(Bloomberg) -- One dragged China into the modern age and pulled off the greatest act of wealth creation in history. The other aims to make the world’s second-largest economy into a superpower.
Deng Xiaoping and Xi Jinping are two disruptive leaders from two markedly different eras. What unites them is a belief that it takes bold action to shock the system into change.
Some 40 years after Deng boldly opened China up to the world, Xi is now reshaping China’s state in his own image. On Tuesday, his administration merged several ministries and agencies, including banking and insurance regulators, in the biggest overhaul of government in a decade and a half. The changes give more power to the central bank and makes plain the Communist Party’s policy-making authority over state agencies.
Xi’s top economic adviser, Liu He, promised delegates at Davos in January that China would unleash reforms this year that would surprise the world. This week, he wrote in the official People’s Daily newspaper that the government restructuring is "revolutionary" and strengthens the Communist Party’s ability to support economic and political reforms.
China’s debt of about $34 trillion, roughly 266 percent of GDP, has been powered to a large extent by borrowing by state companies. That credit buildup, on track to hit more than 300 percent of GDP by 2022, estimates Bloomberg Economics, is in turn fueled by local government leaders, whose advancement has traditionally been tied to hitting economic targets. Lax financial oversight has been at the crux of the problem.
"One of the key tasks for this government over the next five years is eliminating systemic risks and deleveraging," said Tao Dong, vice chairman for Greater China at Credit Suisse Private Banking in Hong Kong. "The government is doing the right thing to have an integrated and comprehensive regulatory framework."
China’s recent economic history is replete with interventions by strong leaders that have smashed entrenched interests.
When Deng Xiaoping’s late-1970s modernization and foreign investment drive started to stall in 1992, the aging revolutionary in his late eighties stepped out of retirement and steamrolled opposition during his famous southern tour of Guangdong province. He garnered public support for his reformist policies, forcing more conservative policy makers to give way.
Premier Zhu Rongji’s overhaul of state-owned enterprises and debt-burdened banks in the 1990s resulted in more than 40 million workers losing their jobs, but was cathartic and kept the economy on track.
Xi took office in 2013 after a decade of modest economic reforms under President Hu Jintao and Premier Wen Jiabao. With corruption and speculation rampant after a 4 trillion yuan ($632 billion) stimulus was unleashed in 2008 to counter the global financial crisis, Wen’s final annual government work report in 2012 acknowledged that the economic model had become "unbalanced, uncoordinated and unsustainable."
Since then, Xi has cracked down on corruption, financial speculation, excess industrial capacity and pollution. Now, he’s trying to defuse China’s debt bomb.
While Deng and Xi share an affinity for big, historical policy shifts, there are key differences. Deng, wary of the dictatorship of Mao Zedong, was the first Chinese leader to institutionalize reforms that ended lifelong tenure in the Communist Party and ensured an orderly succession.
Xi’s government just abolished term limits on the president, adding the risk that policy mistakes will go unchallenged in the future. He’s also clamping down on personnel strategy at state enterprises that control about 40 percent of industrial output, and taking other measures to restore the Communist Party’s role in daily life.
In the Deng era, a slogan exhorted that "to get rich is glorious." Xi has frowned on excess consumption and mercilessly gone after government and business corruption while staking a claim as a promoter of innovation.
The Communist Party is also regaining its primacy in Chinese life. Party cells are being dispatched into companies to track strategy and hiring practices. Even foreign companies are affected with some 70 percent operating in the country already having Communist Party committees, Qi Yu, vice minister of the party’s organization department, said in October.
Rights group Freedom House says China has the least online freedom on the planet and Xi’s reforms are giving the Communist Party control over everything from financial services to manufacturing and entertainment.
"It is inevitable for China to experience mounting tensions between economic reforms and political rigidity," said Fred Hu, a former Greater China chairman for Goldman Sachs Group Inc. who has advised the central government on financial, pension and state-enterprise reforms. "The possible benefit of an authoritarian system is to ensure stability in a vast country going through sweeping economic and social changes." The downside: The lack of independent thinking needed for China’s shift into an "innovation powerhouse," Hu said.
The government reorganization announced Tuesday moves further to centralize power in the nation of 1.4 billion people. Its emphasis on party control arguably represents China’s most decisive shift yet from 1980s reforms led by Deng that were aimed at professionalizing the government after Mao’s disruptive party-led political movements led to famine and bloodshed.
Xi’s challenge is somehow to square the rigid, control-centered framework of the government he’s building with his goal of turning China into an innovative powerhouse driven by services industries and leading-edge technology companies. Xi’s grandiose goals for the economy envision global competitiveness in industries from robots to medical devices by 2025 and a world leader in artificial intelligence by 2030.
The underlying ambition: Avoiding the so-called middle-income trap, when a developing country’s progress stalls through lack of innovation as rising wages and other costs undermine competitiveness in manufacturing industries from clothes to furniture, has been achieved by only five economies while maintaining relatively high rates of growth, according to Nobel laureate Michael Spence, a professor at New York University’s Stern School of Business.
The good news for Xi is that many of the success stories are in Asia -- South Korea, Taiwan, Hong Kong and Singapore -- and all of those, with the exception of former British colony Hong Kong, thrived after evolving from authoritarian systems of government.
Xi can build off a solid foundation with growth accelerating for the first time since 2010 last year to reach 6.9 percent. Expansion of about 6.5 percent is targeted this year.
Nor should anyone rule out Xi’s pledge to transform China into a great power by 2050 given the leadership’s track record of delivering turbocharged growth for decades since Deng, says Steve Tsang, director of the SOAS China Institute at the University of London.
What China now lacks, according to Tsang, is the political stability that flowed from an orderly and institutionalized succession process and the scope for vigorous internal political debates that can produce sharper economic strategy.
"The chance is that China will likewise continue to do well for some time," said Tsang. "But the risk of things going wrong is now significantly increased, and the capacity of the system to deal with them effectively reduced."
©2018 Bloomberg L.P.
With assistance from Kevin Hamlin