014.
[ii] Kroeber, Arthur. "Xi Jinping's Ambitious Agenda for Economic Reform in China." Brookings Institute. N.p., 17 Nov. 2013. Web. 10 Feb. 2014.
[iii] Salidjanova, Nargiza, and Iacob Koch-Weser. "Third Plenum Economic Reform Proposals: A Scorecard." U.S.-China Economic and Security Review Commission. N.p., 19 Nov. 2013. Web. 7 Feb. 2014.
[iv] Szamosszegi, Andrew, and Cole Kyle. "An Analysis of State‐owned Enterprises and State Capitalism in China ." U.S.-China Economic and Security Review Commission . N.p., 26 Oct. 2011. Web. 8 Feb. 2014.
[v] Kazer, William, and Liyan Qi. "China’s State Sector Strikes Back." The Wall Street Journal. N.p., 6 June 2013. Web. 6 Feb. 2014.
[vii] Chen, Baizhu. "More Reform Needed in China." Forbes. N.p., 20 Dec. 2013. Web. 9 Feb. 2014.
[vii] Keck, Zachary. "Xi vs. the Strongmen: The Battle for Reform in China." The DIplomat. N.p., 12 Nov. 2013. Web. 10 Feb. 2014.
[viii] MacLeod, Niall, Wenjie Lu, and Li Chen. "China H-Share Strategy." Global Securities Research. UBS, 18 Nov. 2013. Web.
[ix] Currie, Jeffrey, Damien Courvalin, Philipp Koenig, and Daniel Quigley. "Inverting the Commodity Cycle in 2014." Goldman Sachs Commodity Research. Goldman Sachs, 6 Dec. 2013. Web. 12 Feb. 2014.
[x] Jia, Chen. "Top Leaders Vow to Steer Steady Path." China Daily. N.p., 14 Dec. 2013. Web. 14 Feb. 2014.
[xi] Van Agtmael, Antoine. “Think Again: The BRICS.” Foreign Policy. 8 Oct. 2012. Tue. 11 Feb. 2014.
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