Pettis on China's Need for Reform

I completely agree with Pettis' assessment of China's current need for reform. In the snip below, he discusses the obstacles and risks:

The four stages of Chinese growth

Beijing must therefore embark as quickly and forcefully as possible upon what I have characterized as “second liberalizing period” economic policies, which in a sense means a return to the “first liberalizing period” reform style of the 1980s. There is by the way no longer much confusion over what these policies entail. Beijing knows more or less, perhaps a little later than optimal, exactly what must be done, although the sequencing of reforms is more controversial, and the proof that it understands the relevant issues is that the Third Plenum clearly and explicitly addressed the relevant issues head on, proposing at the end exactly the kinds of policies we would have expected if China is to embark on a new set of policies aimed at driving sharp increases in social capital.

The problem for China, of course, and as I think nearly everyone understands, is to implement these liberalizing reforms well before the country starts to bump up against its debt capacity constraints. Xi’s administration must do this against what is likely to be ferocious resistance from those who have benefitted enormously from constraints on Chinese productivity growth, and who consequently stand to lose the most from real reform.

I would argue that this is exactly what President Xi seems to be doing, and why even before he was formally in power he sought to consolidate power, undermine and frighten potential opposition, strengthen his relationship with the military, and unify the country’s policymakers behind the need for reforms. This may also be why PBoC Governor Zhou – who was among the first senior policymakers, I believe, to recognize the urgent need for China to rebalance economic growth away from the current debt-addicted model – seems to be among the key economic decision-makers.

Unless President Xi is successful in consolidating power and control over economic assets, an abundance of historical precedents suggests that he is unlikely to overcome powerful elite resistance. If he is successful – and for now I am cautiously optimistic that he will pull it off – he will be in a position to implement the urgently needed liberalizing reforms that will push China onto its next stage of sustainable productivity growth, in which case he is likely to be hailed as China’s greatest leader since Deng Xiaoping – and for many of the same reasons.
The whole thing is worth a read.

The reformers are worried about a slowdown for the same reason a democratically elected President or Prime Minister is worried: weak economic growth is bad politics. Usually, a bad economy leads to a political change and for this reason, bold steps are taken early in a new administration so that the economy is rebounding before the next election. Xi and Li serve a 5-year term. Most people expect they will serve two terms as Hu Jintao and Wen Jiabao did, but opponents could replace one or both of them at the next election in 2018.

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