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Yukon Huang (China Opening)

Mar 28, 2018

Currently, China’s economy appears to be doing well regarding key indicators, but the longer-term risks may not be what many believe. The key question is how China will resolve the contradiction highlighted in official statements that the market should play the “decisive” role in allocating resources while the state should play the “leading” role in the economy.

The most obvious example is the slow hemorrhaging of the economy due to the sharp decline in profitability of state owned enterprises (SOEs.) Thus far, diversifying ownership rather than more substantial reforms, such as allowing private interests to take a controlling share, has been the leadership’s strategy as it sees large SOEs as national champions.

For those looking for sources of sustainable growth, the major driver is China’s urbanization process. The state “manages” the movement of labor by discouraging migration to the largest cities rather than allowing market forces and personal choice to shape choices. But this policy militates against faster economic growth since labor productivity is greater the larger the city. Thus many experts have recommended that China’s restrictive residency (hukou) policies should be phased out.

President Xi sees his campaign against corruption as necessary to preserve the credibility of the Party but this may impact negatively on growth if local officials are not responsive to directives. The proposal is to strengthen the rule of law and introduce an all-powerful supervision commission. What is urgently needed are regulations governing the rights of private firms to resources controlled by the state and less restrictions on their operations.

China’s economic success thus far was partly due to a willingness to set aside ideology for results. But President Xi has brought back a stronger ideological flavor in policymaking and recentralizing authority. Only time will tell whether the abolition of term limits will provide Xi with the space to implement reforms that exceed the expectations of the international community by bridging the aforementioned contradiction.


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