Chairman Xi Jinping is combining open market economic methods with traditional Communist Party control to remake the Chinese economy. This points to the firm grip that the Communist Party in China has over the economy coupled with the firm grip that Mr. Xi has over the Communist Party. Critics at home and abroad say that he has ended the reforms which led to the liberalization of the Chinese economy in the first place.
More Muscular Form of State Capitalism: Under Mr. Xi’s plan, state-owned enterprises will acquire more market discipline and the private sector will ascend to more party discipline. Mr. Xi believes that China has certain “Institutional Advantages” coming from a one-party state in that policy makers are not hamstrung by partisan politics. Further, a one-party system enables policymakers to pool the nation’s economic and social resources to meet critical objectives. This approach appears to be an attempt to push two extremes toward the middle – but is that for better economic growth or just easier political control.
Orderliness Versus Fairness: Many foreign business executives and diplomats do not see any further real market reforms taking place. The state-owned-enterprises are backed by deep pockets in the government, and they present an opaque outward appearance which hides preferential rules. Those market reforms that do have effect are more about orderliness than fairness.
Court Reform: One area of reform is the courts system, which had a reputation of not being able to enforce its own rulings. To remedy this, China created a “social credit” system that includes a blacklist for those offenders that don’t adhere to court rulings. The blacklist can prevent the offender from getting a loan or using any aspect of the credit system such as buying merchandise on a terms basis. The state views it as a price that needed to be paid to develop a good working commercial environment.
Financial Reform: Much in the way of banking debt has been supplanted by national debt. Shadow banking has retreated. Long term debt is booming, and the overall system appears to be safer than the one that emerged from the financial crisis of 2007/8. The reforms to both the courts and finance sectors have enabled firms to protect their patents, obtain financing, and make acquisitions.
State Owned Enterprises Retain Inefficiencies: The state-owned-enterprises still face some of the same tensions and inefficiencies that they have always faced – the government over-involving itself on decisions creating confusion with areas of responsibility. Resultingly, the SOE sector does not perform as well as it could, and requires more assistance from the government than it should. Although the government is placing more emphasis on the profitability of the SOE’s, the decision making is not always based upon what makes the company more profitable. For example: An executive with a major SOE insurance firm says that its party committee now controls all senior personnel appointments, and expresses opinions on all large investments.
Blurred Lines of Authority: The state is growing ever closer to the private sector blurring the lines of authority. Major decisions by companies have traditionally been scrutinized by the government, but this scrutiny is more deeply entrenched as the communist party reaches its authority closer to the grass roots level of commerce and industry. The insistence on forming party committees for private corporations to approve decisions and make appointments force entrepreneurs deeper into the grip of the state.
Conclusion: Mr. Xi’s policies have created a more orderly system within which to conduct business. But the very close connection the state’s one-party system has with the private sector provides for an encroachment on entrepreneurship that the next Chinese president might want to exploit in a very different way. It appears that Mr. Xi’s objectives involve combining two incongruous forces – the desire to make the economy continue its rapid growth, and the desire to clamp down on the individual freedom of entrepreneurs to make their own decisions. In our proven system of capitalism, it is the wide range of individual freedom in entrepreneurship that drives a market economy.
Sources: China’s Hybrid Capitalism, The Economist, August 15, 2020