Selling China Short
As China’s most powerful leader since Mao Zedong, is Xi Jinping the problem or the solution to all that ails China?
30 Apr 2019 | Stephen S. Roach
Today, the profusion of negative books on China is more like a tidal wave, certainly more than I have ever seen. Three recent additions to the genre are particularly noteworthy. Each is the work of a seasoned and thoughtful China watcher, and each tells its tale of China woe from a slightly different perspective. Elizabeth C. Economy’s The Third Revolution: Xi Jinping and the New Chinese State is true to its title and focuses on President Xi Jinping. Nicholas R. Lardy’s The State Strikes Back: The End of Economic Reform in China? emphasizes the shift back to a state-centric economy. And George Magnus’ Red Flags: Why Xi’s China is in Jeopardy, examines four traps that have ensnared China.
Each book makes a solid case that stands on its own. Taken together, they tell an even more compelling – and seemingly timeless – story of Western doubts about China. It’s enough to make one wonder how the Chinese ever got to where they are today.
The Xi factor
As China’s most powerful leader since Mao Zedong, is Xi Jinping the problem or the solution to all that ails China? That question is a common theme addressed in all three of these books. The verdict hardly comes as a surprise. For Economy, it’s all about power and control, with an exclamation point added by the elimination of presidential term limits in early 2018. For Lardy, only Xi’s power play can explain a worrisome recent shift back from private-sector dynamism to an increasingly inefficient and debt-intensive state-owned Chinese economy. And for Magnus, this combination of power and inefficiency points to a dire outcome – a Chinese system trapped in a quagmire of debt, currency, and demographic problems that will ultimately make it impossible to escape the toughest trap of all, the dreaded middle-income trap that stymies most developing economies. With China’s standard of living now reaching this daunting threshold, Magnus’ warning is hardly idle conjecture.
But while these pieces of the negative case for China fit together well, they leave a lot out of the story. It all starts with the man, Xi, and how his heritage, values, and life experiences formed him and ultimately shaped his aspirations. These are tough and complex questions about any leader, and Xi is no exception. Addressing them is important because, as all three authors argue, he does indeed hold the key to so much of what is occurring in China today and is likely to impact the country for years to come. And yet, though Xi’s actions have hardly come out of thin air, none of the books under review probes the soul of the man in an effort to discern the hows and whys of the problems they raise. For all practical purposes, Xi simply appears on the scene as China’s so-called fifth-generation leader in November 2012. Yet the clock on Xi obviously started ticking long before he became the leader of the Communist Party of China (CPC).
As the “princeling” son of one of China’s revolutionary heroes, Xi Zhongxun, the country’s future leader was not merely steeped in his father’s harrowing tales of the pre-revolutionary 1930s and 1940s. As a 10-year-old boy, he personally witnessed Zhongxun’s downfall ahead of the Cultural Revolution. Like many, Xi’s family was torn apart in the late 1960s. His father was imprisoned, and one of his sisters was killed. His secondary school was closed, and as a “sent-down” youth, he was banished to hard labour in rural Shaanxi Province.
The signature initiatives of Xi’s first years in office – the “China Dream” of national revitalization and the anti-corruption campaign – are not only tied to the tough life experiences seared into Xi’s consciousness; they are also visible manifestations of an instinctually political man. The China Dream speaks to the outward-facing rejuvenation of the Chinese people – a nationalistic restoration of pride after a century of perceived humiliation at the hands of the West. The anti-corruption campaign is an inward-looking catharsis aimed at cleaning out the rot in the CPC. Pride is hollow unless it is aligned with the legitimacy of an uncorrupt power base. I suspect that this understanding is precisely what Xi Jinping’s heritage lent to his ascendancy in late 2012.
Economy comes closest to understanding the visible manifestations of Xi’s early exercise of power. But her narrative is lacking in critical context. Like Lardy and Magnus, she places great emphasis on the so-called Third Plenum reforms of November 2013 as Xi’s major effort to reshape China. Covering well over 300 action items, these reforms speak to the implementation of the China Dream, essentially providing a new governance framework to replace what Xi believed was the weak link in the vaunted post-Mao Chinese miracle. Nor was this new approach to governance a result of casual observation. It was undoubtedly born of the same chaos and tough personal experiences that shaped Xi and his family during the Cultural Revolution.
