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offers new insights on the changing profile and prospects of what will soon be the world’s largest economy. Written by Daniel H. Rosen, the report clarifies the ambitions of China’s economic reform program, assesses the progress China has made in implementing reforms, and forecasts the economic impacts the program will have on China and the world.
Conclusions
We finish our exploration of China’s reforms with reactions to two questions. First, what broad conclusions can be drawn from the matrix of facts and inferences we amass? Second, what recommendations can be offered to foreign readers contemplating what these conclusions mean for them and their economies? China’s awakening over the past 35 years has already affected global workers, consumers, investors, and the environment in profound ways, and the shock that current reforms portend will greatly amplify this connection. It is incumbent upon business and policy leaders abroad to understand the economic overhaul underway in China.
We draw five conclusions.
1. A GAME-CHANGING REFORM PROGRAM
The program of economic reform President Xi and the Communist Party leadership issued in November 2013 is game changing — far more than a minor adjustment of business as usual or an attempt to stall for time. Foreign reaction to these developments so far has been fragmented, fractious, and divisive, with a good deal of the China-watching community still maintaining a wait-and-see attitude. This is not hard to understand: past reform commitments have often not come to fruition or have been implemented in a manner less consistent with advanced market economy norms than hoped. Ambiguous terms or counter-indications to market-oriented reform remain in the new Decisions on comprehensive reform. However, based on our analysis of the drivers behind China’s new approach, new imperatives laid out in the program, and initial indications of implementation following the Third Plenum announcement, we conclude that a decisive break in policy formation and the Chinese economic model is underway.
This new policy trajectory will have profound implications for the international economic system, and foreign officials and business leaders will need to adjust their expectations and responses accordingly. A firmer consensus in understanding these developments will be helpful, and it is hoped that this study contributes to the formation of such a consensus.
2. A CONVERGENT ECONOMIC PICTURE — WITH IDIOSYNCRASIES
Clearly, Beijing does not believe that different principles of market economics apply in China, any more than gravity applies differently in the Middle Kingdom. The governmental mission and regulatory priorities being pursued in China today are largely consistent with the prescriptions set out by the advanced-economy establishment. There is no Beijing consensus or other alternative economic theory at work here.
But this characterization must be qualified. Wide policy differences on market-oriented precepts exist among advanced economies, and China may be all the more idiosyncratic given its extreme population size, social and developmental challenges, low per capita income level, and political challenges. China’s reforms will make it both convergent with advanced economies and unique, and that contradiction will be discomforting, considering that China will likely be the largest economy in the world in a decade or so. If China hews to the more interventionist end of the advanced-economy policy spectrum, difficult questions will arise for other economies.
3. PLENTY OF EXCEPTIONS AND COUNTER-INDICATIONS
A related point is that with such a broad reform agenda, and so many conflicting pressures to be managed, China may require time to work through adjustments at different speeds in different areas, even without attempting to argue that certain exceptions to the overall reform effort are market friendly in the long term. Most nations reserve some sectors from the normal logic of regulation because of internal politics, despite their general principles to the contrary and the welfare losses entailed with taking such exceptions. The United States diverts from free trade when it comes to Mexican sugar because of politics, not economics. China will have its own sacred cows; we can only hope that the herd will be small. The most promising early sign of reform would be the release of a negative list explaining which industries are meant to be protected from competition; this would help show that Beijing is serious about ensuring that the market becomes the dominant, overriding factor governing economic activity.
4. A NOTABLY FAST START, AND A MOVE TO TRANSPARENCY
The pace of reform and structural adjustment in China today is far faster than was expected a year ago, or than most people believe today. However, the evidence for this — less than one year after the kickoff — is necessarily partial, anecdotal, and contestable. The target of 2020 for completion is ambitious, and shorter timetables of one-to-two years in the cases of foundational elements such as interest rate liberalization and center-local fiscal reform are bold. Reform includes opening to the outside — in terms of foreign trade and investment — not just opening on the inside, and in some cases external liberalization is quickening compared to recent years. However, if the pace of internal adjustment is substantially faster than external opening over a prolonged period of time, then severe international economic tensions are likely to ensue. Foreign investors, for instance, have $2.35 trillion in operations running in China, much of it in the form of joint ventures they might like to restructure and buy out, just as Beijing and the provinces are proposing to permit changes to SOE ownership structures. It is important that they be allowed to do so and not be asked to sit by and wait for the second round. Similarly, reform means the advent of stepped-up competition policy enforcement, but the due process and evenhanded treatment promised to private Chinese firms in the Decisions are owed to foreign investors as well. Other than designated special cases, there should be no reason why “private” should not include “foreign private” firms today, as reflected in the national treatment principle Beijing embraced for policy going forward.
