China moves to Stage 2 of opening up and reform and shows signs of Stage 3.
To comprehend where China is going and what has been announced this last week, we need to start a little way back – in Shanghai in 1963. Bear with me and you will understand why I go through this history. These are solely my opinions but explain my contextualising of the Plenum.
Zhou Enlai spoke that January, 1963, of the Four Modernisations, which became the initial expression of economic development as the priority . This policy speech, represented the views of a small task force led by Premier Zhou , and consisted also of President Liu , Chen Yun, the economics leader, and Deng Xiaoping. Their ideas of the four modernisations, in my opinion, reflected a division which was to become very deep.
This would have contributed to Mao feeling he needed a Cultural Revolution, so deep was his belief in Politics in Command with its class war priority.
The prioritisation of economic development for China can be traced back to that speech in 1963. Its urgency was to manage the demands of a growing population, whose basic needs were not being met.
The implementation, however, had to wait until 1978 and followed the overthrow of the “Gang of Four”.
But that delay only increased the scale of the challenge. The transformation of 1.2 billion peasants to the cities to power a modern economy and free the land for efficient use was about to begin. The target of a medium-sized economy by 2049 was borne.
Of the four authors, only two now survived (Premier Zhou and President Liu had passed on) – Deng Xiaoping and Chen Yun. They led change. They led Stage 1 of the change.
Stage one was powered by creating a low cost export economy. This was to use foreign capital, technology and access to global markets. It was to be based on the East Coast and on forms of doing business which until then had been completely forbidden in a society in which a few thousand only had contact with foreigners. Everything was to change – for ever.
The peasants started moving to the cities, the industries starting modernising and China started to build the reserves for Stage 2. China was never going to get caught being a low cost exporter for ever, as many Asian nations had discovered this was a cul-de-sac.
The evidence of success was everywhere – the size of China’s export markets, the return of China as a major world player, China’s reserves topped everyone else’s, and hundreds of millions had moved to the cities and towns. But the environmental cost was evident as was the dependency on imported resources, especially energy , and many peasants lived in a twilight zone in the urban areas – neither residents nor enfranchised.
During this period, China enabled foreign investment and access to its domestic market, as that was the price of the multi-nationals investment into China. Some of it , in priority areas, worked well and profitably. Most worked very hard to make a modest return, believing the future would justify the opening costs….
Now the next stage – Stage 2 – is being implemented – towards a domestic consumption model based on a market economy with global dimensions, led by the Party and Government. Across the whole nation and beyond. This is the second stage. A big increase in the private sector share of the economy, the increased commercialisation of the State Owned Enterprises , the growth of the service industry, and a new model of the welfare state. The last big phase of movement of peasants is to be completed, and large-scale agriculture and co-operative organisations will begin to dominate.
But, significantly, land will still be owned by the State.,
The Party still controls policy, and the Government still implements policy. But the role of the market is increasing substantially and Party and Government move more towards macro as opposed to micro management.
It is a guided market economy – a market economy with Chinese characteristics. It is a basis deemed necessary to build new major global corporations, and develop the innovation and creativity needed to build a modern nation.
It is a market economy that is planned, regulated, peppered with strategic shareholders, as China holds to its creed of managed economic development. It is a phase to develop a modern economy but with social justice and fairness.
There are major opportunities for global companies to access greater shares in the China market during this period as China feels more confident it can manage the foreign companies, and its anti-trust and other structures are evidence of this new confidence, which breeds clarity and opportunity.
The elements of the modern economy are taking root now and they require some of the trappings of the developed economies, with freer markets, m and a , stock markets, a convertible and global currency. And a private sector who can enjoy the fruits of their work – but soon they will be reminded of their national, patriotic duties, roles, and the need for modesty. Adam Smith’s Theory of the Moral Sentiments will be their bedside reading, together with the Chinese Dream.
The welfare institutions and funds will invest substantially in the stock markets which will grow from a modest $3-4trillion level to the U.S.A. level of $15-20trillion. The funds will become the main owners of the soe’s and thereby produce the first funded welfare state in the world. Business will carry much higher social costs than in the West, because that role of business to care is a key part of stage 3.
This period can only work if the State ruthlessly chases and destroys corruption and recovers the soul of China. China’s values have been undermined during Stage 1, and now the rectification campaign is in full swing. The officials and Provinces are being told what is right and wrong in terms of benefits and behaviour and a new standard of official morality is emerging. It will take 10 years or more. The corrupting effects of Stage 1 are being dismantled and a new China is emerging where big business and Government provide jobs and opportunity , and the Party provides the guidance and overall direction. The Party is the guiding force.
Let no one fool you these are old men grasping on to power. They are a brilliant and very large group who engage in intense and very meaningful democratic debate , until …. A decision is made , and then you have to row with the decision or….
So the Rule of Law is the talk of the town, leaving provincial leaders further denuded of their powers and resources. Rule of law is a means to enforce accountability and goes much wider than making courts independent and just. It is about making officials accountable to the national and local congresses, to hold them accountable for their work and their behaviour. The effectiveness of China’s Rule of Law, like so many other policies, will surprise with its effectiveness. It is well researched and tested. It has been prepared for many years with many studying legal systems, and practising, abroad.
But it will not enable the weakening of the Party. Many foreign commentators will say that this feature alone will undermine the Rule of law in China. The gainsayers have been around for decades. My reading is that the leadership knows where to draw the line and its effectiveness will be apparent.
The democrats of the West genuinely believe our way is the only way, and some are prepared to commit lives to that. But it is not going to be the Chinese way. The ways will be Chinese and the leadership will be with the Party. It is a different system and intends to remain so.
So where is all this leading? Grasp that and everything begins to take shape.
It is Socialism with Chinese Characteristics. It starts to become clearer from 2021, the first target year for this new concept , their long term vision.
2021 is China with its new foundations laid down.
2049 is a nation where a sustainable and reasonable standard of living is across the nation and across society, where values are clear and protected. It is not a nation of equals but “enough” is more the target than more and more. The nation’s economy and society will still be guided by the Party. But its role will be increasingly macro except where fault lines are identified.
2049 is a caring state and a vibrant economy, but where sustainability provides the limits to “enough”.
Some may expect China to resource a rising standard of living, as the U.S.A. has, with a reserve currency approach sucking in the funds and cheap imports of others and exporting RMB currency in exchange. I doubt that as China knows it is not sustainable.
The biggest difference between China’s development model and that of the West is that the Chinese model is planned. It does not seek endless growth, rather seeks adequacy.
China is now past the first stage of creating a new China. The low cost export led boom has transformed China and kick started its journey to 2049 , via 2021 – China’s twin date targets.
Now Xi is leading the transformation to a market economy en route to a socialist economy. It may be that the corruption will render the latter target impossible but that would be to reckon without regard to the Party’s staying power. It may be that China’s vision is unreal. But as we live in a world crying out for new ideas, we should give more credit to China’s deeply thought through plans.
Its destination may be connected to a concept strange but simple – “enough”.
Do not be diverted by traditional reactions to their use of the word “socialist”. China has used Marx, but Chinese socialism is a more developed concept, based upon Chinese history and 21st Century realities.
For the business world, you have to develop global strategies with China, start working on them and think out of the box.
China can solve your development problems but it is for the farsighted.