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Xi’s Reform Gambit

HONG KONG – When Deng Xiaoping initiated China’s market-oriented reforms 35 years ago, he – and the Chinese Communist Party – was taking the biggest political risk since the founding of the People’s Republic in 1949. When President Xi Jinping unveiled his own reform agenda at last year’s Third Plenum of the 18th CCP Congress, he was taking an equally large risk. Will his strategy pay off?

In 1979, Deng was in a difficult situation. He knew that the shift from centrally planned egalitarian socialism toward market-oriented capitalism could destabilize the CCP’s rule, and the unequal accumulation of wealth in the short term could cause significant social and political division. But, with China on the verge of economic and social collapse, following the decade-long chaos of the Cultural Revolution, he had to take action – and there were few, if any, alternatives available.

The reforms turned out to be extremely rewarding: more than three decades of double-digit economic growth followed their implementation. Moreover, they allowed the CCP to retain its hold on power. But they benefited some people and regions much more quickly than others – a problem that was tougher to address than Deng had anticipated.

Xi’s reforms, like Deng’s, reflect the absence of alternatives. Not only has China’s labor-intensive, investment-led growth model run out of steam; bureaucratic inefficiencies and pervasive corruption – not to mention severe and worsening pollution – are also damaging China’s long-term prospects. Only by addressing these weaknesses and shifting to an innovation-based, environmentally sustainable growth model can the country continue to prosper – and ultimately achieve high-income status.