China’s once-in-a-decade leadership transition has now occurred with the conclusion of the 18th Party Congress and speculation is running high as to what the future direction of economic reform will be. The new lineup of the Politburo Standing Committee is a mixed bag in terms of reform. Key reformers like Li Yuanchao and Wang Yang were left off, but protégés of Jiang Zemin captured more spots than Hu Jintao’s allies. Jiang’s reign was associated with more economic reform and his resurgent influence may bode well for a renewed reform push.
Beyond the composition of the standing committee, the other indicator we have is the report to the party congress. In keeping with tradition, Hu Jintao delivered the report at the beginning of the 18th Party Congress. These speeches are looked to as guides to the direction of future policy initiatives, akin to the state of the union addresses in the United States. During a power transition, these reports are especially significant because they are drafted by the incoming administration in conjunction with the outgoing leadership.
Hu’s speech was interpreted by many analysts as a blow to economic reform. The report contains strong language as to the need to strengthen the state-owned portion of the economy. The report proclaims that state-owned enterprises are the principal part of the Chinese economy and that state-owned enterprises will increase their investment in areas of the economy that impact national security and core national interests. Those who buy in to the guojin mintui (国进民退) narrative will find much to fret about.
At face value, this is not very optimistic for economic reform. However, these statements need to be put in context with respect to what the Communist Party’s official position has been over the past decade.
Outside observers tend to scoff at terms like “socialist market economy” and “socialism with Chinese characteristics” as being self-contradictory and ex-post justifications.
Contrary to popular opinion, these terms do have meaning and represent official views on the correct path for economic development.
The essence of a term like socialist market economy is this: There is a proper sphere for both the state and private economy and that both can develop concurrently. From this perspective the call to strengthen and consolidate the state sector does not translate into an attack on private enterprise.
Indeed, if you read further in in the speech you will see Hu calls for further development of the private economy and efforts to ensure fair competition and legal protection vis-à-vis state-owned enterprises. In fact, the speech identifies managing the government’s role in the economy as the central issue in economic reform.
None of the language with respect to either the state or private sector is particularly new. Instead it represents the continued evolution of the Communist Party’s effort to nurture an increasingly important private sector while not abandoning state-owned enterprises. While perhaps not a rousing call to reform, Hu’s speech is also not a return to the economic policies of the past.
Despite the continuity with previous speeches, there were a couple changes that warrant a bit of optimism. Interest rate and exchange rate liberalization were mentioned prominently for the first time. There was also a reiteration of a gradual push towards capital account liberalization. This may mean that actions like increasing the flexibility around the benchmark interest rates this June were not one-off actions, but precursors to further reform.
Incrementalism is the guiding premise of Chinese policymaking today. Officially, this approach has been enshrined into party thought with the elevation of Hu Jintao’s “scientific development” into the pantheon of other ideologies (such as Deng Xiaoping Theory and the Three Represents). Continuity is also baked into the policy process, with the 12th Five Year Plan already setting out much of the policy agenda for the next several years.
There was nothing in the outcome of the 18th Party Congress that indicates bold and rapid reforms are imminent and that’s probably ok. While we would like to see policymakers move more quickly on promoting consumption, reforms to the interest rate and exchange rate need to be carefully implemented. That said, Chinese policymakers should be careful to make sure that incrementalism does not become an excuse for inaction as has often been the case over the past decade.