The aim of Xi’s reforms is to preserve party control; Economic policies will not be matched by political openness, writes Robert Zoellick

June 12, 2014 11:55 am

The aim of Xi’s reforms is to preserve party control

By Robert Zoellick

Economic policies will not be matched by political openness, writes Robert Zoellick

About a year since he took office, Xi Jinping’s direction as president of China is increasingly clear. His priority is the preservation of the Communist party. Cadres now watch a documentary about the end of the Soviet Union; Mikhail Gorbachev is not the hero.

The self-criticism and anti-corruption campaigns Mr Xi has launched are supposed to cleanse the party – but also strengthen his levers of control. He has consolidated power more rapidly than expected: he dominates the standing committee of the politburo and chairs the Central Military Commission, a new National Security Committee and High Level Leading Party groups guiding economic reform.

With the preservation of the party as priority, his changes should be seen as a means to that end. Economic reforms will not be matched by political openness. On the contrary, given the risks of change, the belief is that politics must be kept under control.

The reforms will focus on economic governance and modernisation. These terms may seem ambiguous to westerners. Mr Xi, however, aims to rank as one of modern China’s three great leaders, along with Mao Zedong and Deng Xiaoping. The president’s historic role is to build the modern economic structures of a China restored to its place in the world.

One reformist leader says: “In the past, we could break the old and then establish the new. Now the Chinese economy is too complex; we must first build the institutions of economic governance in which the market will operate.” I suspect this will involve tax reforms; a reallocation of responsibilities for revenues and expenditures between Beijing and the provinces; liberalisation of the hukou household registration system that links people to land and location; establishing rights and markets in rural land; urbanisation; new social safety nets; and expanding financial markets, with lessons about regulation learnt from mistakes in the west.

Another official puts it this way: “The third party plenum drew the blueprint; now we have seven to 10 years to encourage people to build.”

What specific steps might the west expect? One official describes areas from which the government would withdraw, such as the granting of licences and permits, which fuel corruption. Expect prices, especially for commodities, to be set increasingly by markets. There will be greater competition, not least in the service sector. Private companies, which enjoy much higher returns than state-owned enterprises, will receive fairer opportunities.

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Most important, the party and government have to clean up the poisonous pollution. This is a matter not only of health and economics, but fundamental legitimacy.

The government also seems committed to modernising the financial sector, even moving toward the open movement of capital. The reformers have seen other developing economies founder when vested interests are not challenged by markets to shift capital to more productive uses.

Mr Xi and his colleagues know they face risks. China’s stimulus, a huge expansion of credit and construction, left a costly legacy: rising bad debts; empty buildings, especially in midsized cities; and a shadow banking system threatened by bankruptcies. These dangers lead many western commentators to expect further stimulus and bailouts. I suggest they listen closely to the statements of reformers such as Lou Jiwei, finance minister, and Zhou Xiaochuan, central bank governor, who are pressing for structural change. They want to avoid compounding old problems with fresh spending and costly subsidies. Keep an eye out for innovative fixes, such as encouraging provinces and municipalities to sell assets, such as local enterprises, to pay debts.

China’s self-perception, that it has suffered a century of humiliation, demands redress

Nevertheless, China has powerful special interests, so if growth slows too much, we will see compromises. The urbanising country still needs considerable investment and housing for young families, so the government will seek to satisfy current demand by investing in future need. After all, the priority of party survival will require a careful calibration of growth and disruption to create the modern economy that could be Mr Xi’s legacy.

China’s leaders face one other big risk. Given the scope of internal transformation, one might expect its leaders to continue Deng’s strategy of seeking a benign external environment. But China’s self-perception, that it has suffered a century of humiliation, demands redress. Today’s leaders want recognition of the country’s rise – and respect. National pride contributes to the party’s legitimacy, too. When combined with the drive to secure resources and assert maritime frontiers, the nationalist mix could prove combustible.

China’s neighbours, the US and others will need to further integrate the country into the global system, balance its influence and hedge uncertainty. To do so, they need to know how these new Chinese leaders view their historic mission.

The writer is a former World Bank president, US trade representative and deputy secretary of state

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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