The Chinese Debate on Economic Reform

A steady drumbeat of ominous data and troubling commentary on the state of China’s economy has punctuated the summer months. Reports from the commentariat in the anglosphere have provided diagnostic analysis and detailed potential policy solutions that the Chinese government might pursue. However, China’s central decision makers in the Politburo or in the National Development and Reform Commission (NDRC), are more likely to take their cues from internal advisors and domestic experts within the PRC than from those outside. As such, one fruitful exercise is to take the temperature of voices within the system to determine the extent to which their perceptions align or diverge from those in the West, and to ascertain which views carry weight with the final arbiters of economic policy in Beijing. By doing so, analysts outside of China may better comprehend the future (mis)steps that China will take as it struggles to achieve its aim of “basically realizing socialist modernization.”

In July, the Chinese government held several meetings and released documents pertaining the economy. On July 24 the Politburo met to discuss the economy as it usually does this time of year. But on the same day, a 17-point plan was issued by the NDRC, following on from a 31-point plan co-issued by the State Council and the Central Committee ten days prior. These send a clear message about the concern in government over China’s straitened circumstances. Indeed, just this week, the NDRC announced a new “private economy development bureau” to further support private industry (NDRC, September 4). The assessment of the situation is put bluntly in the Politburo readout: “the current economic system is facing new challenges… insufficient domestic demand, difficulties in some enterprise’s operations, multiple risks in key areas, and a complex and severe external environment.”

Even if this view of the problems China faces is widely agreed on, Chinese economic policymakers do not think in the same terms as their Western counterparts. As such, there are often different diagnoses to be found, along with different proposed solutions. For instance, a recent article in the Study Times (学习时报), which is published by the Central Party School, expounds “eight misconceptions about expanding domestic demand,” and starts with the eyebrow-raising sentence “In the first half of this year, the overall performance of China’s economy has been on the upswing” (Study Times, August 16). While much has been written in the West about the need for China to focus on increasing household consumption, this writer instead emphasizes “the critical role of investment, especially the driving role of government investment.”

External experts who have been in consultations with the top economic planners in government also hew close to the Party line. For example, Liu Shangxi, the president of the Chinese Academy of Fiscal Sciences (CAFS), a think tank, has recently written acknowledging the consensus view that China’s economic recovery this year is below expectations (50Forum, July 6). His proposed solutions however center around trying to encourage businesses to borrow and increasing investment in infrastructure and public services. Similarly, a former NDRC official, Xu Lin, gave a lecture in May, also suggesting “supply-side structural reforms, such as addressing regulations in the real estate sector ” as one approach to reducing some of the economic headwinds (WeChat, June 7).

Some prominent voices take a different view and advocate for different policies geared towards supporting the private sector and boosting household consumption. Zhang Jun, who is the Dean of School of Economics at Shanghai’s Fudan University, argues that “there is a significant blind spot in the discussions within the Chinese economic academic community, as all the discussions revolve around the development of enterprises and industries, with no focus on families, and very little attention given to wage issues.” In this, he is of a piece with economists such as Michael Pettis, professor of finance at Peking University, who has long articulated the suppression of wages as a structural issue in need of reform. Others have been more outspoken, such as the retired Tsinghua University sociologist Sun Liping, who calls for “structural reforms,” referring to reducing the role of state-owned enterprises in the economy (Xueqiu, July 21), 2023. Sun’s original post was censored, perhaps as part of a recent push by Beijing to pressure economists not to talk down the economy (Financial Times, August 5).

As the above suggests, while there is general consensus on the nature of China’s economic predicament, and the key causes of the increasing malaise, views on what is to be done differ. Two takeaways emerge from this small survey of texts. First, that solutions are often framed differently within the PRC system to those offered by many in the West; second, that the economy is indeed at a turning point, and that the bankable operating model relied on for much of the last two decades is rapidly running out of road. This latter point can also be detected in a rhetorical shift in the writings of these economists, as clarity about medium-term scenarios require expectations to be revised accordingly.

The question of what road will be taken is unclear. There are multiple factors at play that will impact the direction of the economy going forward, some of which are touched on in the essays in this issue of China Brief. It is worth remembering that, even if there are some encouraging signs among economic experts and advisors in China, an awareness and understanding of the problem does not necessarily entail either that such views are the consensus among the leadership. Nor does this mean that the will and capacity exists within the system to undertake the requisite reforms and pivot to a new approach to managing the economy. As economist Zheng Yongnian wrote following the July Politburo meeting: “Although relevant government departments are aware of these issues and have started to implement some policies, most policies still possess a piecemeal character, treating symptoms rather than causes. There are still no clear policy strategies for the coordinated development of China’s economy and society, let alone practical and effective policies” (Wechat, July 25). The next significant meeting will be the Third Plenum, set for October or November. This will merit close attention, as Third Plenums have often set the economic policy agenda. While the rumblings of increasingly vocal policy experts in China may help push the government towards reform, the reverberations are yet to precipitate a change of direction in the government’s actions.