Opinion | China’s great policy correction – opening up the economy again, and finding a suitable narrative for it

The Chinese economy has had a turbulent year, as growth slowed, economic reform stalled, and trade tension with the United States increased. However, China’s economic reformers see an opportunity in this adversity to reinvigorate internal reforms for long-term growth. Key to their success will be their ability to sell trade concessions sought by the US as beneficial to their reform agenda, while winning the confidence of a wary domestic private sector. 

The push for economic reform dates back to President Xi Jinping’s November 2013 blueprint – a call to “let the market play a decisive role in allocation of resources”, transforming the economy into a model based on high levels of domestic consumption, private-sector-driven innovation and sustainable development.

Implementation began in 2014-15, but the party’s confidence in the market was damaged by the implosion of Chinese equity markets in August 2015. Since then, as tracked by the Asia Society Policy Institute’s “China Dashboard”, there has been a significant slowing in the overall reform programme. Harsh capital controls made private-sector expansion abroad more difficult. Concurrently, fears propelled by China’s ballooning debt-to-GDP ratio prompted Beijing to begin a national deleveraging campaign. This disadvantaged many private firms as credit was often withdrawn indiscriminately from otherwise profitable private firms, while state-owned enterprises were generally spared.

Furthermore, China’s ongoing anti-corruption campaign slowed government decision-making as officials protected themselves from political exposure, hindering private-sector-driven development projects. Additionally, China’s new emphasis on party centrality and ideological primacy enhanced the role of party secretaries operating within private firms. And then there has been confusion over China’s “mixed ownership model” – whether it was an invitation for private firms to absorb poorly performing public enterprises, or a fresh opportunity for SOEs to nationalise well-performing private firms.