A market economy with Chinese characteristics

The question of whether Xi Jinping would focus on economic reform or clamping down on China’s incipient credit bubble has been answered: it’s all about reform.

Watching China grope its way towards a market economy is kind of moving, exhilarating and mystifying at the same time.

It must be a bit like it how would have been in the 1780s watching the United States set up the rules for what became the 20th century’s economic superpower. China is becoming the 21st century’s economic superpower but its rules are very different the US Constitution, although they are being amended as rapidly as America’s were in the years after the Constitution was passed.

Reading the 3500-word communiqué issued last night reminded me of going mushrooming as a kid: you’d walk gingerly through a field full of cow pats looking for the perfect white mushrooms growing in the bullshit.

The 3rd Plenum “gave high appraisal to the successful practices and magnificent achievements of the Party in the 35 years since the 3rd Plenum of the 11th Party Congress” (which brought Deng Xiaoping to power and introduced the idea of Socialism with Chinese characteristics). There are quite a few “magnificents” in fact, referring to the “great strides” of the past 35 years, rather different from Tony Abbott’s strange declaration this week that “the adults are back in charge”.

There’s a lot to be said for a one-party state; all this lurching about every few years from children to adults is bad for business.

Anyway, the Chinese communists have now discovered the market. “The Plenum pointed out that we must closely revolve around the decisive function that the market has in allocating resources. Deepen economic structural reform, accelerate the perfection of modern market systems…”

The word “perfection” suggests they need to catch up with what happened in the US and Europe in 2008, but meetings of the Chinese Communist Party are hyperbolic chambers so that’s just in keeping with the language of the whole communiqué.

The question of whether Comrade Xi Jinping would focus on economic reform or clamping down on China’s incipient credit bubble has been answered: it’s all about reform.

Finance gets a brief mention well down the document while the mushrooms of reform are sprinkled throughout the field.

“We must realistically transform government functions, deepen administrative structural reform, innovate administrative management methods, strengthen government credibility and implementation, and establish a rule of law government and a service-type government.”

The communiqué even talked about democracy: “to develop Socialist democratic politics, we must … pay more attention to completing democratic systems, enriching democratic forms and fully giving rein to the superiorities of our country’s Socialist political system.”

Goodness knows what that actually means, although it’s very clear that the Party has no intention of giving power. In fact quite the reverse: the reforms spelt out last night are designed to entrench it.

Why will it work better this time than when Hu Jintao took over ten years ago, and also issued a 3rd Plenum communiqué full of talk about reform and open government?

Mainly, I suspect, because it has to. Xi Jinping appears to be a stronger character better able than Hu to push through reforms, but also it is ten years on. China’s economy is twice as large and in the meantime the internet has happened.

“The people” now know far more than they used to, and are demanding more – more stuff and more freedoms. For the CCP to retain power peacefully it must provide both.

As the communiqué says, it must “unwaveringly encourage, support and guide the non-publicly-owned economy…” at the same time as the publicly-owned economy.

This is critical to shifting China’s reliance away from exports and heavy industry towards an energetic domestic economy (a bit like what Australia has to do, except on a much bigger scale).

A year ago it seemed Xi Jinping was confident he could do this while at the same time getting control of credit growth and stopping the development of bubbles.

Reading between the lines of last night’s communiqué, it seems he has given up on that: reform is taking precedence; the speculators will have to look after themselves.

This is both understandable and dangerous. The great risk of a credit collapse in China remains, but as long as there isn’t one China should continue to grow and develop into the world’s largest market economy, what you might call a market economy with Chinese characteristics.