China’s second revolution

Plans for sweeping economic reforms will have global repercussions.

If China's economy continues to do well, its imports of goods will hit a value of $10tn in the next five years [AFP]

An ambitious reform agenda was unveiled during the third plenary session of the 18th CPC Central Committee in early November. It will serve as an overarching blueprint for the country’s development in the coming decades. The Chinese central leadership is determined to steer a future course by launching a new plan for reform and opening-up, which will be very consequential for the Brazil, Russia, India, China, and South Africa (BRICS) grouping, and the world at large.

Many observers think that this plenary session is as significant as the one held 35 years ago. In December 1978, Deng Xiaoping, one of the Party’s revolutionary leaders and a survivor of Mao’s Cultural Revolution, succeeded in convincing his senior comrades to support the reform and opening-up project which ushered in pivotal and historic changes for modern China. The country was on the verge of collapse due to the 10-year long Cultural Revolution, ideology-driven international isolation, and domestic political turmoil.

With the reform project, China has achieved remarkable success in developing its economy, lifting more than 600 million people out of poverty in 30 years. However, with remarkable success comes formidable internal and external challenges -difficulties in keeping the economic boom alive, addressing increasing social inequality, upgrading the governance capacities and tackling complex issues as a rising power in world politics.

Chinese leaders are now embracing the second “Deng Xiaoping moment”, by pushing forward with the reform agenda presented in the recent third plenary session. However, the most interesting difference this time lies in how intense the impact of the new reforms will be on the world and BRICS countries in particular.

China’s new reforms will be unfolding in a new global economic and political setting which is not ideal for Beijing.

Supersonic growth 

In 1977, China only accounted for 0.6 percent of global trade volume. Now, China is the largest single trading power, and it is the largest trading partner of more than 120 countries. China’s GDP is over $1.5tn more than the combined output of the other BRICS members. If China’s economy continues to do well, its imports of goods will hit a value of $10tn in the next five years. Based on research done by Chinese and US institutions, the capital outflows of China will be $1-2tn in the decade to come. Additionally, China is seeking a global role for its own currency. The overseas loans extended by China Development Bank outstripped World Bank lending by $10bn in 2008-2010.

However, China’s new reforms will be unfolding in a new global economic and political setting which is not ideal for Beijing. A big question facing most of China’s elites is how Beijing can cultivate and capitalise on the win-win/triple-win partnerships in its renewed reform drive.

Many Chinese believe that Western countries are suspicious of China’s rise and their attitudes towards China’s new reforms may be ambiguous. As Derek Scissors, an expert on China’s economy, pointed out, another decade or two of true market reform could see China as a high-end competitor to the US, and a successful, reforming China will challenge US economic leadership far more intensely than the hints of challenge seen to date. Obviously, Washington will be not as supportive of Beijing’s renewed drive as it was when China started its reform in the late 1970s given the fact that many American strategists now view China as the only potentially qualified rival.

Though Beijing has been quite energetic in upgrading its relations with the US, the EU and other Western countries, it adopted a subtle and forward-looking approach in reassessing and repositioning itself in the global economy. As the 2012 World Trade Report notes, “South–South” trade between developing economies accounted for 24 percent of the world trade in 2011, up from 8 percent in 1990. In 2020, more than 80 percent of the world’s population will live in the developing countries which are seeing an unprecedented rise of the middle class.

Given the dominant role of developing economies in China’s growth, and the huge potential of the global south, Beijing is conducting a quiet rebalancing towards the developing world. Meanwhile it still needs capital and advanced technology and know-how from the developed world. It seeks to position itself as “the state in the middle”, taking advantage of what it has achieved and possessed, acting as a bridge among the developed and developing countries and maximising the strategic space and resilience in response to the new changes in the international economic landscape.

Obviously, such delicate and ambitious rebalancing entails two-fold efforts: One is a series of bold internal reforms to regain the economic momentum and upgrade its competitiveness, and another is to build up an international coalition of ambitious players like the BRICS countries in seeking better development, and reforming the global economic governance. Unfortunately, intra-BRICS cooperation is still limited. For example, the value of China’s trade with South Korea is only slightly less than China’s entire intra-BRICS trade. 

For the sake of moving towards a more market-oriented, efficient, sustainable and innovative economy, Beijing has made a hard choice and is ready to make a real difference.

Comprehensive reform

The prospect of China’s economy and its potential to form and lead the international coalition will hinge upon the effectiveness of its own renewed reforms. Looking into the communique issued after the third plenary session, it is clear to see that it is actually a comprehensive reform package which aims to solve some structural and deep-seated problems, such as modernising the financial system to unleash the private sector’s productivity and creativity, changing household registration regulations to spur labour mobility, transforming the economic growth model, promoting green standards to enhance sustainability, and adopting a rule of law approach and tougher and binding anti-corruption measures. 

Most importantly, it was made crystal clear that the market will have a “decisive” role in China’s economy by 2020, compared to the “basic” role used in the previous policy line. It is certainly a great leap forward in China’s reform path. The communique also highlights that the party will promote national governance systems and governance capacity modernisation. The emergence of such new policy concepts in the party’s vital document is very significant.

China’s leaders have realised that excessive state intervention in the economy is a problem rather than a solution. The recalibration of state-market relations in a bold manner is very compelling and urgent for long-term and healthy growth of the emerging economies, though this process “will be very painful, even feel like cutting one’s wrist”, as Chinese premier Li Keqiang admitted in public.

Government over-intervention, a rigid and risk-laden financial system, high debt levels, restrictions on labour mobility, and structural deficiencies among others issues, are daunting challenges facing the BRICS countries which have suffered from various development difficulties in recent years. There is no alternative but to face the harsh new reality and adapt to changes in the marketplace. Otherwise, emerging countries will be always emerging.

For the sake of moving towards a more market-oriented, efficient, sustainable and innovative economy, Beijing has made a hard choice and is ready to make a real difference. It is perhaps the most inspiring lesson that the non-China BRICS members should learn from Beijing’s new moves.

Minghao Zhao is a research fellow at the Charhar Institute, a Chinese international policy think-tank. He is also an adjunct fellow with the Centre for International and Strategic Studies, Peking University and the executive editor of China International Strategy Review.