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China: a model, risks and attractiveness that need to be put into perspective

China: a model, risks and attractiveness that need to be put into perspective

Davos in 2017 and 2018, the Boao Forum (the Asian equivalent of Davos) last spring, the China International Import Expo in Shanghai in November, the celebration of the 40th anniversary of Deng Xiaoping's major economic reforms in mid-December… all major public events at which China's leaders have willingly promoted free trade and openness, the market, the private sector and fair competition, including for foreign companies, which will receive equitable treatment from Beijing. It's tempting to believe this, to tell oneself that China is putting its money where its mouth is and transitioning to a “western” economic model – not that such a model is the ideal, but it is a known quantity for many foreign investors, offering a degree of clarity and comprehensibility.

 
And yet, following recent political and institutional changes in Beijing – thinking in particular of the removal of the two-term limit on presidential office and the constitutional clause affirming the pre-eminent role of the Communist Party of China (CPC) in leading the country, both announced in early 2018 – one might wonder what kind of economic reforms we should expect in Xi's China.

The fact is that these changes appear not to be fully aligned with the key principles underlying the operation of “market” economies. They are, in all likelihood, more in keeping with China's current economic model – an administered economy in the service of State capitalism; the concentration of power in Xi's hands and the CPC's reinforced role could even call for – if not outright impose – further strengthening of this model. How could it be otherwise? Control over economic levers and the economic cycle, as well as over information and judicial power, is consubstantial with one-party rule or, in other words, critical to the survival of the Party and thus of its “core leader” – namely Mr Xi .

Nor let us forget the Chinese president's comments in his inaugural speech at the CPC's 19th congress in October 2017 – a congress that marked the end of his first five-year term of office and the start of his second term. Xi Jinping said loudly and clearly that “The Party exercises overall leadership over all areas of endeavour”, before pointing out that “A great cause calls for leadership of a strong party”, alluding to plans for China's future also presented during his speech – plans to make China a socialist country transformed by innovation with the foundations of modernity in place by 2035, becoming a modern, globally influential socialist power by 2050. He also heavily stressed the need to reinforce public corporations, making them stronger, bigger and better so that they become national and international champions. These two key parameters were referred to once again just a few days ago, in December, on the 40th anniversary of Chinese reform and the opening up of the country. In any event, they are hard to reconcile with the key parameters of a market economy.

 

 Yes, the recent political changes are beginning to mark out China's future path: towards an economic model whose shape is as yet unclear, but which is very unlikely to look like “western” models and will, in principle, remain closer to an administered economy in the service of State capitalism – a model under which government and party intervention, if necessary to the detriment of private and foreign interests, are a given, market mechanisms are not the rule, resource allocation is still not optimal and there are imbalances between supply and demand, overcapacity and bubbles. This is also a model where the predictable narrowing of scope for discussion and debate within the country's governing bodies raises fears that the risk of errors in managing the economy and society will increase; all the more so when leading a quarter of the world's population which, moreover, is exposed to economic realities that vary widely from one region or sector to another.

This path may offer some economic stability, but it offers little visibility as to its long-term practicability. In any event, it is unlikely to offer much visibility to foreign companies seeking a reasonably transparent business environment and a secure legal framework, particularly in the current context of duelling powers, where national interests are likely to prevail over all other interests, be they foreign or private.

This path will not be free of political pitfalls. The control exerted by Xi and the CPC (in his service) over public life, the Chinese economy and civil society is liable to be accompanied by a search for legitimacy which those in power could find in economic performance (growth and employment) rather than in fundamental reform or, failing that, “outside” the country. It is also likely to fuel frustration within the Party and prepare the ground for destabilising, paralysing infighting when it comes to the issue of handing over power. Lastly, this path may be beset with international tensions caused by incompatibilities with today's dominant economic and political models. This can already be seen with the United States, which accuse Beijing of unfair trading practices, intellectual property theft and forced technology transfers, and whose expectations China's leaders will find it hard to live up to. In short, there is every reason to remain cautious as to China's future trajectory and the opportunities it appears to offer to foreign companies and investors.

 

 For more information, see Emerging Prospects, 26 November 2018, “China – Beyond financial risk”

Sylvain Laclias sylvain.laclias@credit-agricole-sa.fr

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