Some observers caution that the reforms proposed by the Chinese Communist Party (CCP) after the Third Plenary meeting of its Central Committee may fall short of promise because of resistance from vested interests or a lack of political will. My view is that it will bring about fundamental changes in China for one simple reason - politics. First, the CCP leadership fully understands that the party has lost the trust of the people because of rising corruption and cronyism, increasingly offensive income inequality, huge question marks over food safety, and worsening pollution. Second, they realize that the current economic model cannot sustainably deliver the economic progress that citizens expect in return for their allegiance to the CCP. The CCP leaders know that fundamental changes are needed to this economic model to regain the trust of the people. Since survival demands big changes, the leadership will pull out all the stops.
But is there also the political capacity to reform? Observe how President Xi Jinping has personally taken command of the mechanisms that will oversee economic reforms. Xi will lead the group on "comprehensive deepening of reforms" that will implement the planned reforms. In addition, he has set up a "state security committee" which he will lead. A previous CCP leader, Jiang Zemin, tried to set up this state security committee and failed. Clearly Xi’s colleagues were prepared to give him the political authority to press change that even someone as influential as Jiang lacked. Having staked his personal authority behind these reforms, it is unlikely that Xi will compromise or back down.
Change will come in phases and cautiously at first, but cumulatively it will transform the Chinese economic landscape by 2020. Market forces will be given greater influence within the economy, state enterprises will be forced to operate on more commercial terms and the private sector will be given more leeway in the economy. A market for rural land will be established and restrictions on rural migrants living in urban areas will be eased in phases. The relationship among central, provincial and local governments will be revamped, with the latter two levels of authority getting a fairer share of tax revenues, more in line with their responsibilities. Financial reforms will do away with many distortions such as the unfair treatment of savers. If all goes according to plan, China will emerge a more efficient economy, with an even more vibrant private sector than now, generating growth of a better quality in the sense of producing better outcomes for the environment and income distribution.
Other developing countries should heed the changes in China. If China can bite the bullet and make painful changes needed to sustain economic development, why can’t other large developing economies such as India and Indonesia, do the same?
China may well grow progressively more slowly over time as its population ages and the potential for catch-up growth recedes. But its economic impact on the rest of the world, especially other developing economies, will widen. Whereas in the past it was all about imports of intermediate goods for export processing platforms and primary commodities and capital goods for industrial expansion and the property sector, China’s import structure will shift in favor of more consumer-related goods. China’s impact will go beyond trade in goods. In future China’s foreign direct investment, portfolio investment demand for services will become much more important. China is also set to become more competitive in higher value activities which middle income countries currently excel in: there will be more competition for these countries.
In short, China’s reforms are real and they will have a sizeable impact on other developing economies. China will show that the winners in the global economy are those countries that have the political gumption to press ahead with painful changes. Those that don’t will become the losers in the economic game.