The Second Coming of Zhu Rongji?

SHANGHAI – The recent release of a book of speeches by former Chinese Premier Zhu Rongji has refocused attention on his bold – and often highly controversial – economic reforms of the 1990’s, which included reining in state-owned enterprises (SOEs) and overhauling the banking system. But the discussion has taken an unexpected turn, with Chinese media adopting a far less critical stance than that which has prevailed for the last two decades.

Given the apparent parallels between the challenges that Zhu faced and those that current Premier Li Keqiang is now attempting to address, not to mention their shared commitment to economic transformation, this shift could signify rising support for structural reform. But are Zhu and Li really so much alike?

Today, as in the 1990’s, China is experiencing skyrocketing local-government and commercial-bank debt, rising fiscal and financial risk, uncertainty over institutional reform, and declining central-government revenue. According to Bloomberg, Li will be the first Chinese premier not to fulfill the official annual growth target since Zhu. Despite these apparent similarities, however, China’s situation today is fundamentally different from 20 years ago.

In the 1990’s, Zhu’s core mission was to address the consequences of former Premier Zhao Ziyang’s flawed fiscal-decentralization efforts. By pursuing fiscal reform one sector at a time, Zhao left room for local governments to form alliances with SOEs, which provided subsidies to local bodies and enabled them to withhold income from the central government. This led to the build-up of national public debt, which, in turn, compelled the central bank to over-issue currency, fueling inflation.