The Contradictions of Chinese Capitalism

Decelerating growth and financial-market turmoil have raised fundamental questions about the Chinese economy’s prospects. One problem many commentators rightly identify is policymakers’ inexperience with markets; more important, however, may be that the authorities remain in thrall to an unsustainable hybrid market model.


LONDON – The Year of the Monkey is well into its third month – and the rest of the world must hope that China’s authorities will soon start to live up to the monkey’s supposed cleverness. So far, the evidence is unconvincing. The Shanghai Composite Index dropped by 18% in the first two weeks of 2016, and has endured lesser falls since then; the renminbi has been on a downward trend since late 2014; and economic growth continues to slide. In short, it looks to many people as if China has lost the plot.

The critics – including commentators for Project Syndicate – have a point. The Chinese authorities’ brief experiment with a “circuit breaker” to suspend equities trading if the Shanghai index fell by 7% simply generated more panic in January, and the ouster of Xiao Gang, the chairman of the China Securities Regulatory Commission, amplified the uncertainty. Meanwhile, the Chinese leadership faces the daunting task of rebalancing the country’s model of growth from excessive reliance on investment and exports to one more focused on household consumption and domestic services.

But China’s problems may run even deeper. Much of the criticism of recent Chinese policymaking has focused on miscommunication with market actors: The key to establishing “credibility,” according to this view, is greater certainty about the authorities’ intentions. Andrew Sheng and Xiao Geng of Hong Kong’s Asia Global Institute, for example, believe that China’s recent financial-market turmoil is “primarily related to policy transparency and clarity.”

Some Project Syndicate commentators, however, question whether any policy framework aimed at stemming China’s slowdown can be credible in the absence of more far-reaching governance reforms. In fact, there is merit to both arguments. Nobel laureate Michael Spence and the Hoover Institution’s Fred Hu, for example, believe that “China’s trajectory has become almost impossible to anticipate, owing to the confusing – if not conflicting – signals being sent by policymakers.” At the same time, “the principal unaddressed problem affecting China’s financial system is the pervasiveness of state control and ownership, and the implicit guarantees that pervade asset markets.”