Economics and finance, Government and governance | Asia, East Asia

9 November 2016

China’s economic growth challenges could be exacerbated by too much power being placed in the hands of the President, Victor Shih writes.

The latest plenum in China further shored up President Xi Jinping’s personal authority in the party by labelling him the “core” of the central leadership. Furthermore, the plenum called on all party members to “raise their core awareness and awareness for unity,” – essentially that everyone in the ruling party should act strictly in accordance to the instructions of Xi Jinping. But is that necessarily good for policy-making in today’s China?

During the previous Hu Jintao administration, although Premier Wen Jiabao had jurisdiction over economic affairs, he always had to be mindful of other members of the Politburo Standing Committee, who were at least his equal, criticising his policies. This power dynamic provided incentives for the technocrats in the State Council to propose a variety of policy objectives, as well as policies.

As a result, policy discussions were lively as technocrats and experts from the various ministries and think tanks appealed to different elite audiences. To be sure, the debates likely delayed decisions in some cases, but the more decentralised decision-making model also led to a greater variety of ideas, as well as an important self-correction mechanism. When bad outcomes emerged from a given policy, a subset of technocrats quickly pointed out the mistake, even if it meant offending Premier Wen. Because Premier Wen was checked by other elites and because he did not have unilateral authority over mid- and high- level appointments, even more junior technocrats dared to criticise his policies in the belief that the higher-level elites could shield them from any retaliatory action.

More on this: Xi Jinping: China’s Putin? Leadership and 'core' promises

With Xi’s consolidation of power and the extension of his jurisdiction to include economic affairs through his chairmanship of the Leading Group on Comprehensively Deepening Reform (LGCDR), the policy-making environment has changed completely.

A growing number of policy ideas now come from the LGCDR, which lower level technocrats would hesitate to challenge, not knowing whether or not they came directly from Xi. And no one can afford to offend Xi because, unlike Wen Jiabao, he is increasingly unchecked by other high level elites in the regime.

As a result of this, on the one hand, the speed of policy-making has increased. Every meeting of the LGCDR now sees the promulgation of at least half a dozen new decrees. On the other hand, fewer alternatives are explored before a policy is adopted, and even if policy outcomes are less than ideal, fewer actors within the system dare criticise a policy. Without knowing whether anyone in the Politburo Standing Committee can check Xi, mid-level technocrats would run enormous career risks in challenging policies championed by the President.

Xi’s call for the realisation of the China Dream may be creating this echo chamber of a policy environment. In order to realise this ambition, China has to maintain relatively high growth of 6 per cent or above for the foreseeable future. The state media reported Xi’s remarks that “the realising of the China Dream of the great revitalisation of the Chinese people means that the state must be strong and rich, the nation must be prosperous, and the people must live well.”

More on this: Virtues and pitfalls of China’s state-driven growth

Because Xi has put such a heavy emphasis on this objective, China’s technocrats cannot challenge it outright, forcing them instead to accelerate growth even as the private sector acts to slow it down. As debt mounts in the economy, indebted firms are less able to invest, which slows growth. Knowing that most firms and the government are indebted and are unable to spend much, even firms unencumbered with debt will not want to invest as heavily. This process has driven real private sector investment growth down to nearly zero.

However, such a market driven outcome is unacceptable to China’s technocrats, who are fearful of disappointing Xi. Instead of challenging the growth objective, as advised by the IMF, they are pulling out all stops to accelerate state-backed investment in order to replace falling private sector investment. Local governments are taking on increasing levels of debt in order to maintain growth. This will create even more unserviceable debt down the track because investment by state-owned enterprises and local governments will continue to generate smaller cash flows and fewer economic benefits than the initial investment.

The combination of Xi’s rising power and his strong preference for growth will continue to force the Chinese economy to greater leveraging, making the county’s position more precarious, and ironically, imperilling the very dream it seeks to achieve.

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Shih, Victor. 2017. "China’S Policy-Making Echo Chamber - Policy Forum". Policy Forum.