Xi’s long march to where?
Economy, Lardy, and Magnus all raise many legitimate concerns about where China under Xi is headed. Xi inherited many of China’s problems: environmental degradation, mounting debt, income inequality, corruption, and incomplete currency and financial reforms. And several are undoubtedly of Xi’s making as well. But none can be addressed in a vacuum, without due attention to how they have arisen. Context offers the best lens for resolution, and unfortunately that lens is largely unfocused in these three books.
Consider the complex and thorny issue of state-owned enterprise (SOE) reform, which all three authors address in their critical assessments of China’s future. Economy underscores the seeming paradox of the Third Plenum: reforms stressing the decisive role of markets in the allocation
of scarce resources while simultaneously underscoring an unwavering commitment to state ownership of assets. Lardy takes aim at the so-called mixed ownership model of SOE reform – injecting private capital into SOEs – as an arrangement that, he writes, has led to a “continuous and marked decline in the financial performance of state firms”. And Magnus is critical of public-private partnerships for boosting the debt intensity of local government financing vehicles.
On the surface, all of these points appear well-founded – at least from the standpoint of market-based Western capitalism. Blended ownership models lack the purity of the invisible hand (Economy). They are prone to inefficiency and weak productivity (Lardy). And they are a recipe for a debt overhang that could end in tears (Magnus).
But the Chinese perspective is obviously very different. State control is viewed as a stability anchor – undoubtedly a reaction to the near-fatal turmoil of the 1960s and 1970s – as well as a reflection of the urgency of China’s new challenges. It must avoid the middle-income trap that Magnus and others warn about, while protecting itself from the inherent instability of market-based economies that nearly pushed China and the rest of the world into the abyss during the global financial crisis of 2008-09.
Viewed from this perspective, China appears to be more than willing to pay for stability with foregone efficiency and high debt. Ultimately, the question is how steep that price really is. While Economy, Lardy, and Magnus offer a worst-case assessment of how these risks might play out, the Chinese have come to a very different conclusion. In emphasizing the state’s role as a stability anchor, China’s leaders have judged that any resulting foregone efficiency, at least insofar as how we in the West measure it, may be well worth the price. Of course, only time will tell if they are correct.
A similar verdict can be rendered when assessing China’s seemingly ominous debt overhang. Who’s got it right – Western analysts such as Magnus, who worry that China will suffer the same fate as Japan, with its multiple “lost decades”, or the Chinese, who underscore the role that the country’s high saving cushion can play in promoting a manageable deleveraging? Debt problems are at the top of the list for most China doubters – not just Magnus, but also Lardy, Economy, and countless others, including the International Monetary Fund, where China’s debt problems have been featured prominently in the Fund’s annual “Article IV” assessments over the past several years.
Nor has China cavalierly dismissed its own concerns about the mounting debt intensity of its economy. In a high-profile interview published on the front page of the state newspaper People’s Daily in May 2016, an “authoritative person” anticipated the Magnus complaint and warned explicitly of a Japan-like outcome if China didn’t address its mounting debt overhang. Since then, deleveraging has featured prominently in the Chinese policy debate, albeit with mixed results. While the latest figures from the Bank for International Settlements (BIS) put China’s debt at 253% of GDP in mid-2018 – well above the 183% average for all emerging-market economies – credit-gap analytics (also from the BIS), which capture changes in debt intensity, appear to be levelling out. It remains to be seen if deleveraging will succeed, especially given that China’s central bank has recently moved to ease monetary policy and boost credit by cutting bank reserve ratios five times in the past year.
But China’s debt problem is like its SOE problem in one important respect: It arose during a period of heightened instability – in this case, in the depths of the global financial crisis. Indeed, China’s overall debt-to-GDP ratio had been relatively stable at around 140% in the years before the crisis, but then surged to about 250% in 2018. The point is not to ignore China’s debt binge, but rather to understand when and how it occurred. To the extent that it was an outgrowth of deep-rooted instability fears that were magnified during the crisis, the source of the problem, as well as its possible solution, can be better understood. Meanwhile, an outsize Chinese saving cushion buys time – underscoring that China, like Japan, largely owes its debt to itself. If Japan didn’t have a debt crisis with a national saving rate of about 30% in the late 1990s, China is in considerably better shape with a domestic saving rate that currently remains well above 40% of GDP.
