Since rising to power in early 2013, China’s leaders have pushed ahead with dozens of planned reforms. The changes range from letting families have a second child to cracking down on bribe-taking to reducing state controls over foreign exchange and interest rates. Altogether they constitute the biggest policy shifts since at least the 1990s. How fast the changes will come is another question. China’s reform goals were left vague in 2013, allowing plenty of leeway for delays and results that fall short of expectations. Two overarching objectives have remained clear: ensuring the party’s right to govern, and transitioning from an economy reliant on exports and infrastructure investment to one fueled by domestic consumption and the guiding hand of the market. China’s engineering of an epic stock market boom and bust in 2015 showed its leaders frantically shifting course. The benchmark Shanghai stock index more than doubled in a year before its peak in June, then tumbled by a third in three weeks. The government intervened to halt the slide by barring major shareholders from selling stakes and suspending new offerings. The fiddling tarnished the idea that China is ready to relax the guiding hand of the state.
China completed its once-a-decade transfer of power to a new generation of leaders at the 2013 National People’s Congress after what many saw as a decade of inaction under President Hu Jintao and Premier Wen Jiabao. Expectations were high that President Xi Jinping and Premier Li Keqiang would follow through with reforms. Since then, however, the country has seen little concrete progress toward promises to control local-government debt, strengthen environmental protection and reform state-owned enterprises. One reason may be that China’s economic growth was 7.4 percent in 2014, the lowest since 1990, and slowed to 7 percent in the first and second quarters of 2015. The first default by a state-owned company in April 2015 signaled some willingness to let market forces take their course. Done right, China’s leaders may be putting the economy on the path to surpassing the U.S. as the world’s largest and making its citizens wealthier. On the other hand, the consequences for the world could be dire if China doesn’t manage to eliminate overcapacity, revive the property market and focus more on the quality of economic growth than on hitting prescribed annual targets.
There are many factions inside China’s one-party state, including vested interests with a stake in preserving the system. Some want reforms like exchange-rate liberalization and a breakup of state monopolies. Others prefer more state control. Big state-owned companies and the families of communist leaders want to maintain benefits they have built up over the years. Local officials don’t always obey the central government because they have their own incentives to do what they think is best for their careers and their localities. Propping up the stock market added to suspicions that China is still reluctant to turn its back on a Soviet-style controlled economy. There’s danger for the party in doing too much or too little, in alienating domestic allies on the one hand or provoking capital flight if the economy or markets founder on the other. The added complication now is that the Internet, while controlled, has given voice to hundreds of millions of people, many of whom are clamoring for relief from pollution, corruption, injustice and inequality.
The Reference Shelf
- The World Bank and Development Research Center’s 2012 report China 2030.
- Bloomberg News article on Xi Jinping’s progress on economic reforms.
- The Hoover Institution’s China Leadership Monitor.
- Official government website for the Communist Party in English.
- International Monetary Fund China page and report on its 2013 consultation with China.
- McKinsey reports: What’s Next for China.
- A series of Bloomberg QuickTakes explore China’s challenges, including its struggles with air pollution, the debt bomb, currency liberalization and managed markets.