How China can resolve inherent contradictions in its economy

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The idea of a prostrate China being held down by Western imperialists remains a neat domestic foil that autocrats need, in order to avoid having to look deeper at the sources of Chinese malaise. As agitprop, it doesn’t need to be true, only useful.

Yet this kind of common rhetoric shuts down serious policy proposals that Beijing needs if it is to resolve its relationship to capitalism, resourcing fundamentally different macro policies to discover and apply new insights into endemic problems that aren’t going away any time soon.

For instance, when can Chinese people have access to international markets, eliminating self-imposed capital controls? Why can’t the yuan be convertible? And how are functioning bureaucrats going to overcome the paltry use of the yuan abroad without reconciling this reality to the impact Beijing’s foreign policy has upon its neighbors?

Many of these problems stem from China’s acceptance of fiat money and its Keynesian framework relating output growth to both monetary growth (velocity) and employment (the Phillips Curve).

These technical matters can be resolved politically; both Zhou Xiaochuan and his protégé Yi Gang have openly discussed how China is to manage components of its monetary and fiscal policy in ways that sustain domestic stability.

But what if China isn’t on an unstoppable upward path of growth and stability but instead has begun to decline? By rejecting comparative policy options for further political reforms, President Xi Jinping’s efforts at imposed centralization could doom China.

What Arnold Toynbee’s epic publication studying the rise and fall of civilizations in A Study of History reveals is that when expansionist regimes reject the sine qua non of growth, they fail. For Toynbee, the proximate cause for growth is self-determination. Having rejected modest reform toward partly commercialized media, or even limited local elections governed by the rule of law, Xi is running China into a cul-de-sac.

Witness Xi’s public campaign against corruption: It led to massive capital flight. Having openly sought to identify and ruin cadres, Xi’s autocratic putsch toward reform led to bureaucratic paralysis. Quietly look at how appointed Chinese bureaucrats apply Xi’s vision of his “Chinese Dream” for modest domestic prosperity and you’ll discover bureaucrats sending their children abroad for study or a better life.

Remember Alexander Solzhenitsyn’s admonishment at Soviet Marxism while working in Kazakhstan: “They pretend to pay us, so we pretend to work.” The incentives to meet political targets have resulted in political self-preservation at the expense of growth. Without opening China’s mercantile system into a feedback loop, political leaders at the highest levels risk losing touch with the country’s economic and social challenges.

What path should Chinese officials pursue to stem inevitable decline evidenced in Xi’s overt centralization, a gamble preventing growth because it inhibits self-determination? Tinkering inside China’s industrial deep state will procure nothing.

The source providing China with new ideas for growth on a scale to surpass the West resides in political liberalization; in new functioning institutions whose aim is innovation and growth, not rent-seeking. To achieve this, appointed Chinese political officials must do three things to ground current institutions into markets: current and capital account liberalization leading to the creation of a domestic rule-of-law-based bond market. Only then will we witness the explosion of Chinese creativity.

Why should Xi lead in this direction? It’s really quite simple. If Xi Jinping insists on controlling the commanding heights of the Chinese economy, then he should immediately anticipate the direction he’s going in and how he intends to get where he wants without destroying the nation’s social capital as Mao Zedong did.

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