China was the first country to experience a sharp economic downturn brought on by Covid-19 control measures. The state-mandated lockdown kept people at home or placed them in quarantine, effectively closing businesses, halting manufacturing and all but stopping economic activity across the country.
These measures eventually slowed the spread of the virus, avoiding an even greater and longer-term economic shock, but they also came at a huge cost, with a reported 6.8 percent contraction in Chinese gross domestic product in the first quarter of 2020.
China is now in a position to cautiously reopen its economy, a daunting task and one that should be followed closely. What the Chinese state and businesses do to ‘get the nation back to work’ will give clues as to China’s longer-term reform agenda and therefore its potential to contribute to the global economic recovery.
Next year marks 100 years since the establishment of the Chinese Communist Party and the first of two politically significant centennial goals to establish a ‘moderately well-off society’ by 2021.
A hundred years ago, the Chinese economy had yet to industrialise. Half a century ago, the Chinese economy was a Soviet-style centrally planned economy dominated by state ownership and production quotas in urban areas and people’s communes in the countryside.
From the late 1970s, China’s economic planners introduced reforms that allowed new types of economic activity while slowly dismantling many, but not all, aspects of the planning system. Over the next few decades, the Chinese economy integrated into the global economy, becoming a member of the World Trade Organization in 2001, a central part of global value chains and a major source of global demand.
When Xi Jinping took the helm as General Secretary in November 2012, many hoped the new leader would push forward the reform agenda. The Party’s Third Plenum decision in 2013 on Comprehensively Deepening Reform outlined a raft of reform measures and sought to put market forces at the centre of the economy, suggesting this hope was not misguided.
Since then, however, Xi has strengthened the role of the Party across all areas of Chinese society, including the economy, and introduced a new level of state guidance and intervention. There are worrying signs economic reform under Xi no longer means what many Western economists thought it did, if in fact it ever had.
Analysts point to the ongoing role of central and local state-owned enterprises in the commanding heights of the economy and as the vanguard of state-sanctioned overseas projects like the Belt and Road Initiative. They point to management of the private sector and to an uptick in complaints from foreign companies about policies favouring domestic enterprises.
They cite industrial policies like Made in China 2025 designed to drive China’s national innovation and technological upgrading and complain about lax regulatory practices and intellectual property protection. They highlight the lack of progress in domestic reforms across a range of areas, from labour, land and education to financial services.
Many, such as Nicholas Lardy from the Peterson Institute for International Economics in the United States, conclude that reform has stalled and the state has reasserted economic control.
These concerns lie at the heart of a reassessment of the economic relationship with China by the US and European Union. The focus for the US is a long list of grievances outlined in Section 301 of the United States Trade Representative Office. Citing similar concerns, last year the EU issued the EU-China strategic outlook, labelling China a cooperation partner, a negotiating partner, an economic competitor and a systemic rival.
Previously, the US and EU were open to economic integration with the Chinese economy and had profited handsomely in their economic partnerships with Chinese firms. This engagement appears to have been predicated on the assumption Chinese reform would, as it still could, see China’s greater presence in the world accompanied by “greater reciprocity, non-discrimination, and openness of its system”, as the EU-China strategic outlook points out.
How then will Chinese authorities take the opportunity to restart the economy in 2020? Will they continue the trend of Party intervention, restrictions on private enterprises and state-led global economic engagement? Or will this be the opportunity to continue the unfinished reform agenda?
On March 30 this year, the Central Committee of the Communist Party of China and the State Council jointly issued recommendations for furthering market reforms in the post-lockdown environment.
They pointed to five key requirements for improving the economic structure of China’s socialist market economy: create more flexibility in the land system; relax the strict controls of the household residency system to free up labour mobility; more closely align prices (lending, deposits, exchange rates, civil servant salaries) with market rates; ease market entry requirements for foreign firms in the financial sector; reform financial institutions; and develop the market and standardisation of the technology sector.
This is a positive signal that China could reinvigorate the reform momentum as it seeks to restart the Chinese economy in the coming year. If implemented, and as always the devil will be in the detail, such reforms could not only strengthen the Chinese economy but also go some way to ameliorating concerns in the US and EU, making it easier for their businesses to maintain economic engagement.
For New Zealand, it is reasonable to predict that demand from China for New Zealand products, which has held up relatively well, will remain and be important for our export sector during the global downturn. We should also be planning for a prolonged slump in Chinese tourists, students and visitors that could realistically extend out beyond the current controls on international travel.
Of even greater long-term importance is China’s reform trajectory, as that will determine our and others’ level of comfort and ability to engage with the Chinese economy. Whether we can rely again on China to help pull the global economy out of its economic doldrums depends on the short- and medium-term policies the Chinese government puts in place to restart economic activity and trade with the world.
Associate Professor Jason Young is Director of the New Zealand Contemporary China Research Centre based at Te Herenga Waka—Victoria University of Wellington.
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