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Kevin Rudd and Daniel Rosen wonder how serious China's leaders are about newly unveiled economic reforms, given past failures

Kevin Rudd and Daniel Rosen wonder how serious China's leaders are about newly unveiled economic reforms, given past failures

By Kevin Rudd and Daniel Rosen*

Back in 2013, the Chinese government laid out a policy agenda that promised real reforms to an economy laden with debt and distorted by the influence of the country’s large state-owned enterprise (SOE) sector. But instead of seeing that agenda through, China chose to dodge the risks entailed by marketization, and has since reverted to what it knows best: state control over the economy and the semblance of stability that comes with it.

Since 2017, The China Dashboard, a joint project of the Asia Society Policy Institute and the Rhodium Group, has been tracking China’s economic policies. Having analyzed objective data across ten critical spheres of the country’s economy, we find that China’s reforms have been tepid to nonexistent over the past three years.

The Chinese government’s failure to deliver on its promise of a more open economy has undermined its credibility, and fueled the growing global backlash that it is experiencing today. Even before COVID-19 arrived, the lack of reform had sapped China’s economic performance and made it persistently over-reliant on debt, leaving its domestic private sector increasingly disheartened.

Now, China is at a crossroads. The COVID-19 crisis sent its economy plunging by a reported 6.8% in the first three months of this year – its first (acknowledged) quarterly contraction on record. For the first time in more than 25 years, China is not publishing a growth target.

Moreover, because debt is now an even bigger problem for China than it was in 2013, the government does not have the option of pursuing stimulus on the massive scale that it did during and after the 2008 global financial crisis. Piling on more debt would only aggravate the current risks to the economy, which include a property-market bubble and a swollen banking sector that, after a quadrupling of loan portfolios over the past decade, is sitting on mountains of shaky debt.

Faced with these limitations, China’s government has put reform back on the agenda. On April 9, it issued a plan to improve the “market-based allocation of factors of production.” And it followed that up on May 18 with a broad-spectrum manifesto that elevates “employment first” policies to the level of traditional fiscal and monetary policy. The new reform agenda acknowledges the importance of competition, and proposes better protections for private firms, intellectual property, and business secrets. The government has also made pronouncements about strengthening market pricing mechanisms, formalizing property rights, and restricting administrative interference in market activities.

This is all well and good. But can the world believe China this time? The government has yet to explain why the 2013 reform plan was not implemented, and the new reform pledges remain short on detail (wherein the devil lies).

Meanwhile, after being shaken by China’s initial missteps in containing COVID-19, foreign firms are increasingly alarmed by rising Sino-American tensions, and are seeking to diversify their investments across other countries. At the same time, private Chinese firms are holding back on further capital expenditures. If these business shifts continue, China’s ability to recover from the crisis will be hampered.

Moreover, China’s recent decision to impose a new security law on Hong Kong has further exacerbated its economic challenges. Apparently, the government is willing to accept high economic costs and a barrage of foreign outrage in pursuit of a more compliant Hong Kong. But if Hong Kong descends into violence again, and if China responds with extreme forms of repression under the new law, international firms will have less incentive to stay, further clouding the Chinese economy’s prospects.

The coming months will be crucial. If China wants to prove that its reform intentions are serious this time, it could privatize or break up some SOEs. It could abolish the remaining joint-venture requirements. It could relax foreign equity limits, thereby opening up a wider range of industries to foreign direct investment. In fact, the European Union is already pressing China for some of these changes in ongoing negotiations for a comprehensive bilateral investment agreement. We should know in the second half of the year whether China is prepared to assume the risks of genuine reform.

Yet even if China does take a liberal turn on the economy, it is hard to see how it can reverse the “promise fatigue” that has already set in among the country’s international economic partners. Officials in many market economies will insist that China do more to adjust to international market norms, rather than expecting others to adjust to its own party-led economic system. Significant economic reforms within China will be key to leveling the global playing field and preventing many foreign players from packing up and leaving.

COVID-19 is the greatest economic test China has faced in decades. The silver lining for China’s leaders is that the crisis affords them an opportunity to reorient the economy for sustained long-term growth through marketization. Will Chinese President Xi Jinping grasp this reality and seize the moment? Or will he double down on the failed approach of the post-2013 period, when many promised reforms were sacrificed for fear of the change and instability they entailed?


