On its 70th anniversary on October 1st 2019, the People’s Republic of China (PRC) will proudly celebrate the material successes of a lifetime and show them off to the rest of the world. It has many, well beyond the vagaries of economic cycles and notwithstanding the current shift to a more moderate pace of economic growth. The first and foremost is undoubtedly its severe challenge to the liberal perspective regarding the role of economic and political freedom for economic growth. After an initial harmful three-decade tâtonnement in search for a model that proved both well suited to the peculiarities of China’s economy and society and at the same time consistent with the possibilities offered to a large developing economy by unfolding economic globalisation, the Communist Party of China (CPC) cleverly engineered an unprecedented transformation of the country from the second largest closed and planned economy to the second largest open and decentralised economy in the world under one-party rule.
What Chinese leaders have called ‘socialism with Chinese characteristics’ is a unique combination of skilful central policy design and market mechanisms, so that the outcome is in fact a successful case of state capitalism. Unlike all other formerly planned economies, the transition ‘from planned to market’ has been pursued by introducing market mechanisms in an otherwise Party-controlled economic system. Over the past 40 years, China has been actively searching for its role in the world economy, from world’s factory of cheap mass producers to largest trader and now ambitious innovator in Artificial Intelligence. The national mandate in industrial policy since the 13th Plan to invest in dual (civilian and military) use technologies has resulted in growing economic power that is being leveraged to gain more political influence abroad. Such political influence is not intended to gain some foothold in other countries’ internal political affairs, but rather to claim its right to non-interference in its own internal affairs, which includes the features of its political system as well as the pace and type of policy reforms to be implemented.
The chief ability of Chinese leaders has been and still is that of growing into a global economic powerhouse by navigating the rules set by multilateral institutions while still keeping control of the domestic economy through the PRC’s firm hold on the structures of the economy, i.e. land, labour and capital – which is the greatest peculiarity of China’s transition. The control of land (which is state-owned), labour (through an almost perfect segmentation of the labour market) and capital (through an almost totally state-owned credit system), allows the CPC to ensure economic stability while getting the most benefits from the role of the market to boost economic activity and people’s living standards.
At 70, China has become highly interdependent with almost all other countries, both rich and poor, through trade, investment and finance. China is today the largest export destination for more than 35 nations and the largest source of imports for more than 65. The total cumulated amount of foreign investment in China is around 200 billion dollars, and China’s outward investments are worth around 100 billion dollars. The renminbi is increasingly used as a currency in international trade and has been included in the Special Drawing Right basket of currencies by the International Monetary Fund (a bunch of ‘official’ currencies).
The unescapable influence of China over the world economy today comes from its being strongly intertwined with the rest of the world, while still relatively closed to foreign influence. Ironically, the market economy framework it has been so capable of pursuing and exploiting with the rest of the world does not prevent it from claiming to still be a developing economy (and therefore to resist pressures to accelerate internal economic reforms), with the argument that its per capita income still ranks below the 60th position.
This is why the more interesting question today is not whether China will still grow quickly and surpass the United States (which might well happen without any real consequences and in fact has already happened in PPP terms), but instead whether China will be able to survive its own growth. China at 70 has grown (almost) old without becoming (really) rich. The past sources of growth (capital accumulation through cheap state credit, an increasing labour force, growing productivity) have been totally exploited and now have turned into potential bottlenecks to further growth (high national debt, declining working-age population, need for radical innovation). The ‘easy way’ to growth is over and the needs of a mature economy high on the agenda of its leaders: a comprehensive welfare system (health care and pension schemes), a more selective credit allocation system and radical innovation are only the major pillars of future growth. The Chinese leadership now has to show they can refute the old saying ‘if youth knew, if old age could’.