In 2013, the Chinese government unveiled a political program, which promised real reform of the economy is overloaded with debt and skewed under the influence of a large sector of state-owned enterprises of the country. But China did not bring this program to life, and prefer to shy away from risks arising from the transition to a market economy (marketization). The country returned to the methods she knows best: state control over the economy and created a semblance of stability.
2017 monitoring economic policy in China is conducted under a joint project of the Institute of politics the Asia society and the consulting firm Rhodium Group “Chinese monitoring” (The China Dashboard). Analyzing objective data in ten key areas of the economy, we found out that for the past three years, the Chinese reforms were either lethargic or altogether absent.
The failure of the Chinese government to fulfill its promise and make the economy more open and undermines its credibility. In addition, it is a growing global discontent, which now feels China. Before the start of the pandemic Covid-19 the lack of reform weakened the economic performance of China, the country has become too dependent on the continuous growth of the debt, and the private sector have lost their optimism.
Now China is at the crossroad. Because of the crisis Covid-19 of the country’s GDP fell for the first three months of the year by 6.8% — this is the first (officially recognized) quarterly GDP decline in Chinese modern history. For the first time in more than 25 years, China did not publish the target numbers in the growth rate of the economy.
In addition, today the debt has become for China even more of a problem than in 2013, so the government may not resort to massive stimulus, as was done during and after the global financial crisis of 2008. The buildup of debt will only exacerbate the existing risks in the economy, the bubble in the real estate market and a bloated banking sector, sitting on a mountain of dubious debts (in the past decade, its credit portfolio grew four times).
Amid all these difficulties, the Chinese government returned to the theme of the reform agenda. April 9, it published a plan to improve the “market allocation of factors of production.” And then, on may 18, released a broad Manifesto in which decisions under the slogan “Employment first” declared part of the traditional fiscal and monetary policy. In this new reform program recognizes the importance of competition and proposed to strengthen the protection of private firms, intellectual property rights and business secrets. The government also spoke in favour of strengthening the mechanisms of market pricing, formalization of property rights and limitIceni administrative interference in market activity.
This is all very good. But will the world believe China at this time? The government still has not explained why it was not implemented, his reform plan in 2013. In addition, the new promises of reform were given without much detail (and as you know, the devil).
Meanwhile, foreign companies were first shocked by the initial mistakes of China in curbing Covid-19, and now they are increasingly concerned about the growing Sino-American tensions, so they tend to diversify their investments by guiding them to other countries. Meanwhile, private Chinese companies began to hold back new capital expenditures. If all these changes continue, then the possibility of China in the process of economic recovery after the crisis will be limited.
In addition, China’s economic troubles are compounded by his recent decision to impose on Hong Kong the new law on security. Apparently, the government is prepared to accept high economic costs and a surge in foreign indignation, trying to achieve greater subordination of Hong Kong. But if Hong Kong will fall again to violence, and China will respond to this extreme repression under the new law, then the foreign companies will be even less incentive to stay in the country, which will further complicate prospects for the Chinese economy.
Critically important will be the coming months. If China wants to prove that his intention reforms at this time, he could privatize or break up some of the SOEs. He could cancel the remaining requirements for joint ventures. He could ease limits on foreign shares in companies, opening a wider range of sectors to foreign direct investment. The EU puts pressure on China in implementing some of these changes on the ongoing negotiations on a comprehensive bilateral investment agreement. In the second half of this year we will learn whether China is ready to take the risks of genuine reform.
However, even if China really will make a liberal turn in the economy, it is difficult to imagine how he will be able to cope with “tired of promises”, which is already feeling the international economic partners. Officials in many countries with market economies will insist that China actively adapt to the international market standards, and not expect that other countries will begin to adapt to its economic system under the leadership of the party. Significant economic reforms within China will be key to leveling the global playing field and will help prevent a mass Exodus of foreign players.
Covid-19 — this is the most serious for several�� decades of economic challenge for China. But the leadership of the country has a ray of hope: this crisis gives them the opportunity to refocus the economy on a sustainable long-term growth through market reforms. Understand whether Chinese President XI Jinping this reality and do take advantage of it this time? Or he will start more actively to use failed approaches, seen after 2013, when many of the promised reforms, it was decided to donate out of fear of instability and changes associated with these reforms?
