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China in 2019 -- reform or staying the course?

Xi's Deng anniversary speech suggests reform prospects will fade

| China

China bid farewell to Maoism with the launch of its economic reform in 1979. Four decades later, its leaders confront a stark choice: revive long-stalled reform or risk long-term stagnation in face of deteriorating economic fundamentals and a hostile external environment.

What President Xi Jinping decides in the coming year will almost certainly determine which direction China will move in the next few decades because the world it lives in has changed beyond recognition in the last few years.

At home, demographic aging, stagnant reform, and a decade of debt bingeing have depressed economic growth. As government policies continue to favor state-owned enterprises (SOEs), private entrepreneurs are losing confidence.

Xi's long-awaited keynote speech marking the 40th anniversary of Deng Xiaoping's reforms on Dec. 18 highlighted how recent political developments have caused even more concerns. They recall discredited Maoism more than Deng's pragmatism.

Human rights conditions are at their worst in the post-Mao era. Draconian control has been imposed on social media and civil society while neo-Maoist rhetoric permeates propaganda. Xi has undone many of Deng's political reforms. Collective leadership has been replaced by strongman rule. The abolition of presidential term limit in March 2018 raised the specter of another ruler-for-life.

The most consequential development since Xi's rise to power is the West's thorough disillusionment with China and, in particular, the descent of Sino-American relations into confrontation. Beijing's aggressive foreign policy has convinced Washington that engagement has failed. As the U.S. dials up pressure on China, Xi will find his ambitious goals of reinvigorating a Leninist party-state and turning China into a global power difficult to achieve.

Signs abound that China is headed into a perfect storm of deteriorating growth, rising financial sector risks, falling exports due to the trade war, and escalating U.S.-China geopolitical rivalry. Whether Xi can navigate these waters will largely depend on his policy choices in 2019.

Optimists hope that Xi will surprise us all with a 180-degree turn toward radical reforms. Taking advantage of Washington's demand that China opens its market and dismantles state capitalism, Xi may embrace Reform 2.0 and launch another economic revolution.

Reform 2.0 would mean that China privatizes most SOEs, grants equal access to domestic private entrepreneurs and foreign companies, and ends mercantilist trade practices.

On the foreign policy front, China needs to beat a quick strategic retreat. Its bid for global leadership is premature and cannot be sustained by China's limited resources. As the U.S. initiates a comprehensive pushback, Xi's best option is not to engage in a long-term confrontation, but to end an incipient cold war before it is too late. In the near term, the top foreign policy priority of Reform 2.0 is successfully concluding the coming U.S.-China trade talks.

As a strongman with no real rivals inside the Chinese Communist Party, Xi could push through these reforms. To be sure, Reform 2.0 would entail enormous short-term pain, but China would gain a more efficient economy and peaceful relations with the West. If Xi wants to leave behind a positive legacy that rivals Deng's, now is the time.

However attractive Reform 2.0 might appear for China, its odds look unpromising.

Reform 2.0 will not succeed if it is limited to the economy. In fact, major political reform, especially the downsizing the CCP's role, is required to ensure successful reform and repair tattered ties with the West. As experience shows, economic reform under one-party rule can go only so far. Whenever such reform threatens the CCP's core interests, such as control over the economy, it will be stopped.

But, strategic trust with the West is impossible so long as China retains its one-party regime. It should be now clear to Chinese leaders that the root cause of the conflict between China and the West is the difference in political systems and the resulting clash of interests. This clash did not matter much to the West while China was weak. Now that China is poised to become the world's largest economy within two decades, the West simply cannot afford the risking of living under the shadow of an autocratic hegemon.

Xi's choice now is even more daunting than Deng's in 1978-79. For Deng, economic reform was a self-evident means to save a Leninist party nearly destroyed by a megalomaniac. But for Xi, Reform 2.0 requires measures that would endanger CCP rule.

Indeed, Xi's Dec. 18 speech should dispel any doubts about his determination to perpetuate China's one-party state. He declared nine "musts," or fundamental political principles, toward the end of the speech. The first is that everything must be under the party's authority. Only reforms that do not threaten party rule will be allowed since China will "reform only things that should and can be reformed" but reject reforms that "should not and cannot be undertaken." One reform explicitly ruled out is that of state-owned enterprises. Xi repeated his previous pledge that China will "unswervingly strengthen and develop the state-owned sector."

In the light of these unambiguous signals, we should stop counting on a radical policy change in 2019. He will most likely stay the course with mostly tactical adjustments. Beijing's economic policy will remain largely improvisational and more focused on shoring up near-term growth than bold structural reform. The CCP will woo the private sector and foreign businesses with reform promises, but hold the line on maintaining the state-capitalist system. Meanwhile, Beijing will further tighten its control over society and consolidate strongman rule to defend the party and its leadership in an inhospitable environment.

Externally, Beijing will retreat and conserve its resources. It will also try to patch up ties with key countries, in particular U.S. allies, to prevent them from joining Washington in an anti-China bloc.

This muddling through strategy could succeed if Xi strikes a trade deal with Trump. The quick end of the trade war and a pause in the U.S.-China cold war would give Xi breathing room. This is reason enough for Xi to accede to Trump's demands, however onerous.

Unfortunately for Xi, the Trump team is led by hawks bent on an irreversible decoupling of U.S.-China economic ties. Even a Chinese surrender could be rejected as lacking credibility.

So, China's muddling through strategy may not be tenable because a failure of the U.S.-China trade talks could trigger reactions resulting in greater economic and political damage than Beijing contemplates.

When Chinese leaders were planning the festivities marking the 40th anniversary of Deng's reform, they could not have imagined that the world would change so radically. Now that it has, they must come up with a new plan. But Xi's Dec. 18 speech suggests that no such plan exists.

Minxin Pei is professor of government at Claremont McKenna College and the incoming Library of Congress Chair in U.S.-China relations

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