13 December 2018

After 40 years of liberalisation, China still has a long way to go


Saturday December 22 will mark 40 years since China began its long march of economic reform and opening up. The particular anniversary is of the end of the 3rd plenary session of the 11th Central Committee of the Communist Party of China, at which Deng Xiaoping effectively became paramount leader of the Communist Party, and won a mandate to begin reforming and opening up the country to the world.

Deng’s reforms started with the effective privatisation of agriculture: the collective farm system was abandoned and peasants were given their own private plots. A set quota of their produce still went to the government, but the rest they were allowed to sell in the free market. These reforms were such a success that they were expanded to other parts of the Chinese economy.

Private businesses and foreign investment were allowed for the first time since before the communist takeover in 1949, and the government gradually allowed the price system to play a part in more and more parts of the economy. Importantly, the central government created Special Economic Zones, where entrepreneurs and firms could be free of much of the bureaucracy and regulation that so hamper progress. Control of provincial governments was also relaxed, giving them the freedom to experiment and discover the best way to encourage development. Both of these helped to turbocharge the reform process and turn China into a high growth economy.

Despite its success, the process of reform and opening up has never been smooth or easy – most notably in the wake of the 1989 Tiananmen massacre and the social unrest associated with it, the ruling Chinese communist party applied the brakes to its liberalisation project. However, by 1992 the reform agenda began to accelerate once more.

The economic progress has been remarkable: since 1978 economic growth has averaged 9.6 per cent per year, and GDP per capita has increased from less than $300 to just under $9,000. Finally, although nominally still smaller, measured on a PPP basis China’s economy overtook the US in 2013 to become the largest in the world.

On a recent trip to China I was struck by how developed parts of it now are: the most affluent regions such as Beijing or Shanghai average salaries, measured by PPP, are over $35,000, higher than in much of Europe.

Nations have of course achieved rapid development before – the examples of Hong Kong and Singapore immediately spring to mind — but nothing on the scale of China. The World Bank estimates that since it opened up in 1978, more than 800 million people in China have been lifted out of poverty. It is quite simply one of the most remarkably trends in human history. Not only are most Chinese no longer poor, but a great many are affluent: today China has a middle class of over 400 million people and the largest consumer market in the world, with retail sales now exceeding those in the US.

The rapid development of China has led its government to raise its sights. It’s when you see projects like the spectacular Hong Kong-Zhuhai-Macau bridge, which opened in October of this year, that you realise just how ambitious China now is. The bridge took six years to plan and nine years to build is the longest in the world at 55 km, it includes four artificial islands, a 6km underwater tunnel, and is designed to withstand earthquakes and typhoons.

But having visited the administrative centre from which the bridge is to be managed, I cannot help but worry that it may end up as a bit of a white elephant: because a crucial link road in Hong Kong is yet to be completed traffic is currently strictly limited. Furthermore because of the ‘one country two systems’ arrangements for Hong Kong and Macau, there are three customs regimes, complicating matters for traders wanting to use the bridge to transport goods.

However, the authorities seem confident that technology and cooperation between the Chinese mainland, Hong Kong, and Macau can overcome any issues and the bridge will be a success. (How refreshing to hear government officials say that different customs and regulatory regimes can exist side by side and not present an insurmountable obstacle for business, or a threat to the peaceful coexistence of the different regions.)

Ambitious infrastructure projects are a key part of the much talked about Belt and Road initiative. But it’s the geopolitical aspect of the initiative which reveals the role China sees itself playing in future world affairs. Despite the repeated assurances of every single Chinese official I met that it is not an attempt by China to challenge the hegemony of the US and rule the world, but simply to better connect China’s less developed central and western regions with the world, it is hard to escape the conclusion that Belt and Road is exactly that.

However, given China’s size both in terms of population and its economy, it doesn’t seem strange or wrong that it should play a larger role in world events and institutions. This, of course, must mean that the relative importance of the US will decline somewhat. But China is not suddenly going to start having the control or influence that the US has had in the post-war era. Today, China is still far behind the US and the West, both in overall living standards and in particular in certain key technical areas, such as the semiconductor industry as The Economist recently reported.

