Where is China going? The history and future prospects of China’s economic reforms

In recent years, numerous phenomena in Chinese society have worried the informed elites and have angered the common citizens. On the one hand, government power has been expanding, the monopolies of state-owned enterprises, especially central enterprises, have grown, and consumption of public funds and official corruption have become rampant. On the other hand, there have been widespread forced evictions and demolitions in the rural areas, soaring house prices in the cities, serious inflation, glaring wealth gaps and inequalities, and all kinds of rising social tensions. What are the reasons for all of this? Is there any way out?

Whereas some may blame the market economy for all the negative features in Chinese society today, others point out that the real source of the current problems is precisely the opposite, that is, a true market economy has not yet been completely established. The fundamental argument is that the so-called “socialist economic system” that exists in China today is in fact a hybrid system, with half-statist and half-market characteristics, and dominant control by the government. The dangers of stagnation, even retrogression, are lurking within this system.

Reviewing the reform process, we discover the historical roots to the formation of this system. China initially adopted a strategy of incremental reforms to avoid social turbulence, which involved introducing some market mechanisms into the statist economic system, and allowing the development of a private sector. At that time, such a government-dominated market economy model was a necessary stepping stone, but it resulted in a two-track system within an institutional environment that encouraged rent-seeking. The expansion of the institutional bases for rent-seeking activities in turn led to rampant corruption. That is to say, the half-statist, half-market system facilitated the formation of special interest groups that ultimately became the biggest obstacles to the furthering of the reform and resulted in an inextricable impasse.

During the last decade, this alarming process has intensified as a result of a strengthening of the statist elements that have contributed to substantial stagnation, and even retrogression. In many areas, we have witnessed an advance of the state-owned sector and a retreat of the private sector. In particular, a policy of “expanding demand and maintaining growth” was adopted in 2009. The result was that 4 trillion yuan in investments and 10 trillion yuan in loans all went to government projects and the huge state-owned enterprises, causing a large-scale transfer of wealth from the citizens to the government. Central enterprises now hold powerful monopolistic advantages in industries such as energy, raw materials, transportation, communications, and finance. Furthermore, state-owned enterprises have amassed huge profits due to the power of their administrative monopolies and their commandeering of public resources. In fact, the state-owned assets, which have actually become private assets held by various departments, have encouraged the widespread corruption.

Another much criticized problem is land financing. Since the early 1990s, land has become a major source of rent-seeking. After acquiring cheap land from farmers, local governments have sold it at high prices, thereby exploiting the wealth of farmers on a shockingly large scale. On the one hand, land financing has made the local governments extremely rich, encouraging extravagance and leading to large and wasteful projects. On the other hand, many farmers have become either refugees or potential sources of the rising social discontent. Land financing has also increased housing prices and widened the income gap.

The root of all these problems is the growing government power in this strengthened half-statist, half-market system. Surprisingly, there are some who sing the praises of this so-called “Chinese model,” arguing that the strong government, big state-owned enterprises, and GDP growth driven by massive investments have all been positive successes.

However, a continuation of this model will inevitably lead China along a path to an “Asian drama” of rampant corruption and social disintegration.

In itself, the half-statist, half-market system is a transitional form that must move forward and evolve into a true market economy based on rule of law. The consequences of the petrification of this system will be retrogression, with the government constantly expanding its regulatory powers and reverting to state capitalism. In such a case, a small number of plutocrats will control the rights of disposal of state-owned assets and will easily be able to transform them into private property. In essence, the result will be a form of “crony capitalism.” This could provoke a rise of ultra-leftists who, taking advantage of the popular anger, would mislead the people by their “revolutionary” slogans. They would then call for a return to a completely statist system, hence seriously disrupting the process of modernization.

Going forward, how it chooses to proceed will be critical in determining the ultimate fate of the country. If China allows the reform process to stagnate and retrogress, the result will be serious social chaos and disintegration. The only way forward is to readjust the reform agenda by unswervingly promoting market-oriented economic reforms and political reforms in the direction of rule of law and democracy.

Featured Image Credit: Wuxi, Jiangsu, China by Thomas Depenbusch. CC-BY-2.0 via Flickr.