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China's leaders rethink growth model as economy runs out of steam

The Chinese leadership considers proposals such as easing business regulations and liberalizing exchange rates to try to stoke the China 'miracle.'

November 09, 2013|By Barbara Demick
  • Police patrol at Tiananmen Square in Beijing, where security has been beefed up for the Communist Party's Third Plenum.
Police patrol at Tiananmen Square in Beijing, where security has been beefed… (Rolex Dela Pena / European…)

BEIJING — The Chinese leadership is hyping a Communist Party meeting that began Saturday as the greatest financial rethink since leader Deng Xiaoping launched China's economic revolution in the late 1970s.

In keeping with past patterns, the Chinese will not divulge specifics of the four-day session here until it concludes. But proposals that have leaked out in recent weeks include easing business regulations and liberalizing interest and currency exchange rates.

The economic revolution launched more than three decades ago is still unfinished, leaving the country with a hybrid economy sometimes waggishly referred to as "capitalism with Chinese characteristics."

In private talks, the leadership has acknowledged what Western economists have been warning about for years: The growth model that pulled China out of poverty has run out of steam.

"They will do as much as possible under the circumstances," said an academic who attended one of the briefings. Speaking on the condition of anonymity because of the sensitivity of the subject, he said there are more than 300 proposals on the table.

The meeting, called the Third Plenum, is the third session of the full Central Committee of the 18th Communist Party congress. That congress took place in November, when Xi Jinping was installed as general secretary, replacing Hu Jintao.

Traditionally, the first and second sessions are devoted to politics and personnel, and the third to policy, meaning that this is the chance for the new leadership to show what it hopes to accomplish. Xi, now president, and his premier, Li Keqiang, have been talking up their eagerness for economic reform with a succession of prominent economists, including former U.S. Treasury Secretary Henry M. Paulson and a delegation from the 21st Century Council, made up of former heads of state.

One likely target is the nation's old, behemoth state-owned enterprises, many controlled by a clique of elite families. The enterprises still hold sway in the economy, heavily subsidized and benefiting from monopolistic pricing. Also expected to come under scrutiny is an archaic residential registration system known as hukou, which prevents tens of millions of people from moving to cities with the best jobs and schools.

For all the hype about the China "miracle," economists note there are other countries that achieved huge spurts of growth in the 20th century — among them Japan and Brazil — by pouring investment into infrastructure and factories.

"If you look at the history of the countries that have followed this growth model, rapid growth was the easy part. The adjustment process has always been brutally difficult," said Michael Pettis, a finance professor at Peking University.

In a new book, Pettis contends that the Chinese Communist Party needs to look less at its gross domestic product and more at increasing household incomes so that ordinary people share in the wealth. By keeping interest rates artificially low, Chinese families are in effect subsidizing the giant state-owned enterprises that can get cheap capital.

Meanwhile, the low exchange rate for the Chinese yuan benefits exporters but leaves Chinese consumers paying far more for iPhones and jeans.

For China's new leadership, such economic changes would mean challenging powerful vested interests.

"For many years, what was good for the elite was good for the country," Pettis said. "In this big fight about how to adjust, it is always about politics. Not about what is economically efficient."

Hu, the soft-spoken rule-by-consensus technocrat who served as president during the last decade, and his premier, Wen Jiabao, spoke out in favor of economic reforms, but failed to produce many.

Xi Jinping, however, could prove a more forceful figure. He is a princeling; his father was one of Mao Tse-tung's early comrades and a key figure in the implementation of Deng's economic reforms in the southern province of Guangdong.

"The resistance to reforming state-owned enterprises is huge. They are controlled by certain families, and many are members of the central party committee, but Xi Jinping is himself the leader of the princelings so he might be able to do what others have not," said Hu Xingdou, an outspoken economist at the Beijing Institute of Technology.

Xi already has begun to move against the party establishment with a series of corruption investigations, targeting party officials with the giant state-owned China Petroleum and with the Assets Supervision and Administration Commission, which oversees such enterprises.

Since the 1980s, China has experienced average annual growth of more than 10%, and even though it has slowed in recent years, it still has hovered around an enviable 7%.

Without a large-scale financial crisis, it is difficult to muster the political will to revise, economists say.

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