While it is right to praise the progress that has already been made, it is also important to look to the future and discuss some of the issues ahead. Firstly, it is important to remember that large areas of China, especially those central and western regions are not highly developed and still have millions of people living in poverty.

Secondly, China and in particular its current president Xi Jinping may seem determined to continue with reform, such as opening up the services and financial sector, but there are plenty of special interest groups which could prevent this. In particular, the more than 150,000 Chinese State Owned Enterprises (SOEs) play a very sizeable role in the economy, accounting for between 30 per cent and 40 per cent of GDP.

This is partly because they are given advantages that private companies, including foreign firms, are denied. For example, the Chinese government have over the last few years increased capital controls in an attempt to defuse the debt bomb under the Chinese economy. However, these controls have mainly hit Chinese private firms, which have found it increasingly difficult to get access to the credit that they want. Whereas Chinese SOEs have been given special treatment and have had far less difficulty in getting credit.

China should get rid of these advantages, so that SOE’s, Chinese private firms, and foreign firms are treated the same by the government. This is exactly what they have promised to do, but the vested interests in the SOE’s are not going to want to give up the advantages they currently enjoy, and will try to exert whatever influence they have to frustrate reform. It doesn’t help matters that in the hierarchy of the ruling CPC, the executives of SOEs outrank their own regulators.

Demographics are also a serious concern. Like much of the developed world China now has an ageing population, with a median age of 37.4 years, which is above Ireland and only just below the USA. On top of this it no longer has a rapidly growing population, with annual growth of just 0.39 per cent, in line with France, and below both the UK and USA.

This means that over the coming decades an increasing share of the Chinese population will be retired and no longer working. Their retirement will have to be supported off the backs of a workforce which is shrinking as a share of the population. This is a well acknowledged issue in developed nations such as the UK, where the retirement age has already been increased in response. Given that the retirement age in China is 60 for men and 55 or 50 for women (depending on profession), the Chinese government will have to do likewise at some point in the future. As in the West, such changes are unlikely to prove popular with the people, and it could lead to pressure for the government to offer other reforms to placate popular anger.

By other reforms, I really mean what might be called the elephant in the room: political reform. China is not a democracy and it doesn’t have an open political system. The Chinese Communist Party rules with an iron rod. Sadly, while we can celebrate 40 years of opening up and reform and the economic miracle they have created, we must also mourn the tragedy that it has not been extended to the realm of politics.

In the first decade after 1978, there were efforts to reform and open up politically, but these ground to a halt after the Tiananmen Square massacre in 1989, and since President Xi took over in 2012, things have got worse. The Chinese state continues to carry out a policy of mass surveillance, refuses to countenance any democratic reforms, and in Xinjiang province seems happy to incarcerate an entire ethnic group en masse on no grounds other than religious affiliation.

However, despite the apparent lack of progress in this area, there are reasons for optimism. The growth of a middle class in Chinese society, creates a powerful interest group that the CPC will have to placate if it wants to maintain order and stay in power. I was also struck by just how Westernised most of the Chinese, especially the younger generations, now are. Not only in the goods they buy, adverts they are bombarded by, and the TV programmes they watch, but also the values and aspirations they appear to hold.

And while the Chinese state may want to have their own Chinese version of the internet which they can control and manipulate, most young Chinese apparently don’t. Firms like WhatApp, Google, and Instagram may be blocked by the government, but many Chinese simply ignore this and use a VPN to access the internet.

As long as the CPC and President Xi continue to deliver rising incomes and greater opportunities, which economic reform and opening up have made possible, the Chinese people will likely tolerate their authoritarian excesses. But should the people feel that this is no longer the case, then they may start demanding that reform and opening up go beyond just the economy, and as in Tiananmen Square in 1989 the call for democratic reform may be heard once more.

Jethro Elsden is a Data Analyst at the Centre for Policy Studies.