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Realising economic reform in China

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In Brief

The slowdown in growth in China is a familiar story. Annual GDP growth has fallen from an average of 10 per cent to less than 7 per cent. While Chinese growth is still significant in absolute terms, slower growth combined with rising income inequality is becoming a big concern for the Chinese public.


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The slowdown can be traced to a shift in the drivers of growth. State-led investment in the ‘old’ industrial economy is less important today and growth is more dependent on ‘new’ private sector investment and household spending. Labour costs are rising and the technology gap between China and the rest of the world is shrinking.

Slower growth makes it more difficult to maintain employment and to meet expectations of rising incomes. Policymakers are keen to find new sources of growth. Attention has now turned to supply-side reform: adjusting industry structure, creating more competition, and making changes to the management and practice of the old economy. This must work alongside encouraging the growth of the private sector, small- and medium-sized enterprises (SMEs) and the services sector. Also important will be investment in human capital and research.

Policymakers also have to deal with another challenge: rising inequality.

Income gaps in China are widening and income distribution inequality is growing. While Deng Xiaoping’s economic reforms in the 1970s and 1980s initially reduced inequality, the gap between incomes has been rising steadily since the mid-1980s and urban incomes are now more than three times higher than rural ones. Under high growth rates increasing inequality may not be a formidable political issue if incomes still rise in absolute terms. But a simultaneous slowdown in growth and rise in inequality triggers greater public anxiety. While China is not alone in facing this issue, it has become a major public concern.

Dealing with these inequities is no easy task. Supply-side reform policies are generally relevant to both growth and equity goals since they are about encouraging participation in markets. But such policies are difficult to design and difficult to sell to both political leaders and the public. Success also requires cooperation and coordination across agencies. And there will always be opposition to reforms from some affected interest groups like this: in the case of China, this will be from the ‘old economy’. This means that a high degree of resilience and confidence in the reform plans will be crucial.

Reform in other economies has been the result of the combined efforts of a variety of channels, including institutions like universities and think tanks, the media, the general bureaucracy and multilateral agencies. But modern China does not have a firm tradition of educational institutions playing a concerted role in the development of economic policy, though many scholars are clearly key thought leaders. The multilateral agencies have opinions to offer but less leverage these days. The weight then rests with the general bureaucracy.

The general public perception is that China’s bureaucracy lacks the capacity to deliver this kind of change and itself should be the subject of reform. This apparent lack of capability in the bureaucracy may be the consequence of efforts to outlaw corrupt practice. As William H. Overholt has argued China’s anti-corruption campaign has scared public officials away from implementing big reforms.

One solution to this could be an amnesty on past practices with a cap on the scale of impacts of previous decision-making. Although the Central Leading Small Group on Comprehensively Deepening Reform has set out the strategic polices, the reform still needs various levels of government agencies to implement it. Another option may be to drive reform from a newly created set of government agencies specifically charged with that role.

Supply-side reforms work best when the factors of production can be quickly reallocated. The key problems in China are not so much in the labour market, where workers are highly mobile, but in markets for capital.

The financial sector is carrying a heavy load of debt of which a rising share, as much as 15–20 per cent, is in sub-prime loans. Certainly, there is a risk of financial crisis in China. But the risk of such an event is well understood and can therefore be mitigated. China has the resources to deal with the refinancing that may be required in order to release new lending and potentially help capital markets. This would essentially involve giving the banks an amnesty on earlier bad decisions, many of which they were directed to make anyway.

Encouraging growth through supply-side reform will not succeed if bureaucrats cannot be emboldened to undertake big reforms. And the financial sector’s debt levels must be monitored and if necessary refinanced if China is to avoid a crisis. Both situations may require some forms of amnesty.  These moves could help release China’s economic policymakers from their incapacity — either real or perceived — to drive and implement a reform program with an impact on today’s challenges.

Christopher Findlay is Executive Dean of the Faculty of the Professions at the University of Adelaide.

Chunlai Chen is an Associate Professor of the Policy and Governance Program at the Crawford School of Public Policy, The Australian National University.

4 responses to “Realising economic reform in China”

  1. Granting amnesty while also fighting an anti-corruption campaign seems like a huge contradiction to me. How can Xi and others claim credibility if they give amnesty for past decisions made?

    Also, asking bureaucrats to undertake ‘bold reforms’ also seems contradictory. These people are by their nature and the dynamics of the institutions that they work in inherently conservative in approach. Innovation is something they rarely consider because they have never been rewarded for it before.

    Can Xi pull this off?

  2. ‘While Chinese growth is still significant in absolute terms, slower growth combined with rising income inequality is becoming a big concern for the Chinese public.’ Really?

    1. ‘Chinese growth is still significant in absolute terms’: you bet it is. It’ll be $1.3 trillion this year, 500% larger than the USA’s.

    2. China’s economy is much larger than the US’s and growing much faster. It’s certainly not slowing down.

    3. Income inequality is not increasing. It’s largely due to the historic gap between the coastal provinces and those inland.
    It grew – as Deng warned everybody that it would – then stopped widening before it reached the levels of the USA. The new land tax and the in-progress inheritance tax will reverse the trend.

    4. 83.5 percent of Chinese think their country is run for all the people, rather than for a few big interest groups, whereas only 36.7 percent of Americans think the same of their country. 

    4. Pew Charitable Trusts found that 88% of the Chinese surveyed are happy with the economic conditions [compared to the 33% for the U.S., and 15% for the U.K.]. Only 52% say inequality is a big problem.

    • Thanks for some added perspective on the concerns raised by Findlay and Chien. I have one comment and one question.

      Comment:time will tell if the new land tax and the in progress inheritance tax will reverse the trend in income inequality.

      Question: if 52% of the people say inequality is a big problem, is that not still a majority? Is that not still significant?

  3. The use of the word amnesty, while with straight forward meaning and understandable, may not necessarily be very appropriate in the current Chinese political environment. President Xi and the current leadership have openly advocated something like zero tolerance in terms of corruption with the phrase like “strike both tigers and flies”.
    It may be more productive and could potentially incentivise more bureaucrats if the Chinese leadership team gradually move to a method of allowing those people who may have some questionable conducts in the past to correct their past wrong doings with good behaviour including making new above average postive contributions (in Chinese, 将功折罪)。
    How to transition from the current zero tolerance to that regime would need creative imagination.

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