Workers are seen at a housing project construction site in Ningbo, in China’s Zhejiang province, on September 17. The persistent issues in China’s property sector call for for bold reforms from the central government in the face of global headwinds and resistance from interest groups. Photo: AFP
Opinion
The View
by Winston Mok
The View
by Winston Mok
China’s economic woes cry out for Zhu Rongji’s spirit of bold reform
Pledges of reform from a decade ago have been unfulfilled or unevenly implemented, leaving China’s economy struggling to reach its full potential
Leaders should look to the legacy of Zhu Rongji, who embraced bold but unpopular reforms to improve people’s well-being
Ten years ago, the Third Plenum of the Communist Party Central Committee aimed to allow the market to play a decisive role in resource allocation. In contrast, the recent central financial work conference emphasised upholding party leadership and keeping finance people-oriented.
This change in policy, with the state taking precedence over the market, sets the tone for the next plenary meeting.
The reform promises of 2013 have been unevenly implemented over the past decade. For example, consider the development of entrepreneurship and small and medium-sized enterprises (SMEs). Many SMEs suffered heavily under China’s strict zero-Covid policy, and the country’s age of unbridled ambition has given way to its young people “lying flat”.
Firms are increasingly nervous about investing in the uncertain economic climate, despite the state’s reassurances and exhortations.
Meanwhile, foreign companies do not see a level or stable playing field. In an environment of regulatory uncertainty and geopolitical tension, foreign investment in China has fallen recently despite government efforts to promote it.
In terms of innovation and technological development, the Chinese government has prioritised self-sufficiency amid increasing competition with the United States.
It has achieved breakthroughs in some areas with strong state support, but international collaboration with Western countries – which is essential for innovation – has waned in the current geopolitical climate. It is important that state-driven innovations are complemented by market-based dynamism.
02:39
China’s economy sees a resurgence in the third quarter, beating forecasts
China’s economy sees a resurgence in the third quarter, beating forecasts
Urbanisation continues to be a key growth engine, with China’s urbanisation rates rising from 53 per cent in 2013 to nearly 65 per cent today.
But, even as many cities have opened up their household registration, or hukou, to new migrants who meet the required standards, hukou system reforms as a whole remain incomplete in areas such as rights for migrant workers.
Shaped by massive infrastructure development and housing construction, urbanisation has proceeded swiftly but it has not necessarily been of good quality and, as a result, people have not always received the best social services.
There have been clear achievements in poverty alleviation under the banner of “common prosperity”, even though it has sometimes been at a cost to economic growth and has led to depressed demand, with some SMEs – particularly in the tutoring and property-related sectors going out of business. Rural-urban divides persist, and fundamental healthcare sector reforms are still needed despite improved coverage in national medical security.
The goal of rule-based governance might be laudable, but the government’s heavy-handed approach to clamping down on the private tuition sector undermined investor confidence at home and abroad. Gradual experimentalism in an integrated system is more likely to be effective than sudden draconian steps in isolation.
While there has been clear social progress, there have also been setbacks on the economic front, resulting in an adverse economic environment rarely seen since the era of economic reform. Local governments are facing severe financial stress from the effects of the pandemic, diminished land sales and reduced tax incomes.
Local government debt is a key risk for the central government. At the root of this risk is central-regional fiscal imbalances, pushing local governments to rely on land sales.
With the country again facing urgent economic challenges, the bold spirit of former premier Zhu Rongji provides an inspiring model. When Zhu assumed economic leadership in the 1990s, China was mired in high inflation, debt and losses at state-owned enterprises which threatened financial stability. Zhu decisively tackled these systemic risks through fiscal centralisation, slashing bureaucracy and closing or privatising failing firms.
Zhu’s government also partly created the current fiscal imbalance by centralising fiscal resources to address the financial shortfall of the central government. Local governments were left with a disproportionate share of fiscal responsibility compared with their reduced share of fiscal income. Zhu created an architecture of stability for a time but sowed the seeds of structural contradictions which must be addressed eventually.
Now, with local government debt approaching crisis levels, China must again summon the resolve Zhu displayed to recalibrate central-local fiscal relations. The central government must assume greater fiscal responsibility while broadening municipal finance options.
In the long term, property tax – a foundation of municipal finance throughout the world – must form the core of local fiscal income. Given that the property downturn is in full swing, it is not the right time to implement such reforms. Clamping down on highly leveraged private developers, leading to fiscal hardships for local governments, is just a start.
Former Chinese premier Zhu Rongji gestures during his speech at the European SME Award ceremony in Beijing, in December 2004. Zhu is remembered for decisively tackling systemic risks. Photo: AFP
More deep-rooted reforms in taxation, fiscal architecture and social housing need to follow. One example is how the comprehensive housing reform promulgated on September 1 can begin to address the interconnected issues of the property market.
Though controversial at the time, Zhu’s resolute reforms laid the foundation for China’s economic take-off. His willingness to make tough but necessary choices exemplifies visionary leadership.
Zhu’s courage to confront vested interests made him a giant of economic reforms. As China faces new uncertainties, his principled pragmatism provides inspiration. Beijing should apply this spirit to tackling today’s challenges.
Despite the vision for further reforms advocated by Li Keqiang, when he was premier, circumstances constrain policy achievements. While caution is only natural in the current environment, breakthroughs necessitate making tough choices. Inspired by Zhu’s bold approach, China must unflinchingly embark on fundamental reforms to navigate itself out of its complex set of challenges.
Winston Mok, a private investor, was previously a private equity investor
