China Needs a New Commitment to Economic Reform

(Bloomberg Opinion) -- Forty years ago, Chinese leader Deng Xiaoping launched the most dramatic economic transformation in history by encouraging his countrymen to “emancipate” their minds and “seek truth from facts.” The reforms that followed — he called it socialism with Chinese characteristics — were stunning in their impact. China’s GDP today is more than 80 times bigger than it was at the end of 1978.

If Chinese leaders want to extend that astonishing record of achievement, they’ll need to demonstrate the same kind of courage and far-sightedness. The country’s key officials meet this week to set economic policy for the next year. They need to renew Deng’s commitment to truth from facts, and to bold, market-based reforms.

Over four decades of official support for “reform and opening up,” change has not always been smooth and steady. It has come in waves, stopping and starting over the years, interrupted by periods of resistance and retrenchment.

Deng began by lifting state control of farming and reviving private enterprise. Then progress was cut short by the crackdown following the Tiananmen Square protests. After Deng forcefully recommitted China to reforms in 1992, the country opened itself up to foreign investment, joined the World Trade Organization and embedded itself in global supply chains.

Many would argue that Chinese President Xi Jinping has overseen another period of retrenchment, extending the Communist Party’s influence over all aspects of business and society, shrinking the space for ideological debate, and empowering rather than shrinking the state. But Xi has also emphasized the need for further economic reform. Renewing that priority can be presented as a shift of balance rather than an explicit reversal. 

Right now, such a shift would be especially well-timed. Although the party deserves its full share of credit for China’s miraculous resurgence, engaging with outsiders was essential. Since the reforms began, nearly $1.8 trillion in foreign direct investment has poured into China — bringing new technologies and expertise that were vital in raising productivity. In addition, by allowing China into the WTO, then looking the other way as the country skirted some of its obligations, the rest of the world helped the country grow into a manufacturing behemoth.

All those advantages — flows of capital, information and goods — are now threatened. Foreign businesses are losing patience with the discrimination and barriers to competition they continue to face, and the U.S. and other developed nations fear China’s growth is happening at their expense.

Relations are strained and the situation is difficult. But it is far from hopeless. Merely following through on the ambitious market reforms Xi himself laid out in his inaugural economic plan in 2013 would address many Western complaints.

According to the Rhodium Group and the Asia Society Policy Institute, China has so far made progress in only two of the 10 broad areas that Xi has targeted for change. For example, the government committed in 2013 not to discriminate between private companies and state-owned enterprises — a major bone of contention with the U.S. and others. Yet the latter retain big advantages in taxes, financing and access to cheap land. Fully adopting the principle of “competitive neutrality” (an idea touted in both the revamped Trans-Pacific Partnership and the U.S.-Mexico-Canada free trade agreement) would give a boost to China’s own private firms, which account for most of the country’s jobs and growth.

In the same way, if China were to eliminate the controversial targets and subsidies of its “Made in China 2025” plan — both of which arguably violate WTO rules — the main beneficiary would be China. Excessive support, as high as 40 percent of total sales in the case of electric cars, has caused waste and overcapacity. To foster innovation, China should instead promote competition and strengthen intellectual-property rights, requiring its homegrown innovators to build the skills they will need to thrive globally.

Again, when it comes to the WTO, heeding the rules more scrupulously would benefit China as much as its trading rivals. Confidence in the global trading regime is already gravely damaged. If other nations remain convinced that Beijing can’t be trusted to abide by its commitments fully and transparently, they’ll have all the more reason to enter into trade agreements (such as the new TPP) that exclude China. If foreign companies can’t safeguard key technologies, they’ll reshape their supply chains to depend less on China, which is anyway becoming a more expensive place to do business.

To be sure, further economic reform won’t solve all of China’s problems. As long as the country refuses to liberalize politically, it’ll be viewed with suspicion in the West. Limits on Chinese investment in critical technologies and on high-tech exports to China will continue; so will efforts to counter China’s military and geopolitical ambitions. Mere promises to open up won’t make much difference. Beijing has dragged out too many mooted changes for too long: This time, pledges not backed by action won’t suffice.

The greatest obstacle to Beijing renewing its drive for market-guided, globally-based prosperity is political. Above all, its leaders fear losing face, which makes seeming to bend to external pressure so difficult. The country’s leaders can stifle that suspicion by recommitting to the ambitions and methods that Deng first championed many years ago. Foreign leaders can help as well, by ceasing to cast U.S.-China relations in hare-brained zero-sum terms, and especially by avoiding the strutting “my way or else” rhetoric that the current U.S. administration finds so impressive.

Boldness served China well 40 years ago — better than anybody at the time dared hope. Beijing needs to be bold once more.

Editorials are written by the Bloomberg Opinion editorial board.

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