Quo Vadis, China?

Since 1978, GDP per capita in China increased from USD 222.5 in 1978 to USD 7,603.2 in 2014, with the Chinese population growing from 962.2 million to 1,367.8 million over the same period.

The political authority of China’s Communist Party (CPC) is strongly dependent on this economic modernization and poverty reduction. This is why the Chinese government tries its best to avoid any – even temporary – economic slump.

China’s communist government has recognized since at least the 12th Five-Year Plan, passed in 2011, that the Chinese economy is afflicted by serious structural problems.

The plan calls for shifting economic growth away from investment and exports towards domestic consumption, increasing the share of services in the economy and slashing industrial overcapacities, and increasing the share of alternative energy sources.

The overall goal is to move towards a post-industrial service-based economy driven by technical progress.

Can the Chinese leadership succeed?

However, there are doubts whether the Chinese leadership will be able to manage this very complex structural change through the top-down central economic planning. Japan, South Korea and Taiwan have been successful, but the majority of other countries failed at this task.

Not much has changed so far about the dominant position of the CPC. It clings to its vision of achieving “economic growth without socio-political freedom.”

True, the modernization of China’s economy encompasses capitalistic methods. However, individualism and plurality of interests are still rejected by the Chinese leadership on the grounds of their incompatibility both with Chinese tradition and with Marxism-Leninism.

Furthermore, since 2013 the CPC has been successful at disciplining the political elite, controlling justice, systematically monitoring society and consolidating its power. And the 19th Party Congress of the CPC, held this month, could further strengthen the position of CPC General Secretary Xi Jinping.

However, the ongoing consolidation of decision-making, the stricter discipline of the CPC, the focus of power on Xi Jinping, together with the need to solve the existing structural problems and financial bubbles could significantly narrow economic freedom and future development perspectives.

Where will China go from here?

China can revert to a kind of “new-totalitarianism,” maintain the current regime of “hard authoritarianism,” turn back to a sort of “soft authoritarianism,” similar to the regime between 1998 and 2008, or it might change to a “semi-democracy.”

In order to put its economic model on sustainable development path, China should allow extensive structural reforms. That would include a path of creative destruction, without CPC’s central conduct and control.

Moreover, although this does not seem to be very probable under Xi’s current path of “hard authoritarianism,” China should push back government interventions. Otherwise, China’s economic development will be hampered.

At the same time, these changes could lead to the loss of the necessary legitimation of the CPC to reign. For the time being, therefore, the Chinese government prefers to further consolidate its power – for instance, through strategies like “one belt, one road” (OBOR).

That economic strategy opens valves abroad to accommodate the accumulating pressures that are mounting at home due to the structural reforms that are undertaken.

It remains to be seen, however, how much time the Chinese government is actually winning through the OBOR strategy. It is plausible to assume that it will not work in the mid- to long-run, either in China or elsewhere.