China’s liberalization dilemma

October 8, 2021

Beginning in 1978 and throughout the 1990s, China undertook epoch-defining liberal economic reforms in preparation for its accession to the World Trade Organization. Its economy took off, empowering its ascent to great power status. Then, around 2005, the reform impulse began to wane. By the time Xi Jinping had risen to General Secretary of the Communist Party (CCP) in 2012, China’s liberalization period was essentially over. Alarmed by the prospect of a private economy beyond its control, President Xi has doubled down on the role of the state.

At the same time, Mr. Xi has presided over growth rates that are low (by Chinese standards) and declining – from just under 8 percent when he took office to just under 6 percent in 2019. The Chinese economy is currently in the midst of a slowdown, related to but predating a spike in Covid-19 cases.

The problem is that China has extracted most of the value it could from plentiful, cheap labor and cheap capital – the things that drive developing economies. Its labor pool is drying up. Even many Chinese companies are looking abroad for less expensive options. China is entering a period where it must derive more value from gains in efficiency.

This is a classic developing-country problem. Only about a dozen nations have ever successfully cleared that hurdle. Several of them are in Asia: Singapore, Taiwan, Hong Kong, South Korea. It took all four of these countries more than 20 years to make the transition. They did it through liberalization. China has been in transition now for 27 years. And yet, it is heading in the other direction.