Is China’s Free Market Experiment Really Over?
China intends to stay in the exclusive club of globally integrated economies, but what will happen when it tries to remake the rules?
In the wake of the Chinese Communist Party’s (CCP) twentieth annual Party Congress, which in mid-October secured a third term for Chairman Xi Jinping, Western policy wonks declared that the CCP would revert to the ideology it held under Mao Tse-tung and return to Marxism. Yet, there haven’t been signs in recent years of “decoupling” or even of ideological or structural shifts in the economy. Instead, we’re witnessing another stage in the evolution of China’s role in globalization under Xi’s proclamation of a “new journey.”
China’s older generation of so-called “economic rationalists” is on the way out, and its replacements will be part of a younger generation of economists who, although liberal regarding market development, are less committed to orthodox views (or what Xi repeatedly refers to as the rigidity of the past). The outgoing figures, like Vice Premier Liu He, initiated supply-side reforms, but without the requisite institutional reforms or investments in social goods—such as education, housing, and health care—that Xi supports. But the removal of the old guard doesn’t mean a reversion to Mao’s planned economy. Conventional Western analysis misses the fact that instead of implementing a significant structural shift in the economy, the party will be emptying the cage for new birds.
Indeed, China does not look like a country that is moving away from a market-driven economy. China’s leading economic policymaking institution, the National Development and Reform Commission (NDRC), has been drawing new policy guidelines to encourage foreign investment and more high-tech manufacturing. Its updated foreign investment laws include patent protections that recognize intellectual property while reducing the prohibited list for foreign participation.
In the last three years, China’s research and expenditure growth rate has surpassed other countries, with Beijing leading in new patent development. China ranks above all other middle-income countries for its innovation environment. Showcasing the maturation of the Chinese business cycle is Tesla’s historic status as the first American company to operate on its own, instead of as a compulsory joint venture with the Chinese government.
China under Xi looks less like a country that is closing its doors to the outside world, and more like an integral part of the global economy. The International Monetary Fund predicts that China will contribute 30 percent of global GDP growth in 2023. Of Fortune’s top 500 companies, 145 are Chinese. Furthermore, China has bilateral trade agreements with more than twenty countries; belongs to the fifteen-member Asia-Pacific free-trade alliance, the Regional Comprehensive Economic Partnership (RCEP); and has filed for membership in the Comprehensive Progressive Trans-Pacific Partnership (CPTPP), something the United States declined to do. Despite being deemed illiberal, inhumane, or authoritarian for its domestic governance, China’s influence is growing.
New appointees to state ministries will be determined in two sessions in early spring 2023. Most experts agree that Xi is consolidating ideologically, but this is part of a larger story. Like Deng, Xi knows that the party can only be secure if more people live better lives. Looser state control over the economy since Deng, however, has also meant that China has become a land of mega-companies and ultra-rich people. Just look at the Forbes World's Billionaires List, which ranks China second, just behind the United States. Xi has frequently expressed concern that ostentatious wealth risks tarnishing the party’s reputation as a champion of a more equitable future.
Even as he promotes market reforms, Chinese history is a reminder to Xi that internal conflicts have proven to be more threatening to regime stability than external aggression. Underneath the veneer of resurgent ideology lies the contradiction that has confronted China’s rulers throughout its history: how to cede enough without losing the center. It is a risk embedded in the party structure and one foreseen in 1973, nearly one decade before the market-opening reforms of Deng. The formidable sinologist and economist Mark Elvin predicted that a consequence of entering the international market would be “a disruption of the control over information and thought which is essential to the survival of the Chinese Communist regime.”
Is China trapped between economic growth and state control? This is the riddle of China’s new journey, and it’s as old as empire. Only this time, the future of globalization hangs in the balance, with an equally momentous question: China intends to stay in the exclusive club of globally integrated economies, but what will happen when it tries to remake the rules?
Hilton Root is a professor at the Schar School of Policy and Government at George Mason University.
Baocheng Liu is a professor at the University of International Business and Economics in Beijing, China.