Xi Jinping, China’s perennially grinning leader, is fully aware that the world’s largest economy in waiting has to leave Deng’s model of cheap labor, capital and focus on export markets behind. Wages are increasing, capital is becoming too expense, and domestic demand will have to pick up in order to keep economic growth as high as it used to be over the past decades. For the first time since the 70s, many argue, playing it safe means undertaking some more substantial economic reforms.
For the four days of closed-door talks that started last week and involved the Central Committee of China’s ruling Communist Party, optimists had hoped for important reforms in the area of finance, taxation, land, state assets, social welfare, innovation, foreign investment and even political governance.
Yet profound reform à la Deng is unlikely. Many reforms face strong resistance from powerful interest groups such as local governments or state-owned monopolies, which are seen as the main obstacle to modernizing China’s system. Xi Jinping may be an unusually powerful President, but that does not necessarily mean he is strong enough to win the internal power struggle. Alternatively, he may prefer to wait for the economic situation to worsen to increase his leverage. In any case, many observers tend to overestimate Xi’s capacity to influence the Communist Party: Unlike Deng, Xi is no revolutionary hero and former right-hand man of Mao. Also, China in 1978 was an economic disaster, with far fewer status-quo oriented actors than today. Change seemed far more natural back then than it does now.
Most likely, the new reforms (whose real impact will only be known years from now) will seek to slowly liberalize market forces to be the determining factor in setting the price of energy, capital and land. Reforming the latter may make it possible for farmers to sell their land and move to the cities – which, in turn, may increase the rural populations’ role as consumers.
And yet, any reform always carries the risk of producing unintended effects. Reorienting the world’s second largest economy from an investment-led one to a consumer nation is bound to transform Chinese society in ways nobody can adequately predict at this point. Mikhail Gorbachev, loved abroad but disliked at home, is a powerful example of the perils of too much reform. Xi is by definition unable to push through reforms that may threaten the Communist Party’s monopoly.
Yet ill-conceived reforms could also spell economic disaster — not just for China, but also for those 160 countries that have China as their most important trading partner, including most emerging powers. Given all that, Xi is likely to tread carefully – and cross the river by feeling the stones.
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Picture credit: Reuters (http://www.scmp.com/sites/default/ files/styles/980w/public/2013/04/ 23/usa_sin109_35189443.jpgitok=LeDBo20F)
