Can China break shackles of its old economic systems, scale greater heights?

Sanjiv Misra
Making projections about a country as politically and economically inscrutable as China is a hazardous endeavour in the best of circumstances.

“To be rich is glorious” is the famous Deng Xiaoping quote that set communist China on a spectacular growth path spanning over three decades, challenging the entrenched Western perspective that economic prosperity could be achieved only in the liberal market democracies. The shift in viewpoint is perhaps best articulated by Martin Jacques in his provocatively titled best seller, When China Rules the World — the end of the Western World and the Birth of a New Global Order, which built upon available projections that the Chinese economy would overtake the American economy in terms of size by the close of the third decade of this century - a development that could potentially transform the structure of the world order to one dominated by China.

Making projections about a country as politically and economically inscrutable as China is a hazardous endeavour in the best of circumstances. The advent of Xi as the President of China in 2013 marks a discontinuity in the direction and thrust of state policies followed since the time of Deng Xiaoping, and is now a significant factor imparting uncertainty to China’s future prospects.

Xi’s overarching vision of “the great rejuvenation of the Chinese nation” has meant an unprecedented concentration of political authority in the office of the president — tenure limits have been removed, Xi is president for life. There is also deepening authoritarianism with enhanced curbs on the freedoms of individuals and surveillance of activities of China’s citizens. Xi’s term has also seen a more muscular projection of Chinese military power, aggressive expansion of its spheres of influence and a forceful reiteration of historical territorial claims. Abandoning the prudence and caution advocated by Deng (“hide your strength, bide your time”) Xi has openly challenged American dominance in the Asia-Pacific, with thinly-veiled aspirations towards global hegemony.

Xi inherited an unbalanced economy, excessively reliant on exports and debt financed investment for growth. Overdue economic reforms along with deleveraging were an imperative to sustain future growth momentum. However, given his strong distrust of the market mechanism, fearing the associated loss of political control, Xi has regressed to command and control measures for managing the economy. The future role of the private sector, a major contributor to the China growth story, is also under palpable strain.

While the Chinese economy was expected to slow down from its elevated growth levels, it has currently posted its slowest growth in industrial production in 18 years and the slowest GDP growth rate in 27 years. Debt levels have reached a record 310 per cent of GDP, according to the Institute of International Finance and, coupled with a large unregulated shadow banking sector, pose huge systemic risks. Deleveraging is not a viable option presently, since it would further retard growth.

Trade is now a minor factor in the growth equation. Investment and domestic consumption are its the main drivers. Unlike investment, which has been mainly state-driven, consumption is a function of myriad individual decisions as also consumer sentiment, which has been dampened by the ongoing trade conflict with the US. Infrastructure, especially the housing sector, which has been a major growth driver in the past, is substantially over constructed and any further stimulus to it would be a risky strategy.

For China, the Hong Kong protests could not have come at a worse time, with a slowing economy and the trade conflict with the US beginning to bite. It would be unrealistic to imagine that there is no causal association of the intensity of the protests in Hong Kong with the authoritarian policies being followed on the mainland. Reports seem to suggest that the protesters firmly believe that this is perhaps their last opportunity for extracting any semblance of democratic freedoms before Hong Kong becomes just another city under the Chinese yoke. The authorities are caught in a cleft stick because of the serious future ramifications of any steps that they may take at this juncture, not merely on the future of Hong Kong, but also on Taiwan and the mainland.

After several decades of exceptional growth, China is currently the second-largest economy in the world with a nominal GDP at around two-thirds the size of the US. It remains, however, a middle-income country ranked 79 in the world in 2018 with a GDP per capita at around one-third of that of the US.

China is presently facing strong headwinds which are, largely, a consequence of its own policies. Growing state control of the market and expanding role of state-owned companies has reduced competition and adversely impacted productivity growth, which has recorded its lowest level since 1978. The drag of ideology on economic management is palpable and is exacerbating the ongoing growth slowdown. On the external front, the caution and prudence adopted by China previously, which proved to be an anodyne for allaying fears about its dramatic rise as a putative superpower, has been replaced by a “premature assertiveness”, rekindling past anxieties concerning its “peaceful rise” and exacerbating its trust deficit with the rest of the world.

No totalitarian country has in the past achieved the levels of prosperity of the market democracies of the developed world. Will China, shackled by ideology and structures of economic management, which are essentially relics of the past, be able to escape the “middle income trap”, and become the first communist country to do so?

This article first appeared in the print edition on October 22, 2019 under the title 'The great wall ahead'. The writer is a former secretary to Government of India.