The rule of law will lead China out of its economic morass

A full transition to a rules-based society will help Beijing restore the confidence of businesses and citizens in its ability to weather the economic storm
To root out corruption, China must put its faith in institutions with accountability, not endless anti-corruption campaigns

Winston Mok

Published: 4:30pm, 9 Jan 2024

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Forty-five years after China launched its economic reform, its once unstoppable momentum of growth has stalled. This year’s growth is projected by some to be 4.6 per cent. The much-anticipated milestone of China’s GDP surpassing the US’, seen only a few years ago as within imminent grasp, has now been postponed indefinitely. What happened? How can the economy regain its vitality?

What propelled China’s economic dynamism was an increasing recognition of private property rights amid reforms initiated by Deng Xiaoping. The inefficient state sector was gradually replaced by private businesses, which drove economic growth.

But unless China can make a full transition to a rules-based economy, it may be stuck in a middle-income trap that stops it realising its full potential. Today, not only young people, but many business owners are lying flat – acting cautiously to preserve wealth.

For one, property rights are still not completely secure in China. It’s no wonder some of China’s wealthy have set up family offices in Singapore, which is ranked second globally on property rights protection by the Property Rights Alliance’s International Property Rights Index.

While China has gradually boosted its IP protection, the safeguarding of property rights has not improved in the past decade, according to the index. Similar trends were reported by the World Economic Forum, where a glaring gap in investor protection was seen.

Some even perceive property rights as marching backwards in China. And here we should look to the draconian clampdown on the tutoring sector. With the stroke of a pen, billions of dollars in market value was wiped out and tens of thousands of well-paid jobs vanished.

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The moves were surely well meaning – intended to address social problems plaguing Chinese families. But when the state acts arbitrarily, even if it’s for the greater social good, people lose confidence in what should be a predictable social contract.

In aiming to rectify a social ill, the state might have inadvertently caused greater damage – instead of becoming an intended equaliser, the clampdown may have exacerbated educational inequality.

Similar problems afflict the property sector. For many Chinese families, there is no greater pain than continued mortgage obligations for unfinished flats. To tame the runaway property sector, Beijing drew red lines on developers’ financial leverage. The momentous change – again, well intended – was made by executive promulgation without a consultative legislative process.

And when property developers in financial difficulties failed to pay their bills, many of their suppliers, from small designers to large builders, went under. The problem is not limited to private developers; state-backed developers were also guilty of failing to make payments.

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Likewise, many indebted local governments have been unable to pay contractors for infrastructure or other construction projects.

Under the rule of law, local governments and state firms should set a good example of prompt and full payment to suppliers. Equal and strict contract enforcement for all must be a priority – as a first step towards restoring business confidence.

Compared to the early days of reform, local cadres today are required to follow due processes. Extravagant entertainment has also been curbed. But while the crackdown on corruption is welcome, the endless campaigns have failed to stamp it out, with high-profile cases continuing to be exposed.

China’s top corruption-buster warns of ‘risk of rebound’ in cases

Using unconstrained state power to check unconstrained state power does not work. Corruption must be seen in its broader institutional context.

When the root causes go unaddressed, the anti-corruption drive won’t end, sapping bureaucratic initiatives in the process. Corruption can only be minimised by having accountable institutions. Implementing the rule of law and systematic reform for greater accountability is the only lasting solution to overcome corruption.

As evident in the Nordic nations, New Zealand and Singapore, there is a close correlation between strong rule of law and low corruption. These nations consistently rank high in the World Justice Project’s Rule of Law Index, with accountable governments and strong property rights protection. They also score well on transparency and anti-corruption metrics.

A view of Singapore’s central business district on New Year’s Eve 2023. Singapore demonstrates the close correlation between strong rule of law and low corruption. Photo: EPA-EFE

A robust rule of law provides the oxygen for innovation and entrepreneurship to flourish. Secure property rights under predictable regulations give entrepreneurs and investors incentives to take risks with the confidence of reaping rewards.

Constraints on arbitrary bureaucratic interference reduce uncertainties for start-ups and their financial backers. With reassurance that their assets and contracts are protected by the law, China’s entrepreneurs will be motivated to develop transformative technologies and novel business models.

The rule of law can help address many of China’s economic challenges. Stable regulations from due process in legislation will restore investors’ confidence. Full protection of property rights will reinvigorate entrepreneurial initiatives. Transparent and accountable governance can prevent misaligned incentives. Systemic reforms can root out corruption.

China could restore economic confidence in 2024 with the right reform moves

As China navigates economic headwinds, legal reforms can revitalise growth. The rule of law provides a sturdy foundation to secure property rights, spur innovation, restore business confidence and empower the private sector.

On December 23, many people attended the funeral of eminent legal scholar Jiang Ping to pay their respects. As much as they mourned the loss of a man known as the “conscience” of China’s legal world, they also longed to see China’s full potential fulfilled.

Perhaps more than any economist, Jiang’s vision for the rule of law can set China on its journey towards national rejuvenation. Despite the naysayers, China can still become the US’ equal in the next decade – if it takes the path paved by the rule of law.

Winston Mok, a private investor, was previously a private equity investor