5. A REAL PROSPECT FOR POLITICAL ADJUSTMENT?
Many analysts assume that China’s economic overhaul is simply designed to sustain the Communist Party’s authority. If the Party is to endure, then indeed achieving potential economic growth is necessary — China’s leaders state this unambiguously. But Xi’s economic program entails significant devolution of regulatory authority to lower officials with pro- competitive missions. We see four drivers of political evolution in this. First, as the ongoing anti-corruption campaign makes plain, abuse of political power to use state assets and state regulatory authorities for private gains was endemic in the old model of vested interest economics. Xi has disrupted that on a scale great enough to change politics. Second, reform will require a different — though not necessarily Western — approach to separation of powers and checks and balances: these are in the policy mix, and they too change the political equation. Third, public information disclosure registries are proliferating for government fees, administrative powers, real estate property, financial securities, land title and use rights, environmental impacts and pollution emissions, employment levels, and other domains. While the upper echelons of the Party have no interest in using sunshine as a disinfectant, the political implications of this transparency campaign will be hard to reverse, as the public availability of air pollution data has proven. Finally, reform is bolstering GDP growth and thus building the ranks of the middle class. While the small pool of bourgeois Chinese in the past was apt to be conservative and apolitical, the relationship between per capita wealth and political expectations is strong, even in China. So, ironically, accelerating growth also speeds expectations of individual protection from arbitrary political behavior.
But finally, despite signs of economic liberalism driven by necessity, the Party clearly does not intend for China’s political system to converge with Western norms. President Xi has demonstrably tightened the reins on civil society, embraced opportunities to show China’s teeth abroad, and doused expectations that due process would play a significant part in his administration. These moves might be seen as necessary to suppress resistance to economic reform during this critical early period, but there are no guarantees that the Party will reverse course and reestablish a modicum of civil liberties once adjustment has passed. One is hard pressed to find historical examples of single-party, uncontestable political systems that were able to build market-oriented economic systems. It is reasonable to worry that implementation of the Third Plenum economic reforms could fall short or diverge from expectations, including Beijing’s own expectations.
Policy Recommendations for Foreign Consideration
We have taken care to avoid normative prescriptions in this assessment, preferring to stick with describing — as objectively as possible — the economic challenges arising from 35 years of rapid growth, the program of reform to government’s mission and specific regulatory clusters, and the indications that China is moving ahead on that program. Uncertainty about the Third Plenum program, and different interpretations of Xi’s muscular leadership to date, led to a wait-and-see attitude. In year 1 of Xi’s economic program, a strong down payment of new economic thinking was made. Our conclusion, stated earlier, is that China’s reforms are game changing, market oriented, destined to be fraught with compromises temporary or enduring, and connected to geopolitical strategy beyond the economic realm. In light of these considerations, we offer five recommendations for foreign observers.
1. GAUGE INCREMENTAL PROGRESS
Discordant views on the pace and direction of reform in China and confusion about the implications if reform does play out as fully as we expect undermine policy formation and implementation abroad and distract from the urgency of a response. This is true within firms and governments. An effort to assess reform may leave decision makers unconvinced or in disagreement, but it still holds value even if certainty remains elusive. A promising strategy for overcoming this hesitancy is to define and track economic metrics that respond to reform. President Xi’s Decisions and subsequent implementation orders have called for a wealth of new economic data to be collected and made public in a timely manner, supplementing a rich foundation of real and financial economy indicators that are already observable. Foreign officials should encourage and applaud this trend, for it facilitates a shared understanding of China’s economic directions. With solid enough consensus around metrics indicating Chinese reform — for instance, on the number of industries listed for exceptional treatment by Beijing — it becomes much easier to build a positive bilateral or multilateral economic agenda with China based not on where conditions stand today but on mutual expectations about where China will be in three or five or seven years.
