Did China’s Third Plenum Duck and Hide From Reality?

By Steven Hill, China-US Focus, November 29, 2013

Reviews of China’s Third Plenum continue to roll in, with some analysts saying that President Xi Jinping and his co-leaders have unwrapped China’s boldest set of economic and social reforms in nearly three decades, while others calling it a non-event that offered only vague promises of reform.

The truth will likely end up somewhere in between, but one reality is increasingly clear: few of the proposals really are grappling with the profound contradictions of China’s economy today.

Certainly, there were some positives in the Third Plenum’s grab bag mix, including a relaxation of China’s one-child policy, proposed reforms to abolish China’s controversial labor camps and increased mobility for its huge waves of rural migrant workers. Economically, on the radar are vague proposals to further free up markets to play a “decisive” role, and central banker Zhou Xiaochuan has dangled the prospect of speeding up currency reform and giving markets more room to set the yuan’s exchange rate.

But for virtually none of these proposals has a specific timetable been established. At least, not yet.

In the meantime, here’s what has always perplexed me about China, and that directly impacts its economic future – yet mostly was left unaddressed by the Third Plenum. Most of China’s overall exports, especially its high-tech exports, are made by non-Chinese, foreign companies. Foreign companies essentially reprocess imports of semi-manufactured goods that are then shipped to the huge consumer markets in Europe, the U.S. and elsewhere.

China remains in essence a subcontractor to the West. British economic analyst Will Hutton, author of an influential book on China called The Writing on the Wall, has written “The reason why so few people can name a great Chinese brand or company despite its export success is that there are none. China needs to build them, but doing that in a one party authoritarian state, where the party second guesses business strategy for ideological and political ends, is impossible.”

Hutton wrote that in 2006, and things don’t seem to have changed all that much. China remains a historically oddball hybrid of capitalist communism, in which markets and political authoritarianism are trying to dance together but inevitably step on each other’s toes.

The rules of the game in China were established by the plenums in 1978 and 1993 which laid the foundations for China’s current combination of market capitalism and tight political control. If you leave aside the social reforms proposed by the Third Plenum and focus on the economic reforms, this most recent Plenum did not look all that different from the ones that took place decades ago.

Where are the great Chinese companies creating the next iPhone, Google, Skype, Mercedes, Volkswagen or renewable energy technologies? Sure, there are Chinese imitators now, but that’s just the point – they are imitators, not creators and innovators.

What does it take to foster such innovation? That’s a complex question, but most observers seem to agree that it requires a political economy that encourages experimentation and intellectual freedom. It necessitates a system that allows individuals to run against the grain. Ironically, it demands a bureaucracy that allows for trial and error and even failure, because from the ashes of those failures rises new attempts that the next time might succeed.

And to show how far China is from fostering such a system: the corollary to such experimentation and “outside the box” innovation is that those qualities in turn are encouraged by greater political freedom. In fact, they are two sides of the same coin. And on that point, despite pre-event optimism, the Third Plenum was mostly silent.

I still remember the absolute unwillingness of Communist Party authorities to tolerate any public reflection, let alone protest, during the twenty year anniversary in June 2009 of the Tiananmen Square crackdown, and thinking how much it exposed the lack of self-confidence among China’s rulers in either their system, their people or themselves. Unfortunately, President Xi, Premier Li Keqiang and other top leaders seemingly also lack confidence in their system or their people. Otherwise they would take steps – even baby steps – toward unleashing the natural brilliance that clearly resides among the Chinese people.

China’s rulers seem to be sincere in wanting their country to advance economically. So they either are ignoring these vital components of economic growth and success, or else they are banking that China can accomplish something which no other nation has previously done:   become a global economic success, capable of fostering a middle class lifestyle for a billion Chinese, without becoming a center of innovation. And become an innovative ground zero without loosening up the Communist Party’s tight hold on power.

Certainly China has made many impressive gains since the Mao years, both with its roaring economic growth rates and in lifting several hundred million people out of poverty. And certainly China is big, with nearly a fifth of the global population, and so will continue to be a large global consumer as well as producer. China’s voracious need to supply its population and avoid the social explosions that have plagued its history has made it one of the world’s largest consumers of natural resources, extracted from places like Africa, Southeast Asia and South America.

While being big can drive up your GDP numbers to impressive levels, they don’t necessarily drive up your standard of living and quality of life. And so many of China’s other metrics indicate significant challenges for years to come. In fact, in 2006 Hutton wrote “The economic model that has taken it thus far cannot take it much further…China’s capacity to fudge and hide reality is rapidly fading. China is everywhere broaching the limits of its capacity to continue as it has.”

Those words might be overly pessimistic, but they also have a ring of truth. So far, what has come out of the Third Plenum does not convince me that China’s new leaders fully grasp these realities, nor have they drafted a plan to cope with them.

Steven Hill (www.Steven-Hill.com) is a political writer and author of “Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age” (www.EuropesPromise.org) and “10 Steps to Repair American Democracy” (www.10Steps.net)

Steven Hill

About The Author

Steven Hill is a political writer whose latest books are "Expand Social Security Now: How to Ensure Americans Get the Retirement They Deserve" (www.ExpandSocialSecurity.net) and "Raw Deal: How the 'Uber Economy' and Runaway Capitalism Are Screwing American Workers" (www.RawDealBook.com). His previous books include "Europe's Promise: Why the European Way is the Best Hope in an Insecure Age" and "10 Steps to Repair American Democracy." Follow him at www.Steven-Hill.com and on Twitter @StevenHill1776