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China Takes Another Great Leap Forward

12:00 AM, Jun 29, 2013 • By IRWIN M. STELZER
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Li and Xi know that excessive credit expansion has its roots in the willingness of the central bank to pour money into loss-making state-owned enterprises (SOEs) that are inefficient and generally operate in industries suffering from excess capacity. They know, too, that the shadow financial system recycles money it borrows cheaply from state banks into risky financial products. And that if their plans to liberalize the economy are to succeed, if they are to make the flow of credit more responsive to market forces, they must take on the powerful institutions—banks, SOEs, local officials who direct credit to well-connected individuals and companies, often in return for the bribes that fund ostentatious displays of haute couture, flash cars, and special privileges by party elites, to the mounting annoyance of the nation’s still-poor masses. Experts disagree on the extent to which Li and Xi are willing to rile the regime’s power brokers, and risk the political liberalization that would inevitably accompany a surrender of the power of life and death over China’s most important economic players. The fight-back has already begun. In a front-page article The People’s Daily, generally regarded as the voice of the Communist Party, points out that SOEs are stronger than they have ever been, that 54 of them are on the Fortune 500 list of the 500 largest companies in the world, that 117 of the SOEs have paid total taxes that are rising at an annual rate of 20 percent. If that failed to get the premier’s attention, the article, reported in the Financial Times, concluded, “While many people still hold the idea that Chinese state-owned enterprises are ineffective and incompetent, companies which do everything but do nothing well, in fact they have quietly undergone a beautiful transformation.” Think about that, Li Keqiang.

It is not at all clear that Li’s version of market reform bears any relation to that term as it is understood in democratic, market economies. Li has ordered government departments to develop plans to move more than 100 million Chinese into cities from rural areas over the next decade. This is a stimulus program, Chinese style, aimed at creating investment, jobs and, according to Li, “a new type of urbanization that puts people at its heart.” 

Urbanization will run alongside Xi’s program to have officials attend self-criticism sessions and go to the countryside to learn from the peasants, at least those that have not been relocated to new urban areas. If this great leap forward fails to stem the decline in China’s growth rate, several economies around the world might be among the victims.

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