2. DEMONSTRATE SUPPORT FOR REFORM
Acknowledging the existential stakes of reform for China supports the reform process by strengthening confidence that goals are shared. Governments and firms in advanced economies have wrestled with many of the adjustment challenges China is encountering, including rising operating costs, calls for protectionism, opposition to environmental policy enforcement and other aspects of regulatory reform, and myriad other obstacles in the political economy. Many bilateral and multilateral programs of capacity building are in place, but some have lost momentum because China’s reform had stalled over the past decade; these should be reinvigorated, or in some cases replaced. There is no shortage of disagreement among advanced economies about the details of reform: more liberal and statist OECD nations have bickered about proper economic policy since the organization’s founding 53 years ago. Supporting reform in China will require patience and self-confidence. In China, as in the United States and Europe, some oppose marketization out of fear or insecurity or have legitimate concerns about the limits of materialism as the measure of social welfare. These voices should not all be lumped together as anti-reform: it is a challenge of our era to encourage traditional marketization at the same time our advanced conception of the goals of public policy is evolving.
3. FOCUS ON A DOMESTIC RESPONSE
Given China’s mixed political and international security signals, there will be a powerful temptation to view China’s reform-driven economic strength as a threat, and to respond by focusing on external power and influence. Foreign policy must certainly evolve in light of China’s domestic reforms, but if China’s reform program is to be taken seriously, and it should be, then advanced and emerging nations alike need to strive to remain competitive. After adjustment, a more competitive China will emerge. Reforms will include policy changes that respond to long-standing requests from China’s business and trading partners: financial account liberalization, two-way investment opening, a more level playing field for internal competition, and the withdrawal of government from much intervention in the economy. Nations have often defined their past China policies in terms of what China needs to do differently, or what they will do at their borders to manage integration with China. Looking ahead, the policies of other nations toward China must include better enabling environments to keep pace with China’s productivity gains. This will require top-led national conversations about competing effectively in a global environment.
4. INCLUDE A MULTILATERAL ELEMENT
While competitiveness begins at home, it often ends abroad in today’s global economy. In many areas, including international direct investment and competition policy, no robust international organizations and norms guide behavior, and the need to build new regimes is likely to be enhanced by expanding Chinese weight in the system. Economies, especially incumbent leaders, should prepare to help facilitate such undertakings. And as they do so, they should welcome Chinese participation without either excluding Beijing or conceding to Chinese views and seek to maintain confidence in the market-economy principles that have worked in the past.
5. STOP NEGOTIATING FOR WHAT BEIJING IS ALREADY DOING
A typical bilateral or plurilateral negotiation with China has become a set piece in recent years, with China’s partners asking for market access, intellectual property rights protection, and a litany of other policy reforms. The broad slate of domestic reforms in the Decisions tells us Beijing knows these reforms are in its own national interest and must be achieved regardless of foreign pleading. It makes sense from China’s perspective to negotiate concessions from abroad for reforms that must be taken in any case. Those concessions may in turn be good for China’s partners as well, such as reductions in their barriers to Chinese trade and investment; also, the logic of an international negotiation may be mutually valuable for reformers on both sides to make the case for reform to their less change-friendly compatriots. However, it is important to recognize that China is pursuing market-oriented economic reforms for the simple, self-interested reason that it is the smart thing to do.
-----------------------------------------------------------------------------------
i posted the link once but it seems that nobody checks it out....
this is an interesting report i found last year.
it's a very long report so i'll just copy the summary of the conclusion and policy recommendation.
full report: Avoiding the Blind Alley: China’s Economic Overhaul and Its Global Implications | ChinaFile
summary: http://asiasociety.org/files/pdf/AvoidingtheBlindAlley_ES.pdf
offers new insights on the changing profile and prospects of what will soon be the world’s largest economy. Written by Daniel H. Rosen, the report clarifies the ambitions of China’s economic reform program, assesses the progress China has made in implementing reforms, and forecasts the economic impacts the program will have on China and the world.
