China economy

Why economic reforms in China mean a bigger role for the state

Max Zenglein says under Xi Jinping, the state’s role in economic planning has only increased, and signs point to more controls being announced at the 19th Party Congress, rather than liberalisation, given that national interests take precedence over market principles

PUBLISHED : Thursday, 21 September, 2017, 12:35pm
UPDATED : Thursday, 21 September, 2017, 7:10pm

As the Communist Party heads into its 19th Congress in October, we can expect announcements for economic reforms, but not deeper economic liberalisation. Under Xi Jinping’s leadership, state control over the economy has increased, and all signs point to further expansion.

Market-based principles are increasingly subordinated to long-term national strategic ambitions. State-led programmes like Made in China 2025 and the Belt and Road Initiative seek to establish China as a global economic superpower. Another motivation for strong state involvement in the economy is the party’s entrenched distrust of market volatility and fear of losing control over the economy.

Rather than breaking up state monopolies, China’s reforms of state-owned enterprises (SOEs) focus on mixed ownership and public-private partnerships. The idea is to bring in private companies to help transform SOEs into financially sound, innovative and internationally competitive national champions.

In this process, the country’s private tech giants are particularly vulnerable to more government influence. Sectors such as artificial intelligence, big data, digital payment systems and industrial robots are seen as crucial building blocks for establishing China’s global technological leadership. Now that their products fall in the range of national strategic economic interests, they are at risk of closer state entanglement.

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China’s nascent social credit system to monitor citizens’ and companies’ behaviour is the most sophisticated example of the fusion between private companies and state goals as the system builds on user data collected by tech giants. Industrial policies such as Made in China 2025 or Internet Plus, as well as new guidelines for foreign investment, illustrate the state’s leverage in shaping Chinese companies’ decisions. From the state’s perspective, ideal private investment decisions are in sync with national targets.

Another prominent example is an ongoing effort to establish party committees in private, even foreign-owned, companies. Once established, these committees may influence management decisions towards pursuing national targets.

It will be harder to evaluate the competitive landscape in China as lines between policy-driven and market-driven forces blur. Foreign companies will be ill prepared to face growing Chinese competition at home and abroad – just as more liberal economies struggle to respond to China’s state-led forays into their markets.

China’s leaders do not plan to withdraw state influence from the economy. Political stability and the pursuit of national interests take priority over market principles.

Max J. Zenglein is an economist at the Mercator Institute for China Studies in Berlin