If not Xi, who?
In short, the critical view of China, as carefully developed by Economy, Lardy, Magnus, and countless others, is largely lacking in context. It pins the blame on Xi without due attention to the role he is playing in responding to China’s deep-rooted fears of chaos, which are grounded in very real experiences in its ancient past, as well as in the modern experience of the People’s Republic. For Lardy, it’s as if Xi simply flipped a switch in 2013; ironically Lardy’s previous book, Markets Over Mao: The Rise of Private Business in China, came to exactly the opposite conclusion. The point is not to deny the real shift in China’s growth dynamic and its understandable effect on Lardy’s own thinking. But here as well, context is essential to fit this shifting piece of China’s puzzle into place.
At the same time, an emphasis on context should not be taken to mean that the litany of problems China faces are inconsequential. That’s especially the case with environmental degradation, an issue that Economy has long championed. The same can be said for Magnus’ emphasis on China’s demographic challenges brought about by the high-speed aging of its population.
In fact, in an earlier book (with Michael Levi), Economy emphasized the critical link between environmental degradation and China’s resource-intensive growth miracle. And Magnus briefly mentions the devastating famines of the late 1960s, which, together with a looming population explosion, seemingly justified China’s draconian one-child family-planning policy, which sowed the seeds of the current aging problem. But Xi is hardly to blame for problems that predate his leadership. The question concerns the solutions he may, or may not, offer.
Context also puts a very different spin on the narrative discourse of Western hand-wringing over the Chinese value proposition. Yale historian Jonathan Spence first underscored this point a generation ago in The Chan’s Great Continent: China in Western Minds. In an extraordinary dissection of prominent Western accounts of China over the past 800 years, ranging from Marco Polo’s thirteenth-century journals to the eighteenth-century writings of Montesquieu to the twentieth-century accounts of Richard Nixon, Spence concluded that the West invariably sees China through the same lens that it sees itself.
That point is well taken – and it may be even more relevant today. Do we worry about China’s debt problem because we had a debt crisis? Do we worry about a Chinese property bubble because we had one? Do we extrapolate the failure of the former Soviet Union to a Chinese model that still clings to SOEs? Does the Japanese economy’s prolonged stagnation portend a similar outcome for China? Spence urges us to answer such questions from the Chinese perspective. I couldn’t agree more.
That’s not to say that contextualization lets China’s current leadership off the hook in addressing the major challenges that lie ahead. I am struck by the worrisome emphasis on ideological purity in Xi’s approach, a tendency that stands in sharp contrast to the more pragmatic tactics once espoused by Deng Xiaoping. Today’s world poses tough challenges for any country, including China. Meeting those challenges requires flexible and adaptable policies and reforms that may well be lacking in a country that now seems more wedded than ever to socialism – albeit a socialism with “Chinese characteristics”. Be that as it may, those characteristics need to be understood in their own terms, not just “ours”.
The final chapter of Economy’s latest book underscores my complaint. There, she focuses on the mounting tensions in the US-China relationship and basically frames the conflict as a Xi-centric rejection of the post-World War II norms of Pax Americana. “Under Xi’s leadership”, she writes, “China’s domestic political and economic landscape does not reflect progress toward an open, transparent, or democratic system”.
Economy is hardly alone in expressing what has now become US politicians’ bipartisan complaint over China’s failure to comply with the grand deal it struck with the West in 2001, when it joined the World Trade Organization. US President Donald Trump’s administration frames China as an existential threat to America’s future prosperity. Leading Democrats are equally fed up with China’s unwillingness to play by US rules. Yet, in keeping with Spence, this also tells me that the United States continues to have a hard time getting out of its own skin in understanding China.
In the end, resolving conflict without context is just as tough for countries as it is for individuals. That critical point has unfortunately escaped the latest efforts by Economy, Lardy, and Magnus. And it is notably absent in the great debate between two global powers with very different systems.  
Stephen S. Roach, former chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs. He is the author of Unbalanced: The Codependency of America and China.
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