Conclusions
We finish our exploration of China’s reforms with reactions to two questions. First, what broad conclusions can be drawn from the matrix of facts and inferences we amass? Second, what recommendations can be offered to foreign readers contemplating what these conclusions mean for them and their economies? China’s awakening over the past 35 years has already affected global workers, consumers, investors, and the environment in profound ways, and the shock that current reforms portend will greatly amplify this connection. It is incumbent upon business and policy leaders abroad to understand the economic overhaul underway in China.
We draw five conclusions.
1. A GAME-CHANGING REFORM PROGRAM
The program of economic reform President Xi and the Communist Party leadership issued in November 2013 is game changing — far more than a minor adjustment of business as usual or an attempt to stall for time. Foreign reaction to these developments so far has been fragmented, fractious, and divisive, with a good deal of the China-watching community still maintaining a wait-and-see attitude. This is not hard to understand: past reform commitments have often not come to fruition or have been implemented in a manner less consistent with advanced market economy norms than hoped. Ambiguous terms or counter-indications to market-oriented reform remain in the new Decisions on comprehensive reform. However, based on our analysis of the drivers behind China’s new approach, new imperatives laid out in the program, and initial indications of implementation following the Third Plenum announcement, we conclude that a decisive break in policy formation and the Chinese economic model is underway.
This new policy trajectory will have profound implications for the international economic system, and foreign officials and business leaders will need to adjust their expectations and responses accordingly. A firmer consensus in understanding these developments will be helpful, and it is hoped that this study contributes to the formation of such a consensus.
2. A CONVERGENT ECONOMIC PICTURE — WITH IDIOSYNCRASIES
Clearly, Beijing does not believe that different principles of market economics apply in China, any more than gravity applies differently in the Middle Kingdom. The governmental mission and regulatory priorities being pursued in China today are largely consistent with the prescriptions set out by the advanced-economy establishment. There is no Beijing consensus or other alternative economic theory at work here.
But this characterization must be qualified. Wide policy differences on market-oriented precepts exist among advanced economies, and China may be all the more idiosyncratic given its extreme population size, social and developmental challenges, low per capita income level, and political challenges. China’s reforms will make it both convergent with advanced economies and unique, and that contradiction will be discomforting, considering that China will likely be the largest economy in the world in a decade or so. If China hews to the more interventionist end of the advanced-economy policy spectrum, difficult questions will arise for other economies.
3. PLENTY OF EXCEPTIONS AND COUNTER-INDICATIONS
A related point is that with such a broad reform agenda, and so many conflicting pressures to be managed, China may require time to work through adjustments at different speeds in different areas, even without attempting to argue that certain exceptions to the overall reform effort are market friendly in the long term. Most nations reserve some sectors from the normal logic of regulation because of internal politics, despite their general principles to the contrary and the welfare losses entailed with taking such exceptions. The United States diverts from free trade when it comes to Mexican sugar because of politics, not economics. China will have its own sacred cows; we can only hope that the herd will be small. The most promising early sign of reform would be the release of a negative list explaining which industries are meant to be protected from competition; this would help show that Beijing is serious about ensuring that the market becomes the dominant, overriding factor governing economic activity.
4. A NOTABLY FAST START, AND A MOVE TO TRANSPARENCY
The pace of reform and structural adjustment in China today is far faster than was expected a year ago, or than most people believe today. However, the evidence for this — less than one year after the kickoff — is necessarily partial, anecdotal, and contestable. The target of 2020 for completion is ambitious, and shorter timetables of one-to-two years in the cases of foundational elements such as interest rate liberalization and center-local fiscal reform are bold. Reform includes opening to the outside — in terms of foreign trade and investment — not just opening on the inside, and in some cases external liberalization is quickening compared to recent years. However, if the pace of internal adjustment is substantially faster than external opening over a prolonged period of time, then severe international economic tensions are likely to ensue. Foreign investors, for instance, have $2.35 trillion in operations running in China, much of it in the form of joint ventures they might like to restructure and buy out, just as Beijing and the provinces are proposing to permit changes to SOE ownership structures. It is important that they be allowed to do so and not be asked to sit by and wait for the second round. Similarly, reform means the advent of stepped-up competition policy enforcement, but the due process and evenhanded treatment promised to private Chinese firms in the Decisions are owed to foreign investors as well. Other than designated special cases, there should be no reason why “private” should not include “foreign private” firms today, as reflected in the national treatment principle Beijing embraced for policy going forward.