*Kevin Rudd, a former prime minister of Australia, is President of the Asia Society Policy Institute. Daniel Rosen is a founding partner of Rhodium Group. Copyright: Project Syndicate, 2020, and published here with permission.

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28 Comments

Well this is bound to have an impact on their economy. BBC Beijing to set up new security office in Hong Kong. "China's new security law for Hong Kong envisages setting up an office in the territory to gather intelligence and handle crimes against national security, state media say. The new security law will also override any local laws that conflict with it, Xinhua news agency reported.

The planned law has sparked protests and drawn international condemnation. Critics say it will destroy the freedoms Hong Kong enjoys but which are not available in mainland China."
https://www.bbc.com/news/world-asia-china-53119992

BBC, one of British Intelligence's stenographers is not a good starting point for the veracity of it's news content.

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Questioned about freedom of speech in his country President Xi Jinping responded that freedom of speech in China was not an issue, it was just that freedom after speech could not be guaranteed.

This is based on assumption that China will be welcome by open arm by all - Will they ?

"for sustained long-term growth"

Can't be had in a bounded system. Period.

Rudd may be a Mensa-level intellect in some things, but this is a dropped ball of first-order magnitude.

PDK as always fails to comprehend what 'growth' is, when it is obvious to everyone that is not stuck in antiquated Malthusian mindsets and ignorance of a technological age that continually reduces the cost of everything, and finds cheaper alternatives to expensive inputs, that it is becoming almost entirely decoupled from production of physical goods.

I don't think it is PDK that fails to comprehend growth, not at all.

Of course the debate here is whether or not the system is bounded. And what long term means.

We've seen time and time again that the bounds are pushed out through technology. Can this occur infinitely? Probably not, however what does long term mean? 10 yrs? 20/50/100/200?

I think we can safely say technology will be able to push out the bounds on our finite physical resources for at least 200 years

Kevin is a bright boy, but a boy, like most lefties are. His eternal optimism for socialist methodologies working has to be admired - a bit like Chris Trotter's I suppose. The sad truth of socialism is that it rewards those who not contribute. We all need to contribute - to ourselves, our families, to our friends & communities, to our cultures & our countries. That's how life gets by, gets on & gets up again when you fall over. If socialism doesn't allow you to fail, how can you learn to get better? You can't. You fail, socialism rewards you for failing (kindness???) so you fail again. There is no growth here - either personally or anywhere else. Socialism encourages people to fail & is therefore a failure of in its own right. I don't know about you, but I do not wish to become a beneficiary before my time. At 65 I'll accept it, but not before.

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What you're describing sounds like today's "capitalist " system, not allowed to fail, rewards those that make no contribution and so on.

Indeed, crony capitalism for asset owners.

When we last visited our old neighbours in the USA we asked why the then president Obama was being called a socialist. The answer was prompt, and simple. Because he will take money from us, that we have earned paid tax on and saved and give it to someone who has done none of those things. That is a deeply entrenched basic maxim and hardly difficult to find anywhere, in society globally. Like it or lump it, in the free world people, as the song goes, have the right to be wrong if they choose, lawfully of course.

Pathetically trite and simplistic reasoning for public taxation.
Since Americans have chosen to vote for governments that insist on spending and not taxing, they have a $26 trillion deficit.
Governments tax and spend money mostly to maintain a "society" (untrendy word but coming back recently) and law and order.
prev they just taxed to fund wars.
Individuals cannot exist without a society to create them.
Just because the Right has dominated social discourse for 45 years, this truism should not be forgotten

"Righties": can we please have a recital of their economic polices post CV19, or is it more of the neo-liberal and zombie financialisation that got us in this mess 1986-2019.
Funny how "Rightie" is not a term of derision, as it should be

You may have missed this, but, RWNJ

Very few countries in the world aren’t socialist, to some degree. One you introduce redistributive taxation policies for welfare, state pensions etc, you’re well down the road. Decency v Darwinism really, only debate is the allocation. Society needs cooperation to flourish. The ultimate outcome of ‘survival of the fittest‘ is a singularity.

Socialism, for those who do not read enough, entails ownership of the means of production.
That rather narrows the candidates for the title
And rigged single party elections, by the way, excludes China and Russia, both of which are in fact a mix of kleptocracy and oligarchical elite rule.

