Friday, November 28, 2014

China’s Stability Gambit

BEIJING – The first principle that I learned when I started focusing on China in the late 1990’s is that nothing is more important to the Chinese than stability – whether economic, social, or political.

Given centuries of turmoil in China, today’s leaders will do everything in their power to preserve stability. Whenever I have doubts about a potential Chinese policy shift, I examine the options through the stability lens. It has worked like a charm.

Stability was on everyone’s mind at the annual China Development Forum (CDF) held March 17-20 in Beijing. Hosted by Premier Wen Jiabao, with many ministers of the State Council in attendance, the CDF is China’s most important international conference. Yet, literally two days before this year’s CDF began, the controversial Bo Xilai was removed as Party Secretary of Chongqing. As a strong candidate to join the Standing Committee of the Politburo, China’s inner circle of leadership, Bo’s sudden demise was stunning. There was a palpable buzz in the air as we convened in the Diaoyutai State Guesthouse.

The formal sessions played out predictably, placing great emphasis on the coming structural transformation of China’s growth model – a colossal shift from the all-powerful export- and investment-led growth of the past 32 years to a more consumer-led dynamic. There is now broad consensus among China’s senior leadership in favor of such a rebalancing. As one participant put it, “The debate has shifted from what to do to how and when to do it.”

Many of the other themes flowed from this general conclusion. A shift to services-led growth and an innovations-based development strategy were highlighted. At the same time, there was considerable concern about the recent resurgence of state-owned enterprises, which has tilted the distribution of national income from labor to capital – a major impediment to China’s pro-consumption rebalancing. The World Bank and the China Development Research Center (the CDF’s host) had just released a comprehensive report that addressed many aspects of this critical issue.

But the CDF’s formal proceedings never even hinted at the elephant in the chambers of Diaoyutai. There was no mention of Bo Xilai and what his dismissal meant for China’s domestic politics in this critical year of leadership transition. While it is easy to get caught up in the swirling tales of palace intrigue that have followed, I suspect that Bo’s removal holds a far deeper meaning.

Chinese officials faced the risk of a dangerous interplay of political and economic instability. Hit by a second external demand shock in three years – first, America’s subprime crisis, and now Europe’s sovereign-debt crisis – any outbreak of internal political instability would pose a far greater threat than might otherwise be the case.

Bo personified that risk. He embodied the so-called “Chongqing model” of state capitalism that has been ascendant in China in recent years – government-directed urbanization and economic development that concentrates power in the hands of regional leaders and state-owned enterprises.

I spent some time in Chongqing – a vast metropolitan area of more than 34 million people – last summer. I left astonished at the scope of the city’s plans. Orchestrated by Chongqing Mayor Huang Qifan, the principal architect of the spectacular Pudong development project in Shanghai, the goal is to transform the Liangjiang area of Chongqing into China’s first inland urban development zone. That would put Liangjiang on a par with coastal China’s two earlier showcase projects – Pudong and the Binhai area of Tianjin.

Yet this is the same state-dominated development model that came under heavy criticism at this year’s CDF – and that stands in sharp contrast to the more market-driven alternative that has gained broad consensus among senior Chinese leaders. In other words, Bo was perceived not only as a threat to political stability, but also as the leading representative of a model of economic instability. By dismissing Bo so abruptly, the central government has, in effect, underscored its unwavering commitment to stability.

This fits with yet another curious piece of the Chinese puzzle. Five years ago, Wen famously warned of a Chinese economy that was in danger of becoming “unstable, unbalanced, uncoordinated, and unsustainable.” I have repeatedly stressed the critical role that Wen’s “Four Uns” have played in shaping the pro-consumption strategy of the “Next China.” Wen’s critique paved the way for China to face its rebalancing imperatives head on.

But, in their formal remarks to the CDF this year, China’s senior leadership – including Premier-designate Li Keqiang – dropped all explicit references to the risks of an “unstable” Chinese economy. In short, the Four Uns have now become three.

In China, such changes in language are no accident. The most likely interpretation is that those at the top no longer want to concede anything when it comes to stability. By addressing economic instability through pro-consumption rebalancing, and political instability by removing Bo, stability has gone from a risk factor to an ironclad commitment.

There can be no mistaking the Chinese leadership’s core message nowadays. They are the first to concede that their growth and development strategy is at a critical juncture. They worry that the “reforms and opening up” of Deng Xiaoping are in danger of losing momentum. By addressing the interplay between economic and political risks to stability, the government is clearing the way for the next phase of China’s extraordinary development. I would not advise betting against their commitment to achieving that goal.

Read more from our "Roach on China" Focal Point.

  • Contact us to secure rights


  • Hide Comments Hide Comments Read Comments (3)

    Please login or register to post a comment

    1. CommentedProcyon Mukherjee

      I see in this pro-consumer –domestic rebalancing as opposed to labor intensive exports a new challenge for the developed world as in this dynamic the biggest impact would be on ‘dollar savings’ that China orchestrates, the gluttony of which impedes on the interest rates to zoom as the marginal savings rate helps to leeway to the float that U.S. Treasury needs. This will further direct the economy to raise its wage rates as the domestic sector would get the much needed fillip from the rise in the domestic demand. This will be the tipping point, for China, its impact on the rest of the world needs to be evaluated.

      Procyon Mukherjee

    2. CommentedMilo Jones

      For a banker, the author evinces an extraordinary faith in the ability of the Chinese leadership to control and manage the Chinese economy. Given how little they know about so many aspects of it, their perverse incentives, and the surety that the unintended consequences of any policy will outstrip the intended consequences, I wouldn't be so sure that stability can be maintained. After all, even the degree of urbanization in China is both uncertain and subject to widespread manipulation and misrepresentation (See "“Facts” Everybody Knows – Statistical Cautions about the BRICs:

    3. CommentedZsolt Hermann

      This desperate attempt by the Chinese leaders, described in the article reflects our human concern, that we always try to remain in control, that we feel ourselves above the system we live in and believe we can direct everything around us, mostly by force and coercion, keeping a tight grip on things.
      At the same time what we learn through the global crisis is that even institutions we ourselves created, our social, political or economical system just to mention the most obvious, are slipping through our fingers, are falling apart, and we are standing after our whole evolution so far, at the point of not knowing who we are and where we are, and especially where we should be heading.
      So does this mean that the western point of view, especially the US Republican point of view asking for total freedom, minimal central control, that everybody can basically do whatever they like is the right approach, or the "balanced European" approach is the right one?
      Unfortunately none of them are correct. It does not matter which approach we choose until we do not understand the vast natural system we are just part of, and we do not accept that in order to succeed, to have a sustainable future and to survive we need to harmonize ourselves with this system.
      Our inherent human nature is all about subjective self calculations, maximum self profit with minimum or zero concern for others or for the environment we exist in.
      The vast natural system around us is based and is surviving by homoeostasis, all the elements of the system (except humans) instinctively following this law of overall harmony and mutuality.
      Even our healthy human body is based on the same principles, still when it comes to how we relate to each other or to the environment around us we fall back into our selfish, egoistic nature.
      Today as even humanity has evolved into the global, integral network, from which none of us can escape, break out, we cannot ignore the laws of integral systems.
      It is as if so far "we were given" a loose, free playground, a vacuum where we could experiment with different models, go through different stages, but from now on the "playtime" is over and we need to mature and adapt to the system.
      The Chinese leaders are not alone in their search for the perfect formula for the future, the whole of humanity is in it together.
      And as it happens in global, integral systems the answers can only come when we truly start to cooperate, in a mutually responsible fashion, for the benefit of the whole system, taking into consideration all of its elements.