Economic slowdown may prompt reluctant reform in China

Author: Hiroki Takeuchi, Southern Methodist University

At a press conference on 28 May 2020, Chinese Premier Li Keqiang told reporters that China was considering joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Following Li’s comments, Wendy Cutler, former US chief negotiator of the Trans-Pacific Partnership, argued that China’s interest should be taken seriously because the economic reforms that China would be required to undertake as a CPTPP member ‘would be a welcome step for a beleaguered global trading system’. China formally applied to the CPTPP on 16 September 2021.

At the Asia-Pacific Economic Cooperation summit in November 2022, President Xi Jinping advocated for China’s CPTPP candidacy again. But while Xi’s pursuit of CPTPP membership suggests a willingness to reform China’s state-led economic structure, the news that Li — a strong proponent of reformism — will not be reappointed to the Central Committee in 2023 has raised questions about Xi’s willingness to undergo genuine reform.

China’s leadership contains both reformist internationalists and anti-reformist nationalists. CPTPP membership, which requires a commitment to domestic economic reforms, would empower reformists who favour international cooperation. While it was Xi who made a clear signal that China would be willing to join the CPTPP in November 2022, Li has always been a stronger proponent of market-oriented economic reform.

Li and his allies, such as Wang Yang and Hu Chunhua, might be more reformist and internationalist than Xi and his people, but this does not necessarily mean that the party leadership is divided into two camps or factions. Both the reformists and the nationalists agree that maintaining social stability is crucial to achieving regime resilience, but they have conflicting views on how to achieve this goal.

The reformists argue that China should commit to domestic economic reforms, such as reducing the dominance of state-owned enterprises (SOEs), by joining international economic institutions like the CPTPP. This would enable China to benefit from interdependent relations with the global economy and achieve sustainable economic growth, which would bring social stability and enable one-party rule to be maintained.

On the other hand, the nationalists argue that China should protect its vested interests through the SOE system and state-led capitalism, and that the reforms required by the CPTPP would directly undermine the rent-seeking mechanism through which these vested interests are pursued. Instead, China should project its power by adopting nationalist foreign policies even if they cause friction in international relations.

In the 1980s, Deng Xiaoping, who encouraged people to embrace the market economy with the slogan ‘reform and open-up’ (gaige kaifang), adopted the concept of ‘hiding our capabilities and biding our time’ (taoguang yanghui) as a pillar of Chinese foreign policy. He argued that China should not project its power but focus on economic development.

In the 1990s, Jiang Zemin, whose commitment to reformism and internationalism was weaker than Deng’s, employed a ‘co-optation’ strategy. This strategy encouraged former officials and SOE managers to start businesses using their political connections, with the aim of preventing the market economy from compromising China’s one-party rule. This co-optation strategy formed the basis of China’s state capitalist system, where the Communist Party champions the distribution of vested interests.

Hu Jintao, who succeeded Jiang in 2002, promoted the idea of ‘harmonious society’ (hexie shehui) and sought to curb corruption rooted in the state capitalist system and solve the economic inequality that had rapidly increased during the 1990s. But Hu was never able to consolidate his power base and failed to stem rent-seeking behaviour. As a result, economic inequality expanded and the pace of reform slowed during his ten-year tenure.

When he assumed office in 2012, Xi observed that China had maintained rapid economic growth since 1978 primarily through privatisation — leaving many hopeful that Xi’s presidency would be characterised by further reform. But Xi took China’s achievement of long-term economic growth to mean that market reform was no longer necessary and began to prioritise political control over economic efficiency. A resurgence of state intervention under Xi has diminished the role of the market and private firms in the Chinese economy.

While China has continued to embrace trade liberalisation by joining the Regional Comprehensive Economic Partnership (RCEP), the absence of any requirement to undergo SOE reform means that foreign companies wishing to do business in China need to compete against heavily subsidised domestic companies.

SOEs are inevitably less productive than private firms. By dropping Li and other reformists from the Central Committee, Xi seems to have once again prioritised political control over economic efficiency. But the Chinese economy has been slowing down since before the COVID-19 pandemic, and stalled SOE reform under the Xi administration has not helped.

Xi and his anti-reformist nationalists will continue to be pressured by unfavourable economic circumstances. There is a slight possibility that China’s economic slowdown will prompt a return to reformism and internationalism sooner than Xi and his loyalists may wish.

Hiroki Takeuchi is Associate Professor of Political Science and Director of the Sun & Star Program on Japan and East Asia at the Tower Center for Public Policy and International Affairs, Southern Methodist University.

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