LJM,

You use the word socialism with little or no understanding of it. here is a quote from Martin Wolff, chief economic commentator on the FT-hardly a bastion of socialism-"High tax countries have been more successful in achieving their social objectives than low tax economies. They have done so with no economic penalty". You might want to look back at American tax rates in their post WW2 'golden age'.
I don't recall American banks and insurance companies being allowed to fail in the GFC. Is the US a socialist country?

Socialist is the name we give to a society where the state helps those who cannot help themselves, and places less emphasis on helping those individuals who are able to make money if allowed, or given the freedom, to do so.
Capitalist is the name we give to a society that emphasizes the facilitation of making money by private individuals and either doesn't help the rest of society or only minimally does so.

But these are just convenient labels that have picked up so many connotations over the years that they are not now really useful.
If you want to get down to the real nitty-gritty you have to start talking in terms of social evolutionary theory which provides more insight into how society is organised.

What name do we give a society where the state not only helps those who cannot help themselves, but also supports those who just don't want to help themselves?

'Declining', 'Failing', 'Degenerating', 'Suiciding', 'Stupid'
A large proportion of humans are, for sound evolutionary (don't waste energy when food is in short supply) reasons, fundamentally lazy. They will try to get through life on minimum effort if given the option. Policy that enables that, eg vote-yourself-rich pandering to welfare recipients or civil servants via left wing political Clientalism inevitably leads to the destruction of societies, as Greece, Argentina (Peronism), Venezuela (Chavesmo) and in next 10-20 years most of the oil producing 3rd world illustrate.

Now we are getting there! This is the problem we face in NZ were our socialism has been corrupted by interest groups to the point where people can and do actively choose to not help themselves. But a significant part of this issue is the trans-generational issue of not enough jobs paying decent wages. Chris Trotter's article discussing the 'light Governmental touch' talks about government but makes no mention of the devastating effects on jobs that has had. And this results in an inevitable decline in societal standards and safety. And this is visible every where.

Are you describing benefits to the poor and elderly, benefits and transfers to asset owners and property investors, or both?

Because, yeah, transfers to asset owners have certainly undermined generations of productive young Kiwis in recent years, and this welfare mentality among asset holders needs to change.

"Socialist is the name we give to a society where the state helps those who will not help themselves,..."
There. Fixed it for you.
Social security is a safety net; not a hammock.

Rudd is such a "useful idiot", to use Stalin's phrase, which seems appropriate since we are discussing an openly Stalinist state. Silly boy, it's not about looking after people, it's about controlling them. Sheesh.

Marx or someone like him said," To each according to his need. From each according to his abilities." That is classic socialism.

If China were to do a complete about face and do all Kevin is expecting, I would still place no faith whatsoever in that. It could only be viewed as a temporary bending to the headwinds that they face. Xi has made their long term objectives abundantly clear, and China is a nation that acts to very very long term plans. They could change Xi, they could change their policy settings and even laws, but I would not trust them for 5 seconds. It is best that we significantly reduce and eventually eliminate all our trade with them as quickly as possible without pushing ourselves into the sort of dangerous and bullying stand-off that Australia faces. I seem to remember Rudd as a very pro China politician. Maybe he is no longer useful to them and has been tossed off the sort of gravy train that they reserve for useful politicians. Good on you Kevin for speaking out.
As a side note, after the USA elections later this year we can expect that the war or words with China will be smoothed over by China's totally corrupt puppet, Joe Bidden. Infective concessions will be made and he will be hailed as the great negotiating master of the century. Nothing will really change and China will go back to screwing the world.
https://nypost.com/2020/03/12/why-china-is-rooting-for-joe-biden-to-win-...

Socialism and capitalism both have very scary and dangerous consequences. Countering these very dangerous tendencies require a vigilant, strong, brave, active and wise nation (collectively). Without such an entity, both socialism and capitalism will be terrible.
In my personal view, in a capitalist state, individuals will fight to reign in the capitalist madness and sometimes they succeed and often they fail. Individual's ability to do so in a social state is far less as the state will inevitably equate itself with people and effectively eliminate all who stand against it.

Days to the General Election: 26
See Party Policies here. Party Lists here.