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A timely moment for reform in China

April 28, 2015
   
   

“Never let a good crisis go to waste.”

That advice has been attributed to everyone from Rahm Emanuel to Winston Churchill. Now it’s time for the Chinese Communist Party to heed it, according to the panel of experts on China’s growing pains at the 2015 Milken Institute Global Conference.

China’s economy has slowed considerably since its heyday of double-digit annual growth. In fact, the decline may be even greater than the central government is willing to admit. That makes now the perfect opportunity for the party to undertake seriously needed structural reform, said Professor Minxin Pei, director of the Keck Center for International and Strategic Studies at Claremont McKenna College.

China has long engaged in an unsustainable economic development model, Pei said, adding that the party has consistently ignored these warnings. The slowdown represents the chickens coming home to roost. Pei said the question the party should be considering is not how much pain will be caused by adopting needed reforms, but how painful things will be if they don’t.  

Economists have used the term “hard landing” to describe the difficulties China will face if it makes sudden changes to its financial house. But Jiming Ha, vice chairman and chief investment strategist for Goldman Sachs’ Private Wealth Management China practice, said a prolonged downward adjustment would be just as devastating.

Pei put it in terms anyone could understand. “People watching China are obsessed with the concept of a heart attack, but what they should be worried about is cancer.” Because the government hasn’t taken steps to address a fundamental structural problem in the economy, “we’re seeing the spread of cancer throughout the system.”

The members of the panel, moderated by Chan Heng Wing, chairman of the Milken Institute’s Asia Center, were cautiously optimistic about President Xi Jinping’s campaign to root out corruption within Communist Party ranks. Pei said the president was part of a political lineage that dates to the 1949 revolution, and therefore considers political corruption as stealing from his family. “He views himself as the only person who can save the Chinese Communist Party from repeating the tragedy of the former Soviet Union, which collapsed because of corruption.”

The president will have his work cut out for him, though. Ha noted that China’s history is dotted with centuries of corruption, from the Qing dynasty back to the Ming dynasty and even earlier. He hoped the president could finally eradicate corruption and institute true rule of law.

The panel did shine a light on two bright spots for the Chinese economy: “One Belt One Road,” a 21st-century version of the Silk Road that will enable China to ship more of its products around the world; and the Asia Infrastructure Investment Bank, a multibillion-dollar partnership with seven other Asian nations to create all kinds of infrastructure the region will need over the next decade.

Lifen Zhang, honorary founding editor of FTChinese.com, said the two initiatives showed that China was being practical about its future. Overcapacity has saturated demand from the U.S. and Europe; these projects will help China export its overcapacity to Africa and other parts of Asia.

“If this is what we mean by Chinese assertiveness, then we need more of it,” said Pei. Or, to paraphrase Teddy Roosevelt, “Carry a big wallet, but walk quietly.”