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China economy

Is reform dead in China? Trump’s trade war may be breathing life back into the cause

Deng Yuwen says China’s economic reforms have stagnated as Beijing does not have the will to wade into political reform and further marketise the economy. However, the trade war with the US might give China the push it needs to change things

PUBLISHED : Tuesday, 02 October, 2018, 7:47am
UPDATED : Tuesday, 02 October, 2018, 7:54am

As China marks the 40th anniversary of its reforms, Beijing has already announced that it will hold a grand commemoration at the end of the year, and officials have recently cranked up the propaganda about reforms. But besides paying tribute to the glory of past reforms, will Beijing announce a new round of changes and return to the path of Deng Xiaoping’s reforms? That’s unclear to the outside world.

Meanwhile, most people in civil society, and even inside the system, are pessimistic about reforms. More than 10 years ago, when some liberal intellectuals chanted the slogan “Reform is dead”, society might not have agreed; now, this has basically become the social consensus.

Against this background, a recent seminar held by an influential Chinese think tank, the China Economists 50 Forum, has ignited public expectations that China will restart its reforms. This is due to the attendance of Liu He, who is President Xi Jinping’s chief economic adviser, the maker of China’s economic policies, and vice-premier.

The China Economists 50 Forum is an academic organisation with the mission of advancing China’s reforms. Its members basically include China’s top economics scholars, as well as retired and incumbent senior officials who are also academics – Liu is one of them.

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In general, officials at the vice-premier level do not attend or participate in non-official seminars. This is not only a question of time and itinerary, but also because the outside world ascribes political motivations to the officials’ actions and activities. If they attend a seminar, it shows the seminar has a political purpose that needs to be highlighted by their attendance.

And this is how Liu’s participation in the China Economists 50 Forum was seen. At the seminar, the top scholars spoke boldly of reform, different in tone from official propaganda. If these words had been spoken by an outside scholar, or an unimportant scholar inside the system, they would have sounded like grievances. But these scholars are deeply involved in China’s economic decision-making – some of the scholar-officials were or are policymakers – and the same words spoken by them gained a different meaning.

For example, Yang Weimin was a deputy director of the powerful Office of the Central Leading Group for Financial and Economic Affairs and is now a deputy director of the Economic Affairs Committee of the Chinese People's Political Consultative Conference. At the seminar, he criticised the official reforms as “small reform” and “fake reform”. Calling for accelerated, comprehensive and deep reforms of the system in a new era – real changes that “crunch hard bones” – he proposed reforms from eight aspects, including the reduction of the government’s power to decide resource allocation.

Considering he was Liu’s deputy at the Central Leading Group, Yang’s relatively complete proposal could, to some extent, be regarded as an expression of Liu’s views. However, it would still be a stretch to interpret the seminar as a signal that China is restarting its reforms. At best, it was a gathering of scholars and officials who are dissatisfied with the current situation and hope Beijing will undertake what they believe to be real reforms.

But there is great uncertainty about whether Beijing will accept their suggestions, and how far China’s reforms can go. We won’t know until the end of the year, the reason being that, at the moment, Beijing does not have the will to undertake political reform.

The question of political reform was sidestepped by the top scholars at the seminar, probably because they realised it could not be discussed and it would be useless to talk about it. Yet, they all know it is impossible to carry out real economic reforms without making political changes. Authoritarian power is not compatible with the market economy, and ultimately compromises market efficiency.

So what is Liu He’s attitude towards political reform? It now seems that although the trade war has not diminished his role as Xi’s key economic adviser, he is cautious about political reform and has a limited right to speak about it, if at all.

I don’t doubt that Liu himself believes in the market economy. He should know that further marketisation of the Chinese economy would inevitably require corresponding changes in the governmental and political systems. Yet, in the past few years, Chinese politics has made a left turn – a trend Liu has failed to stop.

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A key item in Yang’s proposal called for the reduction of the government’s power to allocate resources, which is not about to happen soon, considering the state of China’s reforms in recent years.

Moreover, the party is more powerful than the government now, and controls everything; the behind-the-scenes power to decide resource allocation has already been transferred from the government to the party. Under the circumstances, anyone who wants to reform the party system will be accused by rivals of weakening the party’s leadership, and this is a political risk those reform-minded senior officials are unwilling to take. Also, the supreme power has shown no sign of willingness to reform the party.

But if the party and the government don’t change, there are no grounds to talk about large-scale tax and fee reductions. This is actually why the government keeps introducing tax cuts, but enterprises actually feel their tax burden increasing.

Similarly, if the party and the government’s functions stay unchanged, party-controlled, state-owned enterprises will not be able to marketise and become more efficient. To survive and develop, these SOEs will then rely further on national support, squeezing the development space for the private economy.

Having said that, reforms are not a lost cause. Facing external pressure from the trade war with the United States, the Chinese authorities may have no choice but to make limited reforms.

On top of previous tariffs on US$50 billion of Chinese goods, US President Donald Trump has decided to impose 10 per cent tariffs on US$200 billion of Chinese goods, and is threatening to tax the remaining US$260 billion-plus. This will undoubtedly exacerbate China’s economic difficulties and might even plunge the country into a crisis.

To avoid social unrest, the authorities could respond with reforms: relax their control of the economy, curb the expansion pace of SOEs, and allow the private economy to develop more rapidly. As part of a plan to support people’s livelihoods, tax cuts should be implemented, the government should be trimmed, and incomes lifted. The economy should be driven by domestic demand and rely less on external markets.

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Such reforms are very likely. And although reforms of this kind cannot solve China’s fundamental problems and meet people’s demands for democracy, they would release the vitality of Chinese society, resolve the difficulties created by the trade war and tide Beijing over.

From this perspective, Trump may be the greatest midwife of China’s reforms.

Deng Yuwen is an independent political commentator and international relations scholar. This article is translated from Chinese