Will Xi Jinping’s Administration Return to the Path of Chinese Economic Reform, or Emphasize its Socialist Side?

Regulatory Trend 1: Policies with No Concern for Economic Impact

The Xi Jinping administration’s primary regulatory trend has been to adopt a series of policies without worrying about the impact they might have on the economy. These can be divided into four categories.

(1) Platform Company Squeezing

From 2021, the government has repeatedly fined and otherwise sanctioned platform companies like Alibaba, Tencent, Didi, and Meituan for violations of financial regulations and antitrust laws, as well as inadequate information security measures. As a result, those companies have seen major drops in performance and stock price and have been forced to lay off workers.

(2) Banning For-Profit Education Business

In July 2021, citing “soaring child-rearing costs,” the government announced that it would ban new for-profit cram schools, make existing ones nonprofit, and regulate tuition fees. The sudden announcement sent the stock prices of listed educational companies plummeting and put them on the verge of extinction.

(3) Tighter Regulation of the Entertainment Industry

In September 2021, regulators tightened rules on program content and performers to correct what they call the vulgarization of television and entertainment programming, and to cultivate a healthy spiritual culture of morality and love of party and nation. They have also put in place measures to combat youth video game addiction, with playing time limits and requirements for users to register real names.

(4) Other “Anti-Economic” Policies

Other policies have also been enacted without concern for economic impact. The credit squeeze put on real-estate companies starting in 2020 had a serious negative macroeconomic influence and led to a major drop in income for local governments. Another example is the “zero-COVID” policy that caused untold economic and social damage over the last couple of years.

Repeated Revisions and Relaxations

Yet, each of the policies above were later revised and withdrawn in turn, and of course there is no need to mention the abrupt repeal of the Zero-COVID policy. The harsh pressure on real estate also went under review in the fall of 2021, while the platform industry clampdown changed course in March 2022 to “promote healthy development.” The State Council went on to revise its for-profit educational business ban in December of last year with an eye to “support the development of disciplined private educational businesses.”

Why do these revisions and retractions keep happening? Is it because President Xi, who is considered to have a tight grip on power in the country, is prone to changing his mind? Likely not, since it is impossible for Xi alone to decide such policies.

One hypothesis is that the administration and Chinese Communist Party both contain a mixture of conservatively minded people and those more economically focused, and policies fluctuate in time with the shifts in power balance between those two groups. When China succeeded in quashing the pandemic in its early days and restored economic activity relatively quickly in 2020 and 2021, it reinforced the idea that “China’s way is the best way,” strengthening conservative voices. That led to the policies mentioned above. Then, when the economy began to suffer, in my view that led to a stronger voice for those with an economic and reform mindset, allowing them to revise or reverse the harmful policies.

Last December, the Central Economic Work Conference offered statements like, “we will increase efforts to attract and utilize foreign capital and widen market access,” “we will actively seek to join high-standard economic and trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP),” “we will meet the demand for equal treatment between state-owned and private enterprises,” and “we will support platform companies in leading economic development, creating jobs, and playing an active role in international competition.”

That could signal a restart of reform and opening up, and some observers are hoping that 2023 will mark a reaffirmation of the economic reforms like those produced in the 2013 Third Plenary Session of the 11th Central Committee of the Chinese Communist Party, or Third Plenum.

Will that be the case? Even if it is, the extent to which this “reboot” will take root will depend on the economic situation going forward, although depending on foreign capital in tough times is a standard move from the CCP playbook. The reform measures advanced by the powerfully reform-minded Third Plenum in 2013 have since been hollowed out. Based on these precedents, it is hard to deny the possibility that conservative voices will once more gain strength as the economy improves, leading to more anti-economic policies put in place.

Regulatory Trend 2: Capital Control over Private Enterprise

The 2013 Third Plenum promoted a system of mixed ownership, with both state-owned and private enterprise existing together. This can have two versions: one where private enterprise joins in the management of state-owned companies, and one where the government and state-owned enterprise join in the management of private companies. In China, the latter is far more common than the former.

The second of the Xi administration’s regulatory trends is strengthening capital control over private enterprise under the guise of “promoting mixed ownership.”

According to leading analysis firm Fitch Ratings, the number of acquisitions by Chinese state-owned enterprises of A-share private companies (Chinese companies listed on the Shanghai Stock Exchange or Shenzhen Stock Exchange and traded in yuan) increased from 6 in 2017 and 18 in 2018 to 50 in each of 2019 and 2020. It seems many of the acquisitions within that post-2018 increase are private enterprises that fell into financial difficulties and were then acquired by local-government-affiliated investment funds.

