The world appeared to change on Nov. 15, the day bold and epochal reforms were unveiled that promised to overhaul one of the world’s biggest economies. Analysts, investors and historians alike rejoiced at the audacity of the plan.
That was Japan. On Nov. 15, 2012, Shinzo Abe, then one month away from becoming prime minister, pledged “unlimited” stimulus and the kind of supply-side policies for which investors had long been clamoring. A year later, the buzz is gone, and not a single structural reform has been implemented. Abe’s record should give pause to those now rushing to praise Xi Jinping for a Chinese reform document that is as vague as it appears bold.
Granted, the comparison between Japan and China is an imperfect one. The two countries have vastly different political systems and levels of per capita income, not to mention different challenges to overcome. But they’ve followed similar development paths, with China now facing the same dilemma Japan did in the 1970s ― how to lessen a dependence on exports and excessive investment and promote consumption-led growth. More important, both leaders face tremendously powerful vested interests that are intent on thwarting their most critical reforms.
In the West, there’s a sense that Xi can snap his fingers and have the Communist Party ― indeed, all of China’s 1.3 billion people ― fall in line. Yet the world once thought the same thing of Japanese leaders from Kakuei Tanaka to Yasuhiro Nakasone to Junichiro Koizumi. Japan was long praised for its consensus-driven society and political system, where gray-haired party elders would issue decrees and obedient, self-sacrificing citizens would bow and do their duty for the motherland. In fact, a network of entrenched bureaucrats, businessmen and local interest groups was developing all that time into a powerful force against change ― one that has stymied Abe thus far.
Xi may face even stronger resistance. Credit where it’s due: The 60-point plan released late Friday is more audacious than even many China bulls expected. In the 12 months since he took over the Communist Party, Xi has announced more economic reforms than predecessor Hu Jintao did in 10 years. Xi is clearly positioning himself as China’s most powerful leader in decades. Hence talk of a Deng Xiaoping moment.
Deng put China on a new course toward prosperity in 1978. Now Xi wants to move the country up the value chain. In the interim, though, the power of vested interests has expanded drastically. Politics is proving to be a bit too lucrative for China’s own good as untold numbers of millionaires and even billionaires get minted among the Communist Party’s upper echelons. The desire for change understandably shrinks as overseas bank accounts swell. Few of the epochal changes Xi proposes will work without the cooperation of these reluctant cadres.
“Now it’s going to be the hard and complicated slog of implementation,” says Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong.
Abe’s journey from economic rock star to question mark offers some pointers to Xi. First, be specific about not just what you want to do but also how you’re going to do it and when. Beware grand plans that rely copiously on verbs like “deepen,” “perfect” and “strengthen” without offering specifics or timetables. Xi wants to increase the accountability of state-owned enterprises. Great, but tell us how. Government audits? More independent directors? Demanding greater disclosure about their operations, holdings or carbon footprint? And when exactly will all this happen?
The Communist Party intends to liberalize the financial system. Terrific, but does that mean a more independent central bank to set interest rates? Freer yuan trading? What about reining in the shadow-banking system shackling China with untold billions of dollars of nonperforming loans?
Bottom line, Xiconomics so far is looking all too much like Abenomics. Dramatic statements and gestures to build support among the news media, foreign investors and the broader public are easy. But unleashing the necessary animal spirits requires bold action sooner rather than later.
The best thing Xi could do to enliven the economy is clamp down hard on corruption. He’s already begun, most dramatically by taking down rival Bo Xilai: The Chongqing politician is now serving a life sentence in prison for bribery and abuse of power. If Xi really wants to scare party officials straight, Xi would allow anti-corruption investigators to go after an ally as well.
Xi should order random lifestyle checks on top party officials to see who owns too many houses on Hainan Island or apartments in Paris. He might consider establishing an independent anti-corruption agency with subpoena powers. Also, leaders need to do more to change the incentives for promotions, making them more about merit, less about connections or factions.
As Abenomics is proving, this initial burst of enthusiasm will carry Xi only so far. If the Chinese president hasn’t thought long and hard about how to implement his grand vision ― which means, in part, how to navigate around China Inc. ― he’d better start today.
By William Pesek
William Pesek is a Bloomberg View columnist. ― Ed.
(Bloomberg)
