How Xi Jinping’s focus on security and control punctures decades of China optimism
- With a shrinking working-age population, China needs an acceleration in productivity growth to reclaim its mantle as the world’s greatest growth story, but the Chinese leader has not delivered on the promise of a rebalanced economy
Having shuttled back and forth to the region during that period as Morgan Stanley’s chief economist, I had quickly come to appreciate the power of China’s market-based economic transition. So, in March 1998, I took a very different view on the pages of the Financial Times with my first published commentary on China, “The Land of the Rising Dragon”.
My argument, in a nutshell, was that China would supplant Japan as the new engine of post-crisis Asia. Japan was floundering in the aftermath of its post-bubble implosion, whereas a reform-oriented China had the wherewithal, determination and strategy to withstand the currency contagion of a devastating external shock and sustain rapid economic growth.
As China delivered – boosted by its accession to the World Trade Organization in late 2001 – while Japan sunk into its second lost decade, the Chinese economy took off like a rocket.
It was the beginning of an extraordinary journey for me as Wall Street’s resident China optimist.
In the spring of 1998, I spent a day in Seattle with then finance minister Xiang Huaicheng. He had read my piece in the FT and wanted to exchange views on the Chinese and US economies. He implored me to think of China less in terms of legacy state-owned enterprises (SOEs) and more through the lens of a rapidly emerging entrepreneurial subculture driven by township-village enterprises (TVEs).
Xiang was kind enough to organise a subsequent tour of several TVEs in Fujian province. The most impressive was the Hengtong Group, a rapidly growing producer of high-quality fibre optic and telecoms cables. Loaded with state-of-the-art technology from Germany and the United States and staffed with a surprisingly large number of college graduates, Hengtong was the opposite of China’s long-ossified SOEs.
Could China avoid the chronic problems that had long afflicted other blended systems, including Japan? This same question was posed by former premier Wen Jiabao.
I first met Wen in late 2002, a few months before his elevation to the premiership under president Hu Jintao. His curiosity impressed me more than his skills as a strategist, which had distinguished his predecessor Zhu Rongji.
But Wen had the courage to spark a debate about one of China’s toughest problems. In a public press conference in March 2007, he warned that while the economy was superficially strong, it risked becoming “unstable, unbalanced, uncoordinated and unsustainable”. To Wen’s great credit, he posed the paradox of the “Four Uns” just a few months before the eruption of the US subprime mortgage crisis, which would culminate in the 2008-09 global financial crisis.
China’s flexible, blended, increasingly dynamic private sector could do all that and more. In the years following Wen’s proclamation, China’s five-year plans aligned with this rebalancing agenda. The case for a structural transformation to a more market-based system was increasingly on track. Optimists like me felt vindicated.
But shortly thereafter, uncomfortable frictions started to creep into the rebalancing strategy.
China had come close to the promised land. Its modern economy was on an extraordinary trajectory. The rebalancing agenda promised more to come, but Xi broke that promise. The political economy of autocracy has thrown cold water on those of us who used to be diehard China optimists.