Outlook for Xi's reform implementation

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Wencan Kuang's picture


In China, the Third Plenary Meeting of its top leaders is often regarded as a landmark event. Although such a meeting only produces vague guidelines rather than concrete policies, it does have the potential to reset the country’s long-term growth trajectory, and from time to time, lead to fundamental economic reforms. For example, the 1978 third plenary meeting, during which Deng Xiaoping famously rejected Mao’s “Two Whatevers” principle and announced his open door policy, has allowed China to enter into a phase of rapid growth, lifting the living standards of hundreds of millions of people.  

In recent years, as China approaches the Lewis turning point, fear of an economic slowdown has pervaded the globe. Many scholars have been calling for a “reform 2.0”1 so as to ensure the sustainability of China’s long-term growth.

Amidst high expectation for reform, the Third Plenary Session of the Xi Jinping-led central committee took place in Beijing last November. Honoring his promises for unprecedented economic and social reforms2, Xi announced a 60-point reform package, setting forth his vision of the rejuvenation of the Chinese nation.

Impressive as Xi’s reform program looks on paper, many economists are pessimistic about its actual implementation. As the famous economists Roubini3 put it in the Davos World Economic Forum, “Talk is cheap ... we have to see action and so far we have not seen a lot of action." Will Xi’s reform program be actually implemented? This paper attempts to answer the question by analyzing factors that are likely to drive or stall Xi’s reform.

Aggregated social and economic problems necessitate an urgent reform

Perhaps the most powerful impetus for Xi’s economic reform stems from the fact that china’s economic and social condition have already deteriorated to such an extent that procrastination is no longer an option.

In the past few years, the Communist Party has witnessed an increasing number of “mass incidents” (large-scale protests), and on many occasions, even the uprising of entire villages, such as the case of Wukan village4.  Many scholars in China have attributed this rising social tension to an economic phenomenon called “guojinmintui”, which refers to the economic trend where the state enterprises advance while private sector retreats and where the fruits of economic growth were mainly reaped by the state while the private sectors and individual citizens were cut out of the benefits.

This phenomenon is especially visible during the financial crisis.

To avoid an economic hard landing, the then Wen Jiabao-led State Council announced a 4 trillion stimulus package in the fourth quarter of 2008, and ordered the state banks to start making loans to businesses so as to save solvent firms from bankruptcies and sustain the country’s GDP growth. However, while all companies are created equal, some of them are more equal than others and many deserving private companies were not granted any of those stimulus. For instance, while the state-owned China Eastern Airlines was bailed out by a 7 billion5 Yuan capital injection form the State-owned Assets Supervision and Administration Commission (SASAC), the more solvent and privately owned East Star Airlines was denied access to state bank loans and was forced into bankruptcy liquidation.

As a result of “guojinmintui”, the wealth gap between the public and private sectors continues to diverge and rampant corruption scandals, such as the Bo Xilai case, continues to disgrace the leadership, forcing the communist party into its worst legitimacy crisis since the 1989 Tiananmen Square incident.

Now to reverse that trend, the Xi-Li administration has to enact the reform policies that they recently announced. As China’s GDP growth starts to slow, the last window of opportunity to reform is closing, and after a lost decade of “no reform”6 the people are getting increasingly impatient, the Xi-Li administration, unlike their predecessors, can no longer afford to muddle through; their reform has to be properly implemented and the Chinese leadership knows that.

Vested interest and Xi‘s reform

While the legitimacy crisis of party can certainly motivate China’s top leaders to enact potentially painful reforms so as to avoid the possible demise of their authoritarian regime, the motivation that the crisis provides has its limits. This is especially so if we take into consideration the likely opposition from the vested interest groups7.

China’s decades of double-digit growth has improved the living standards of the public, but it has also created large groups of constituents who have benefitted immensely from the current economic system. These groups, including the aforementioned SOEs, provincial governments as well as real estate developers, will surely resists all policy changes that might threaten to undercut their perks and privileges. In fact, the power of these vested interest are so deeply entrenched in the current economic system that scholars in China have attributed the failure of many recent pilot reform programs8 on them.

It is against this backdrop that many China watchers have argued that a complete implementation of Xi’s reform program is unrealistic. Many leaders of these interest groups hold important posts in the party congress, as they push back on economic reform, the Xi-Li administration might have to make compromises and water down their reform plans so as to maintain the internal unity and stability of the party.

Centralized power and leadership unity can comprehensively deepen reform

While resistance from vested interests are real, and reforms are certainly made more difficult because of that, it is not impossible for the leadership to overcome such resistance.

During Deng’s time, China had a fully central-planned economy. The interest of SOEs and central-planning agencies, which were subject to Deng’s reform back then, were no less deeply entrenched as compared to that of the vested interest today, but Deng Xiaoping, nevertheless managed let “some to grow rich first” and implemented his painful reform plans by “playing the provinces against the center.”9 If we benchmark Deng’s reform to that of Xi, it is reasonable to say that it’s not impossible for today’s leadership to overcome political opposition, as long as Xi has the same kind of political power and support that Deng had back in China’s first reform era.

Of course, time has changed, today’s communist party has to operate based on collective leadership, and there’s no single outsized leader in China today who can steer the direction of the nation however he wants. But then again, Xi Jinping is by far the most powerful and transformative leader since Deng10. The possibility of him engendering a genuine and meaningful economic reform should not be understated. This is especially the case considering the following two points.

Firstly, there’s clear sense of urgency and a collective understanding of the need to reform in the party. In the months leading up the third plenum, Li Keqiang, the head of state council, pledged "Wrist-Cutting" resolution11 to reform the economy, while other members of the PSC have also publicly endorsed the idea of economic rebalancing, showing strong support for Xi’s reform agenda and great signs of unity in the party leadership. Beyond that, provincial governments, envying the light regulation in the Shanghai FTZ and the potential reform dividends, have also expressed great enthusiasm in setting up free trade zones in their own provinces.12 All these support would help improve the chance of actual implementation of Xi’s policies.

Secondly, Xi has amassed more power in his first year than his predecessor did in a decade. Coming from privileged family, Xi has more political capital than his predecessor to reform the economy. Within just one year, Xi’s anti-corruption campaign has already investigated and arrested so many “tigers” (high-level party bureaucrats) that were previously thought to be untouchable, including the former Minster of Railways, Liu Zhijun13, and the “security czar”, Zhou Yongkang14. Not only that, Xi’s political power was further strengthened after he was appointed the head of both the “central leading group for comprehensive reforms”15 and the National Security Council16 (NSC). As an APCO report17 argued, with the help of NSA, oppositions to Xi’s reform can be easily eliminated; all xi has to do is to place the issue “under the rubric of security”, and the vested interest will “get out of the way”. With such power centralization, it’s likely that Xi will be able to replicate Deng’s success and fundamentally reform China’s economy.

Event risk and Conclusion

No reform is immune to event risks, especially given that China’s loosely regulated shadow banking system has just dodged a bullet weeks ago18. Should the widely anticipated hard landing ever occur, it’s still a question whether the Xi-Li Administration will continue to deleverage the economy and rein in China’s local debt, given that they have kept emphasizing the importance of sustaining China’s GDP growth rate. Will Xi Jinping eventually revert to the government’s old habit of delaying reform and ramping up infrastructure investment to support growth? Only time can tell. But for now, based on the limited information we have, such scenario isn’t likely to happen and given the aforementioned arguments it’s reasonable to be optimistic about the actual implementation of Xi’s recently announced reform plans. 


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