This is my usual follow up to my BloombergViews piece on why reform in China is so hard. As usual, start there before coming here to get more detail or analysis.
One of the most common mistakes of even seasoned China watchers is to confuse announcements with actual change. Too many times, people equate the announcement with a fait accompli due to the perception of government announcements as commands handed down by God.
The Chinese make an analogy that China is like a duck on a pond. Above the water, everything is peaceful and serene, leading the outside observer to believe there is nothing interesting happening or that everyone is falling into line. Beneath the surface as the duck swims the water is in constant turbulent chaos as the duck swims in a variety of directions.
In fact, many of the so called reforms, like a push to enforce the rule of law and corruption crackdown, actually have some very real grounding in governance. By that I mean, China is a hierarchical society dependent on a singular leader, so enforcing policy or laws is a very difficult proposition. If a leader does not want to follow a rule or law because of a specific situation, they do not. Consequently, the push to enforce the rule of law can be seen as a response to this inability to enforce policy and laws handed down by Beijing.
If we get back to the current state of affairs, we need to place the intentions of Beijing against this larger backdrop. While I have been critical of Beijing and policymaking by the leadership, I think it is important to provide some important context. Economists can always argue about how big or small numbers in policy proposals should be, but if we look at the current state of China, I do not think even among senior Chinese policy makers that there is a lot of dispute about the basic problems. I will even go one step further to say we can accept the numbers Beijing has put forth about reform as reasonable and a good starting point. In other words, let us leave aside debates about the size of proposed reforms.
If we take that as the general starting point, this leaves us with two basic questions. First, does Beijing (and by extension China) actually want to enact the reforms? I would strongly caution anyone against offering up an unqualified yes or no. I think most people see the problems, but I am not personally convinced that Beijing is completely behind the reforms. I want to emphasize that does not mean they are against them. For instance, Beijing has a long history of announcing reforms that they intend to mean different things that what most outsiders hear. As a simple example, what Beijing means by rule of law and what most outside China understand by rule of law are two entirely different things. My general sense is that Beijing wants the reforms but doesn’t want the tradeoffs/costs/tough decisions that come with them. Like a dieter who says he can lose 20 pounds and still keep eating ice cream and brownies, they want to lose weight without the sacrifice. I think Beijing wants to lose the weight but does not want to give up the brownies.
Second, even if we assume that Beijing is completely and firmly in favor of reform and accept the tough decisions, does it have the power/influence/ability/levers to push through reform? Again, I would caution anyone against giving an unqualified yes or no. I think once you leave Beijing, the picture becomes much more questionable. For instance, even if we believe that GDP growth is not the dominant factor in promotions, even now you will not get promoted in China as a banker, politician, or bureaucrat by shutting down low capacity plants. You will not get promoted by doing things that cause problems or rock the boat. Furthermore, however perverse, many local governments are heavily dependent on a very small number of industries for most of their revenue. Consequently, even if the firm has to borrow even more money to stay in business to pay the tax bill, the local governments incentive is to prop up the firm even longer so that tax revenue can continue to flow. As local governments control about 85 percent of all public spending in China, reform will stem from policy execution by the local government and not Beijing press releases. Given that one of the driving themes of political reform is to force the Party, cadres, and governments to follow Beijing edicts, it should give you some idea how well Beijing feels the provinces are doing in getting on board the reform train. There are already reports of provinces pushing back against the policy initiatives of Beijing. Again, the primary problem is that while most people recognize the problems, everyone wants someone else to make the sacrifice. In short, I think even if Beijing is completely behind the reform plans, which I believe with the qualification that they do not want any pain to accompany the reform, I do not think you can expect a high probability of success out in the provinces.
I believe China needs significant reform. However, I would be willing to accept Beijing is serious about it if I believed that the leadership was firmly behind the reform push and was willing to make the sacrifices necessary. I do not currently believe either of those propositions, so more problems will come.