There has also been a recent increase in investments in private enterprises in various regions to strengthen R&D capabilities and foster strategic industries, including some that take the shape of venture investment. According to an announcement by the Chinese State-owned Assets Supervision and Administration Commission, from January to August 2020, state-owned enterprises under direct central control invested in more than 6,000 private enterprises nationwide, with total investment amounting to 400 billion yuan.

China is not the only place where the government uses investment to rescue important private companies that have fallen into financial difficulties or to foster industry. What makes China unique, however, is the large power of state-owned enterprises in the economy in general and the large number of cases where they take over private enterprises completely.

In China, state-owned companies account for one in four of all A-share listed companies, approximately 50% of market capitalization, two-thirds of sales, and three-fourths of profits. When one goes on to consider that many promising private enterprises accept government investment because it carries advantages when fundraising, obtaining subsidies, and getting permits and licenses, the issue becomes one of macroeconomic structure regarding state control over the economy.

The latest examples of state control of private companies include the government’s acquisition of special management shares in platform companies like Alibaba and TikTok and its dispatch of officials to management. These “special management shares,” also known as “golden shares,” are preferred shares that carry 1% interest in the company and convey special veto rights on important business decisions.

The earlier mentioned governmental clampdown on platform companies in the name of financial regulations, antitrust violations, and inadequate information security measures was prompted by the CCP’s deep concern that these private platform companies listed on overseas markets and completely controlled by their founders were gaining massive social influence.

That clampdown effectively gave the CCP the power of life and death over such companies, and with the special management shares it now has control of the companies in both name and fact. The government’s recent shift to supporting platform companies as leaders in economic development and international competition may simply be because it already owns them outright.

Regulatory Trend 3: Strengthening the Party’s Corporate Control

The third of the Xi administration’s regulatory trends is using CCP apparatus to tighten control over private enterprise.

In 2020, the CCP clarified the “united front work” it was undertaking with respect to the private sector economy, describing it as “faced with new situations and new tasks because the scale of the private sector has been expanding, risks and challenges have increased significantly, and the values and interests of the private economy personnel have become more diverse.”

Instructions based on that recognition have come down to establish CCP branches in private and foreign-owned companies for deeper participation in management. The actual situation is not entirely clear, but in 2017 the CCP revealed that 70% of non-state-owned enterprises had established Party branches, and about 74,000 enterprises with foreign capital, or 70% of the total, had branches, mainly in joint ventures. Recently, foreign financial institutions with permission to start domestic operations have also been required to establish CCP branches.

A Global Trend Toward “Big Government”?

As described, for a short time starting in 2020, China was overcome by the excitement of believing “the Chinese way is the best way” and adopted a series of ill-considered policies that, when the economic situation worsened and the “windfall” shriveled, were quickly reversed or revised.

At the same time, President Xi seems bent on continuing his pursuit of reinforcing party leadership and control, and as long as he stays at the top that is unlikely to change. Despite indications from the Central Economic Work Conference over the last two years of a restart of “reform and opening up,” that can remain nothing more than temporary expedience unless that one factor does change. That is because the root of reform and opening up is a willingness to hand the economy over to the free market.

However, it is also important to consider the Chinese government’s increased economic interventions in the context of global movements.

The 40 years since the “small market” trend that began in the 1980s have seen a complete reversal. President Xi is said to have a strong focus on “common prosperity,” or the party slogan indicating shared wealth for all, but at heart his true concern is the danger of the global trend of increased class differences, in particular economic disparity.

Where China stands out is that its “big government,” in this case the party, goes beyond mere economic intervention, with the declaration, “Party, government, military, civilian, and academic; east, west, south, north, and center, the Party leads everything.” Is that an effective way to run a country? Looking at the yes-man filled personnel appointments for Xi’s third term administration fills me with apprehension. One can only hope that the chaos surrounding the zero-COVID policy and its sudden reversal are not signs of things to come for China.

(Originally published in Japanese. Banner photo: On December 12, 2022, Chinese President Xi Jinping smiles and shakes hands with Crown Prince Mohammed bin Salman of Saudi Arabia during a state visit to Riyadh, Saudi Arabia. Xi’s visit was likely intended to strengthen strategic relations, particularly economically. © AFP/Jiji.)