Chinese leader Xi Jinping looks increasingly like the anti-Deng Xiaoping. Xi would no doubt object to such a characterization. He has, after all, lionized Deng any number of times as the author of China’s economic miracle.
But whatever Xi says, his actions would take China in a very different direction from Deng’s economic policies. Xi is, in fact, undoing much of what sparked China’s growth in the first place. Unless Beijing changes course and returns to the economic practices that promoted growth, all the fear the West presently feels about Chinese economic dominance will be moot. The Middle Kingdom’s economy will slow and likely stall.
Deng, whatever other undesirable policies he implemented, presided over China’s economic rise a little over 40 years ago at what was officially called the Third Plenary Session of the 11th Central Committee of the Chinese Communist Party. There, he authorized a clean break with the centralized and belligerent approach of Mao Zedong. He had visited the West and saw the ongoing economic growth and levels of wealth. He was especially impressed with Singapore’s use of trade to rise from poverty to riches. He wanted something similar for China. Then, as now, economists, policymakers, and historians hotly debate the causes of economic growth and development.
Deng settled on the areas where these disputants tended to agree.
Under the rubric “reform and opening,” Deng ended the near isolation practiced under Mao and set out to encourage trade between China and the rest of the world. He invited foreign investment into China. To promote both trade and investment, he stopped pursuing longstanding maritime disputes between China and other Asian nations. His reforms moved the country’s economic management away from the rigid, centralized planning practiced under Mao, allowing for more entrepreneurial activity and market direction of economic effort.
With Western help, the changes created rapid development and growth, a record that needs no review here. Those gains have put Xi in a position of power and prestige that no modern Chinese leader has enjoyed.
But in recent years and especially recent months, Xi seems determined to undermine the economic structures on which his power today rests. He had already exacerbated the maritime disputes that Deng quieted. In this more recent time, Xi, contrary to the “reform and opening” policies, has begun to close China to Western investment. He has also used the government’s huge regulatory power to discourage activities that, though they promise huge market gains, are nonetheless contrary to the Chinese Communist Party’s centralized plan.
The starkest evidence of Xi’s change shows in Beijing’s recent harassment of Chinese technology companies, particularly those serving Chinese consumers.
Last October, Jack Ma, founder of Alibaba and its affiliate Ant Financial, called attention to the situation, complaining publicly about the difficulty of raising capital from state-run Chinese banks. When in early November, he turned for needed financing to an initial public offering (IPO) on the Shanghai exchange, Beijing had the exchange cancel the deal.
More recently, Beijing used its regulatory power to fine the food delivery company, Meituan, simply for being too big.
The ride-hailing company, Didi, after a wildly successful IPO in the United States, found itself forbidden by Beijing to seek new subscribers.
After a different and also successful IPO in the United States by a growing Chinese tutoring company, Beijing forbade it to teach subjects taught in China’s state-run schools, in other words, its most popular products.
Research by Goldman Sachs has discovered that in just the months since Ma complained, Beijing has taken at least 50 such actions.
From a purely economic standpoint, it’s hard to justify this behavior. It thwarts growth by cutting the flow of financial capital to some of the fastest-growing and most innovative parts of China’s economy. If such actions bewilder anyone who values wealth creation, it’s apparent that Xi and his government, drawing on their communist roots, value control and secrecy more.
Accordingly, they have directed state-run banks to favor activities that fit in the central plan and ignore any other borrowing needs, however much market directions favor them.
Part of that controlling impulse also punishes any firm that would seek to end run the control exercised by the banks by, say, issuing stock on either the Shanghai or U.S. exchanges. From this perspective, listing on the American exchanges must look especially dangerous, since that act imparts some control to U.S. shareholders as well as American regulatory authorities, as both demand certain disclosures from the Chinese companies trading on U.S. exchanges.
Also telling is Beijing’s recent decision to emphasize manufacturing. While China had grown for years on manufacturing for export, as the economy became more developed and wealthier, Beijing, at least until recently, had determined that the economy needed to broaden its economic base, reduce its relative dependence on exports and emphasize growth in consumer products as well as services. Market forces were naturally bringing about this shift in emphasis. But now Xi wants to block this change and emphasize manufacturing again.
Beijing has made clear this shift in emphasis in its “Made in China 2025” plan. It explicitly aims to make the world dependent on China for crucial manufactured goods, among them artificial intelligence (AI), electric vehicles, biometric devices, and aerospace.
This insistence on government-directed, as opposed to market-directed, actions may work for China over the next few years, even though it flies in the face of the successful economic reforms of the past, but ultimately, the dominance of central direction will fail China. By thwarting active areas of the economy, as Xi and his plans have, China will deny itself sources of innovation that all modern economies need in order to advance.
No doubt China’s leadership rejects the notion that consumer-oriented firms can offer useful innovations, but as any economic history will make clear, innovation often comes from unlikely quarters. The best approach is to have as many sectors of the economy as possible seeking to innovate.
Central direction also narrows the economy’s focus, making the entire economic effort less likely to capture new directions.
The “Made in China 2025” plan may focus on today’s hot topics, but there’s no telling whether these products will really capture the future, and to the extent that they don’t, the plan will create huge amounts of waste that no economy, even China’s, can afford. Of course, market-directed economies also generate a lot of failed effort, but because they never concentrate as thoroughly as centrally directed efforts, their losses tend to be smaller, while at the same time, their diversity of effort is more likely to capture aspects of the future unseen in the present.
As indicated, Xi might luck out with his “Made in China 2025” effort. Some part of it might capture the future and give China an economic leg up on its Western competition. But since coming years, much less decades, seldom behave as plans anticipate, the future will increasingly deviate from the way China’s central planners expect.
The longer Xi’s policies last, the further he will have taken China from the advantages that Deng brought it, the more damage his policies will do, and the less imposing China’s economy will become.
