What does the future hold for China’s economic transformation as its first ‘reformists’ fade from prominence?
After years of decision-making, retirements of market believers, such as Wu Jinglian, set to complicate China’s process of reinventing its economic model
In 1989, after Deng Xiaoping crushed the democracy movement in Beijing, it seemed that an age of liberal and pro-market experiments were over.
In the compound of Zhongnanhai, the walled community of the Chinese leadership, a small office with the task of studying how to dismantle China’s command economic system for a market-based one was closed down.
But unlike political reform advocates and researchers, who were later jailed or expelled by Deng, those involved in designing an overall market-based economic system in China, without challenging the absolute power of the Communist Party, were largely protected and assigned to other government jobs.
The market reform researchers in the late 1980s and early ’90s published many articles detailing their thoughts on the country’s economic future.
Many climbed China’s bureaucratic ladder over the following years, becoming Beijing’s most capable hands on economic, financial and monetary matters and wove their early views into state policies that fundamentally shaped the economic landscape of China and also the world.
They are known as China’s reformists, a vaguely defined group that played an instrumental role in framing the country’s “socialist market economy” – a hybrid of a free market economy and an authoritarian government.
Their intellectual leader is Wu Jinglian, an 86-year-old renowned economist, who led research teams and advised China’s top leadership.
Many of Wu’s early colleagues also became reformists, such as Zhou Xiaochuan, the People’s Bank of China governor; Lou Jiwei, China’s recently retired finance minister, and Guo Shuqing, governor of Shandong province.
However, after a quarter of a century of push and pull, many prominent reformists are fading from China’s policy decision arena as they approach retirement age.
When China’s most powerful cadres gather at Beijing’s Jingxi Hotel this month to chart economic policies for next year, one of their top agenda items could be finding replacements for this pool of talent.
The pro-market generation is departing at a time when China needs such reform-minded officials to complete the nation’s half-completed economic liberalisation and to steer the world’s No 2 economy into its next phase.
“People such as Lou and Zhou are liberals and reformists ... They were among the first batch of China’s technocrats to grasp the fundamentals of Western economics,” said John Wong, a professorial fellow at the East Asian Institute of the National University of Singapore.
Lou, praised as being “uniquely at home with the market economy and also having a strong international outlook”, helped design a centralised fiscal and tax system in 1994, which channels a large share of tax revenue into central coffers and compensates local losses through a transfer payment system.
This government talks of reform, but protects poorly operated state-owned enterprises and remains hostile to market-based competition
It helped Beijing weather the Asian financial crisis and state-owned enterprise reform, but the new tax system also forced local governments to rely on financing vehicles and land sales to fund local spending, sowing the seeds of local debt crises.
Zhou was bestowed the role of financial regulator. He designed the revamp of China’s state banking sector, created the interbank bond market, liberalised interest rate controls, and developed a Chinese central banking scheme that, on the surface, is on a par with the US Federal Reserve, the Bank of England and the Bank of Japan.
The reformers began to emerge on China’s decision-making stage after Deng’s Southern Tour in 1992 when he urged the country to embrace markets. As paramount leader and general architect of China’s reform and opening up, Deng cleared the ideological obstacles for Beijing to officially pursue things that were once derided as capitalist.
At a key Communist Party gathering in the autumn of 1992, it was decided that China would pursue a market economy where resources would be allocated by market forces, instead of state orders.
Under Zhu Rongji, who was a vice-premier in charge of economic works before he was named premier from 1998 to 2003, deregulation and liberalisation were rolled out aggressively.
Thousands of state businesses were shut down, a trading account for the yuan was opened in 1994, private businesses became active players, and China became a member of the World Trade Organisation in December 2001.
Within a decade, China’s image turned from a repressive communist behemoth into an emerging economic powerhouse, and the reformists were behind many of the changes.
Zhu had worked with many of them in the 1980s, including Lou, and Zhu’s aide, Li Jiange, another member of the group.
The ‘black box’ fiscal system has not yet been changed ... Reformists stress economic liberalisation but cannot address justice, fairness and the interests of the weak
A group of talented, overseas-educated Chinese returned to the country and assumed important offices. They included Fang Xinghai, vice-chairman of the China Securities Regulatory Commission (CSRC), and Gao Xiqing, a former general manager of China’s sovereign wealth fund.
Laura Cha Shih May-lung was appointed by China’s cabinet as a CSRC vice-chairwoman in 2001, the first person outside the mainland to assume a vice-ministerial rank.
“These people have been instrumental in China’s age of reform. They really did do things that changed the system,” said Fraser Howie, director of Newedge Financial in Singapore and an co-author of Red Capitalism: The Fragile Financial Foundations of China’s Extraordinary Rise.
While they are eager to learn from mature economies about running a market economy, they are doing so without challenging China’s one-party, bureaucratic system, an opaque and secretive decision-making process, or largely vested interests in China’s state monopolies.
For instance, while Lou is trying to set up a fiscal system where officials will be accountable for public spending, it’s a big question whether this can be achieved in a country where external checks on government budgets barely exist and where government officials’ assets are strictly guarded as confidential information.
“The ‘black box’ fiscal system has not yet been changed. All are decided by administrative officials,” Hu Xingdou, an economics professor at Beijing Institute of Technology, said.
“Reformists stress economic liberalisation but cannot address justice, fairness and the interests of the weak.”
Even with purely economic decisions, their ideas are often subject to political winds.
After a poorly handled stock market rout, a new initial public offering system was shelved indefinitely so that officials could continue to examine which companies should be entitled to sell shares to the public.
The weakening yuan has also prompted Beijing to adopt unannounced capital account controls, holding back the opening of the capital account and the yuan’s global ambition – which have been Zhou’s long-term goals.
The influence of liberal pro-market ideas have declined in the past decade as the state’s hand became increasingly intrusive in economic activities to create a situation known as “the advance of the state sector and the retreat of the private sector”.
President Xi Jinping, who came to power four years ago, has pledged to let the market play “a decisive role” in economic activities, but state control over the markets for securities, property and foreign exchange market has increased.
“This government talks of reform, but protects poorly operated state-owned enterprises and remains hostile to market-based competition,” said Derek Scissors, a researcher at the American Enterprise Institute, a Washington-based think tank. “The 2013 third plenary meetings offered grand words but the results have been disappointing.”
At the same time, Xi’s top economic aide, Liu He, is the organiser of the China 50 Economists Forum, a club of renowned pro-market economists, including Zhou, Lou and Guo.
An article by an unidentified “authoritative person” in the People’s Daily in May blasted excessive state investment in the economy and designated bank lending, and argued that China’s economic growth would follow an “L-shape” trajectory, or low growth.
“The thinking of Liu He, the ‘authoritative person’, is definitely behind the economic exposition of Xi,” said Henry Chan Hing Lee, an adjunct research fellow at the National University of Singapore.
The question is whether Xi really will pursue market reforms – which would come at a price – or retreat to Soviet China 2.0 ,where reformers are no longer needed.
“Political reform isn’t a cure-all. What is needed in China is greater accountability and responsibility at all levels of the system,” Howie said. “Yet that isn’t happening.”
