Given China’s failure to follow through on the marketization policies that it announced seven years ago, it is reasonable to be suspicious of the government’s latest reform push. Much will depend on what Chinese leaders fear more: disruptive change, or a creeping malaise of their own making.
BRISBANE/NEW YORK – Back in 2013, the Chinese government laid out a policy agenda that promised real reforms to an economy laden with debt and distorted by the influence of the country’s large state-owned enterprise (SOE) sector. But instead of seeing that agenda through, China chose to dodge the risks entailed by marketization, and has since reverted to what it knows best: state control over the economy and the semblance of stability that comes with it.
Since 2017, The China Dashboard, a joint project of the Asia Society Policy Institute and the Rhodium Group, has been tracking China’s economic policies. Having analyzed objective data across ten critical spheres of the country’s economy, we find that China’s reforms have been tepid to nonexistent over the past three years.
The Chinese government’s failure to deliver on its promise of a more open economy has undermined its credibility, and fueled the growing global backlash that it is experiencing today. Even before COVID-19 arrived, the lack of reform had sapped China’s economic performance and made it persistently over-reliant on debt, leaving its domestic private sector increasingly disheartened.
Now, China is at a crossroads. The COVID-19 crisis sent its economy plunging by a reported 6.8% in the first three months of this year – its first (acknowledged) quarterly contraction on record. For the first time in more than 25 years, China is not publishing a growth target.
Moreover, because debt is now an even bigger problem for China than it was in 2013, the government does not have the option of pursuing stimulus on the massive scale that it did during and after the 2008 global financial crisis. Piling on more debt would only aggravate the current risks to the economy, which include a property-market bubble and a swollen banking sector that, after a quadrupling of loan portfolios over the past decade, is sitting on mountains of shaky debt.
Faced with these limitations, China’s government has put reform back on the agenda. On April 9, it issued a plan to improve the “market-based allocation of factors of production.” And it followed that up on May 18 with a broad-spectrum manifesto that elevates “employment first” policies to the level of traditional fiscal and monetary policy. The new reform agenda acknowledges the importance of competition, and proposes better protections for private firms, intellectual property, and business secrets. The government has also made pronouncements about strengthening market pricing mechanisms, formalizing property rights, and restricting administrative interference in market activities.
First published by Project Syndicate on 22 June 2020.