5. A REAL PROSPECT FOR POLITICAL ADJUSTMENT?
Many analysts assume that China’s economic overhaul is simply designed to sustain the Communist Party’s authority. If the Party is to endure, then indeed achieving potential economic growth is necessary — China’s leaders state this unambiguously. But Xi’s economic program entails significant devolution of regulatory authority to lower officials with pro- competitive missions. We see four drivers of political evolution in this. First, as the ongoing anti-corruption campaign makes plain, abuse of political power to use state assets and state regulatory authorities for private gains was endemic in the old model of vested interest economics. Xi has disrupted that on a scale great enough to change politics. Second, reform will require a different — though not necessarily Western — approach to separation of powers and checks and balances: these are in the policy mix, and they too change the political equation. Third, public information disclosure registries are proliferating for government fees, administrative powers, real estate property, financial securities, land title and use rights, environmental impacts and pollution emissions, employment levels, and other domains. While the upper echelons of the Party have no interest in using sunshine as a disinfectant, the political implications of this transparency campaign will be hard to reverse, as the public availability of air pollution data has proven. Finally, reform is bolstering GDP growth and thus building the ranks of the middle class. While the small pool of bourgeois Chinese in the past was apt to be conservative and apolitical, the relationship between per capita wealth and political expectations is strong, even in China. So, ironically, accelerating growth also speeds expectations of individual protection from arbitrary political behavior.
But finally, despite signs of economic liberalism driven by necessity, the Party clearly does not intend for China’s political system to converge with Western norms. President Xi has demonstrably tightened the reins on civil society, embraced opportunities to show China’s teeth abroad, and doused expectations that due process would play a significant part in his administration. These moves might be seen as necessary to suppress resistance to economic reform during this critical early period, but there are no guarantees that the Party will reverse course and reestablish a modicum of civil liberties once adjustment has passed. One is hard pressed to find historical examples of single-party, uncontestable political systems that were able to build market-oriented economic systems. It is reasonable to worry that implementation of the Third Plenum economic reforms could fall short or diverge from expectations, including Beijing’s own expectations.
Policy Recommendations for Foreign Consideration
We have taken care to avoid normative prescriptions in this assessment, preferring to stick with describing — as objectively as possible — the economic challenges arising from 35 years of rapid growth, the program of reform to government’s mission and specific regulatory clusters, and the indications that China is moving ahead on that program. Uncertainty about the Third Plenum program, and different interpretations of Xi’s muscular leadership to date, led to a wait-and-see attitude. In year 1 of Xi’s economic program, a strong down payment of new economic thinking was made. Our conclusion, stated earlier, is that China’s reforms are game changing, market oriented, destined to be fraught with compromises temporary or enduring, and connected to geopolitical strategy beyond the economic realm. In light of these considerations, we offer five recommendations for foreign observers.
1. GAUGE INCREMENTAL PROGRESS
Discordant views on the pace and direction of reform in China and confusion about the implications if reform does play out as fully as we expect undermine policy formation and implementation abroad and distract from the urgency of a response. This is true within firms and governments. An effort to assess reform may leave decision makers unconvinced or in disagreement, but it still holds value even if certainty remains elusive. A promising strategy for overcoming this hesitancy is to define and track economic metrics that respond to reform. President Xi’s Decisions and subsequent implementation orders have called for a wealth of new economic data to be collected and made public in a timely manner, supplementing a rich foundation of real and financial economy indicators that are already observable. Foreign officials should encourage and applaud this trend, for it facilitates a shared understanding of China’s economic directions. With solid enough consensus around metrics indicating Chinese reform — for instance, on the number of industries listed for exceptional treatment by Beijing — it becomes much easier to build a positive bilateral or multilateral economic agenda with China based not on where conditions stand today but on mutual expectations about where China will be in three or five or seven years.
