Xi Jinping's political economic transformation and its international implications: a preliminary assessment.

• Author: Dittmer, Lowell
• Position: FOCUS - Essay

A Brief History of Recent Political Economic Developments

"Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past," Karl Marx wrote in 1852. "The tradition of all dead generations weighs like a nightmare on the brains of the living." Although leaders of the hierarchically organized Chinese Communist Party (CCP), and Xi Jinping above all, who came into power in uniquely favorable circumstances and has proceeded to strengthen his position since, would seem to be in a much better position to cast off this "nightmare," the truth of Marx's aphorism applies no less here. Thus to understand where Xi Jinping is going we first need to see where he is coming from. Despite the Tiananmen "incident," the Party-State that Xi ascended was far more firmly institutionalized than the shambles Deng Xiaoping inherited from the Cultural Revolution. His smooth ascension was relatively unmarred by factional strife and the apparatus was united in defense of the solid achievements of the reform era, symbolized in 2010 by surpassing Japan's GDP to become second largest economy in the world. Though some were disappointed in the lapse of reform under Hu Jintao and Wen Jiabao, the decade had also posted the nation's most rapid sustained GDP growth since the early Great Leap Forward, and China's survival of the Global Financial Crisis that tipped most developed economies into prolonged recession without a single year of negative growth convinced many that the PRC was on the right track. (1) The popular and elite expectations that greeted Xi's rise were hence mixed, as were the political resources he had on hand to fulfil his unexpectedly vast ambitions.

In the aftermath of Tiananmen China found itself surrounded by Western nations triumphantly jubilant about the disintegration of the Soviet bloc and looking forward to the inevitable collapse of the PRC with unconcealed Schadenfreude. Economic GDP growth plummeted to 4 percent in 1989 and 1990, exacerbated by Western economic sanctions. (2) In 1991-1992, many of the leading reformers having been purged, a reverse current arose within the leadership arguing that reform was a dangerous ideological deviation and demanding a return to socialist orthodoxy. (3) But Deng Xiaoping in his famous Southern Voyage [nanxun] curtailed the discussion of "isms," arguing that the country's troubles (and those of the former Soviet Union) had been caused by too little reform rather than too much. He pushed many of the conservative elders who had supported his crackdown into retirement and instigated the 14th Party Congress to endorse a "socialist market economy" as the goal of reform. The Chinese people were encouraged to "dive into the sea" [xia hai] of economic transformation and avoid further political experiments. "Opening to the outside world" was pushed hard to overcome Western sanctions as China expanded SEZ rules to the whole of China and liberalized its investment regime to facilitate more FDI. Foreign policy priorities shifted to developing countries and particularly to China's Asian neighbors to circumvent Western sanctions. Zhu Rongji was promoted to vice premier, then premier to lead the reform effort. The economy responded with rapid growth and double-digit inflation, brought under control by tight money and a slowdown induced by the Asian Financial Crisis by the end of the decade.

The 1990s under Jiang Zemin and Zhu Rongji can be generally characterized as political/administrative centralization (from "one down" to "two down" for central appointments, return to CCP nomenklatura recruitment) and economic liberalization, the latter accelerating toward the end of the decade in preparation for China's bid for WTO membership. Jiang introduced "three represents" to permit private entrepreneurs and other useful "new class" elites to enter the Party. China's foreign policy was designed essentially to protect and promote the economy following Deng's 24-character expression (tao guang yang hui, etc.). Financial coordination was centralized under four big central banks in 1993, the currency was devalued and a new central tax regime introduced in 1994 with its own administrative hierarchy, raising central revenue substantially. (4) Many of the township and village enterprises that had mushroomed in the 1980s to take advantage of rural reforms went into bankruptcy in 1995-1996, sparking a massive drive to privatization, complemented by privatization of the hitherto state-owned urban housing sector. Albeit spared the financial fall that afflicted Thailand, Indonesia and South Korea, China was severely affected by a collapse of export markets in the Asian Financial Crisis and adopted expansionary fiscal and monetary policies to maintain an 8 percent growth rate, increasing the rate of fixed asset investment over consumption. The state-owned enterprise (SOE) sector had consistently underperformed, accumulating an unsustainable number of nonperforming loans, and Zhu Rongji undertook a major reform that involved setting up "asset management companies" to purchase and resell the NPLs and a program called "grasp the large, drop the small" [zhua da, fang xiao] designed to retain only the most efficient upstream firms while encouraging the rest to merge or adopt various privatized corporate models. This provided a stimulus to private sector development.

