WHEN it comes to economic reform, China’s leaders no longer believe that time is on their side. With a new sense of urgency, President Xi Jinping and his inner circle are trying one of the most ambitious economic-and social-policy reform plans in the history of the world.
But in any authoritarian country change creates risk. Consider the scale of the proposed plans. For China to reach the next stage of its development, a much larger share of its products — now destined for Europe, America and Japan — must be sold to consumers inside the country. This shift will require a big increase in local purchasing power and, therefore, an enormous transfer of wealth from large domestic companies to Chinese households.
In addition, China’s leaders appear to be on the verge of approving 12 new regional free-trade zones, which will drive competition and efficiency on a new scale in many economic sectors. Further, they recognise the need for more liberalisation of the financial system, a move that will require tolerance for outright defaults on bad loans, and the anxiety and anger that comes with them.
Here, as in other areas of the reform plan, change is dangerous; but Xi has come to believe that pressing ahead is important if China is to take the next crucial steps toward building a middle-class, digital-age economy. Moreover, the reforms are crucial for the Chinese Communist Party’s (CCP’s) long-term hold on power.
Further, the leadership will withhold support and money from state-owned enterprises that underperform to try to increase their efficiency. This will potentially put large numbers of workers out on the streets.
The government’s steps to tackle China’s polluted air and water, a problem that officials can no longer ignore or explain away, will also weigh on short-term growth.
In the past, the CCP has responded to slowing growth with a surge in state spending meant to create jobs and keep the system humming. This time, the authorities are allowing it to slow down at a measured pace, partly because that is a precondition for the kind of growth that does not depend on the state. In addition, the slowdown helps to sustain demand for reform.
To reach these goals, Xi is centralising power, launching a charm offensive, and cracking down on official corruption and extravagance. He is also using anticorruption and re-education efforts to intimidate (real and potential) reform opponents in the CCP.
Finally, the leadership has created new party institutions, answerable directly to top officials, to ensure that all changes are implemented as planned.
Nonetheless, while the reforms are crucial for China’s future, they are certain to produce a backlash. Some of the losers have the means to defend their interests: purged officials, companies, industries that face new regulatory scrutiny and firms forced out of business, have well-placed friends in China’s enormous bureaucracy.
Moreover, free-trade zones bring greater competition, including from foreign firms, which raises risks of increased unemployment and capital flight.
China’s leaders have long feared publicly visible divisions within the elite, given the risk that infighting could expose sensitive secrets. Xi’s proposed reforms are just the sort of change that might have this effect. That risk is much greater today than it was ten years ago. With hundreds of millions of Chinese now online, and other 21st-century communication tools available to an unprecedented number of citizens, ideas and information cross China’s internal and external borders with unprecedented ease and speed.
In response, the CCP continues to develop new technologies to stifle or redirect dissent. But the battle for control of China’s public discourse is not one that the leaders can win every day for the foreseeable future and they know it.
There are broader questions as well. The authorities appear confident that they can manage the risks a gradually slowing economy generates. What if they are wrong? What if bank defaults pile up, creating a major credit crisis? What if unrest grows to levels not seen in many years? These scenarios are highly unlikely this year. But early signals suggest that if trouble develops, the party will choose a crackdown over concessions, and there is no guarantee that party unity will hold in such a scenario.
For outsiders, the reform process poses risks that extend well beyond the global economic fallout of a sharp Chinese slowdown. The country’s neighbours, particularly Japan, have the most to fear.
If reforms become broadly unpopular or expose dangerous divisions within the leadership, the government will have good reason to divert public attention from controversies at home by picking fights abroad. Frictions between China and the Philippines, Vietnam, and others in the South China Sea persist, but confrontations with Japan, including over territorial disputes in the East China Sea, are more likely to cause the most damage.
No one in power in either country wants a war, but diplomatic dust-ups between China and Japan, the world’s second-and third-largest economies, respectively, have already taken a toll on their commercial relations. In particular, Japanese companies operating in China have sustained significant reputational and financial damage during recent episodes of trouble between the two governments.
Conflict with the US is unlikely for the moment. At such a delicate time internally, China would gain nothing from antagonising the US. But trouble with US allies, particularly Japan, could draw the US into a fight that it would strongly prefer to avoid.
In short, China is on the brink of large, necessary, and dangerous transformations that promise to change the country for the better – or make everything, including regional stability, much worse. The entire world has a large stake in what happens next.
• Bremmer is president of Eurasia Group and the author of Every Nation for Itself: Winners and Losers in a G-Zero World. Gordon, a former director of policy planning in the US state department, is chairman and head of research at Eurasia Group
© Project Syndicate, 2014
Chinese President Xi Jinping. Picture: REUTERS
WHEN it comes to economic reform, China’s leaders no longer believe that time is on their side. With a new sense of urgency, President Xi Jinping and his inner circle are trying one of the most ambitious economic-and social-policy reform plans in the history of the world.