2. DEMONSTRATE SUPPORT FOR REFORM
Acknowledging the existential stakes of reform for China supports the reform process by strengthening confidence that goals are shared. Governments and firms in advanced economies have wrestled with many of the adjustment challenges China is encountering, including rising operating costs, calls for protectionism, opposition to environmental policy enforcement and other aspects of regulatory reform, and myriad other obstacles in the political economy. Many bilateral and multilateral programs of capacity building are in place, but some have lost momentum because China’s reform had stalled over the past decade; these should be reinvigorated, or in some cases replaced. There is no shortage of disagreement among advanced economies about the details of reform: more liberal and statist OECD nations have bickered about proper economic policy since the organization’s founding 53 years ago. Supporting reform in China will require patience and self-confidence. In China, as in the United States and Europe, some oppose marketization out of fear or insecurity or have legitimate concerns about the limits of materialism as the measure of social welfare. These voices should not all be lumped together as anti-reform: it is a challenge of our era to encourage traditional marketization at the same time our advanced conception of the goals of public policy is evolving.
3. FOCUS ON A DOMESTIC RESPONSE
Given China’s mixed political and international security signals, there will be a powerful temptation to view China’s reform-driven economic strength as a threat, and to respond by focusing on external power and influence. Foreign policy must certainly evolve in light of China’s domestic reforms, but if China’s reform program is to be taken seriously, and it should be, then advanced and emerging nations alike need to strive to remain competitive. After adjustment, a more competitive China will emerge. Reforms will include policy changes that respond to long-standing requests from China’s business and trading partners: financial account liberalization, two-way investment opening, a more level playing field for internal competition, and the withdrawal of government from much intervention in the economy. Nations have often defined their past China policies in terms of what China needs to do differently, or what they will do at their borders to manage integration with China. Looking ahead, the policies of other nations toward China must include better enabling environments to keep pace with China’s productivity gains. This will require top-led national conversations about competing effectively in a global environment.
4. INCLUDE A MULTILATERAL ELEMENT
While competitiveness begins at home, it often ends abroad in today’s global economy. In many areas, including international direct investment and competition policy, no robust international organizations and norms guide behavior, and the need to build new regimes is likely to be enhanced by expanding Chinese weight in the system. Economies, especially incumbent leaders, should prepare to help facilitate such undertakings. And as they do so, they should welcome Chinese participation without either excluding Beijing or conceding to Chinese views and seek to maintain confidence in the market-economy principles that have worked in the past.
5. STOP NEGOTIATING FOR WHAT BEIJING IS ALREADY DOING
A typical bilateral or plurilateral negotiation with China has become a set piece in recent years, with China’s partners asking for market access, intellectual property rights protection, and a litany of other policy reforms. The broad slate of domestic reforms in the Decisions tells us Beijing knows these reforms are in its own national interest and must be achieved regardless of foreign pleading. It makes sense from China’s perspective to negotiate concessions from abroad for reforms that must be taken in any case. Those concessions may in turn be good for China’s partners as well, such as reductions in their barriers to Chinese trade and investment; also, the logic of an international negotiation may be mutually valuable for reformers on both sides to make the case for reform to their less change-friendly compatriots. However, it is important to recognize that China is pursuing market-oriented economic reforms for the simple, self-interested reason that it is the smart thing to do.
-----------------------------------------------------------------------------------
i posted the link once but it seems that nobody checks it out....
this is an interesting report i found last year.
it's a very long report so i'll just copy the summary of the conclusion and policy recommendation.
full report: Avoiding the Blind Alley: China’s Economic Overhaul and Its Global Implications | ChinaFile
summary: http://asiasociety.org/files/pdf/AvoidingtheBlindAlley_ES.pdf
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