Following China's admission to the WTO in December 2001 significant changes were made in China's developmental model. The Hu Jintao-Wen Jiabao tandem both had career backgrounds in China's less developed provinces and represented a more neo-leftist approach to reform, focused on correcting the externalities of rapid GDP growth and redistributing benefits to those left behind. The new regime focused on the "Three Rural Issues" (san nong), agriculture, the countryside, and farmers, and implemented tax-for-fee (fei gai shui) reform in 2002 and abolished the thousand year old agricultural tax entirely in 2005, a bold move designed to equalize the yawning gap between rural and urban incomes; they also introduced China's first comprehensive national health insurance system (at a minimal level of coverage) and increased spending on education and defense.

Despite some rhetorical innovations (the "scientific development concept" and "socialist harmonious society"), the Hu Jintao regime was ideologically orthodox, discontinuing privatization and increasing outlays for internal security and wei wen or "stability maintenance" (repression of dissent). (5) Shrinking the state sector as pursued under Zhu had incurred popular opposition because of "management buyouts" (MBOs) and asset stripping (6) and was hence replaced by "SOE reform," with two main components: First, converting SOEs into share-holding corporations that sold stock in Shanghai, Hong Kong, or New York stock markets while retaining the state as majority share-holder. Second, a major step toward revitalization of the state sector per se was taken in late 2006 with the State Council decision formally reserving certain "strategic" sectors of the economy for SOEs. (7) This enjoined nonstate firms from competing in strategic markets, while state firms were assured privileged access to loans, land, and price-controlled inputs. Under these circumstances the SOEs became highly profitable and vigorously expanded, pushing aside or merging with private competitors to dominate their strategic sectors (and spilling over into other sectors as well, such as housing), inspiring the "guo jin, min tui" popular reversal of the officially endorsed slogan. While Chinese (and some Western) statistics show continuing growth of the private and corresponding diminution of the state-owned sector, this is partly due to the tendency to conflate private and "nonstate" (i.e., share-holding enterprises with majority state ownership) categories. It is true that the state sector (including subsidiaries, provincial and municipal SOEs) has diminished, but as of 2012 it was still estimated at 36 percent of GDP and a somewhat smaller proportion of total employment. (8) The sector has been profitable but not internationally competitive, with a small and shrinking share of exports, particularly after the Global Financial Crisis (GFC). But the strategic/pillar industrial sector, ancestor of Lenin's "commanding heights," retained a leading position in control of much of the upstream portion of the economy with excellent upside potential, favored for reasons of ideology, globalist ambitions and bureaucratic vested interests.

China's development in Hu-Wen era hence focused on strategic industrial command of domestic markets, vacating export markets to foreign-invested enterprises (FIEs) and a small but growing private sector. Given the strategic sector's position upstream this entailed an emphasis on heavy industry or fixed asset investment, especially infrastructure and construction, which expanded steadily through the 2000s. Housing was a particularly lucrative sideline because lacking attractive investment opportunities in overcapacity industries such as steel or cement, investment in housing created an inflationary bubble that continually raised the value of sunk investments. (9) The share of private consumption in GDP had by 2010 receded from ca 50 per cent to 34 per cent since the late 1990s; wage growth remained stagnant until the closing years of the decade. The infrastructure and construction achievement was indeed impressive: the world's largest high-speed rail network, the world's biggest output of steel, cement, solar panels, and a great many other products. The economy grew at its highest sustained rate since the beginning of reform. True, investment became increasingly inefficient because so much of it was wasted on products for which there was no market demand, thus total factor...