But in any authoritarian country change creates risk. Consider the scale of the proposed plans. For China to reach the next stage of its development, a much larger share of its products — now destined for Europe, America and Japan — must be sold to consumers inside the country. This shift will require a big increase in local purchasing power and, therefore, an enormous transfer of wealth from large domestic companies to Chinese households.
In addition, China’s leaders appear to be on the verge of approving 12 new regional free-trade zones, which will drive competition and efficiency on a new scale in many economic sectors. Further, they recognise the need for more liberalisation of the financial system, a move that will require tolerance for outright defaults on bad loans, and the anxiety and anger that comes with them.
Here, as in other areas of the reform plan, change is dangerous; but Xi has come to believe that pressing ahead is important if China is to take the next crucial steps toward building a middle-class, digital-age economy. Moreover, the reforms are crucial for the Chinese Communist Party’s (CCP’s) long-term hold on power.
Further, the leadership will withhold support and money from state-owned enterprises that underperform to try to increase their efficiency. This will potentially put large numbers of workers out on the streets.
The government’s steps to tackle China’s polluted air and water, a problem that officials can no longer ignore or explain away, will also weigh on short-term growth.
In the past, the CCP has responded to slowing growth with a surge in state spending meant to create jobs and keep the system humming. This time, the authorities are allowing it to slow down at a measured pace, partly because that is a precondition for the kind of growth that does not depend on the state. In addition, the slowdown helps to sustain demand for reform.
To reach these goals, Xi is centralising power, launching a charm offensive, and cracking down on official corruption and extravagance. He is also using anticorruption and re-education efforts to intimidate (real and potential) reform opponents in the CCP.
Finally, the leadership has created new party institutions, answerable directly to top officials, to ensure that all changes are implemented as planned.
Nonetheless, while the reforms are crucial for China’s future, they are certain to produce a backlash. Some of the losers have the means to defend their interests: purged officials, companies, industries that face new regulatory scrutiny and firms forced out of business, have well-placed friends in China’s enormous bureaucracy.
Moreover, free-trade zones bring greater competition, including from foreign firms, which raises risks of increased unemployment and capital flight.
China’s leaders have long feared publicly visible divisions within the elite, given the risk that infighting could expose sensitive secrets. Xi’s proposed reforms are just the sort of change that might have this effect. That risk is much greater today than it was ten years ago. With hundreds of millions of Chinese now online, and other 21st-century communication tools available to an unprecedented number of citizens, ideas and information cross China’s internal and external borders with unprecedented ease and speed.
In response, the CCP continues to develop new technologies to stifle or redirect dissent. But the battle for control of China’s public discourse is not one that the leaders can win every day for the foreseeable future and they know it.
There are broader questions as well. The authorities appear confident that they can manage the risks a gradually slowing economy generates. What if they are wrong? What if bank defaults pile up, creating a major credit crisis? What if unrest grows to levels not seen in many years? These scenarios are highly unlikely this year. But early signals suggest that if trouble develops, the party will choose a crackdown over concessions, and there is no guarantee that party unity will hold in such a scenario.
For outsiders, the reform process poses risks that extend well beyond the global economic fallout of a sharp Chinese slowdown. The country’s neighbours, particularly Japan, have the most to fear.
If reforms become broadly unpopular or expose dangerous divisions within the leadership, the government will have good reason to divert public attention from controversies at home by picking fights abroad. Frictions between China and the Philippines, Vietnam, and others in the South China Sea persist, but confrontations with Japan, including over territorial disputes in the East China Sea, are more likely to cause the most damage.
No one in power in either country wants a war, but diplomatic dust-ups between China and Japan, the world’s second-and third-largest economies, respectively, have already taken a toll on their commercial relations. In particular, Japanese companies operating in China have sustained significant reputational and financial damage during recent episodes of trouble between the two governments.
Conflict with the US is unlikely for the moment. At such a delicate time internally, China would gain nothing from antagonising the US. But trouble with US allies, particularly Japan, could draw the US into a fight that it would strongly prefer to avoid.
In short, China is on the brink of large, necessary, and dangerous transformations that promise to change the country for the better – or make everything, including regional stability, much worse. The entire world has a large stake in what happens next.
• Bremmer is president of Eurasia Group and the author of Every Nation for Itself: Winners and Losers in a G-Zero World. Gordon, a former director of policy planning in the US state department, is chairman and head of research at Eurasia Group
© Project Syndicate, 2014
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