Diminishing returns have set in and it has become plainly evident that the main elements of the broad reform program first launched by Deng Xiaoping in 1978 are no longer applicable or sustainable for spurring China’s continued modernization over the coming decades.

In 2007, Wen Jiabao described the nation’s economy as characterized by “4 uns”: “unstable, unbalanced, uncoordinated, and unsustainable.”


It is much more difficult for nations to alter their direction than it is for cars. Even when nit is evident that a chosen direction is failing, it remains difficult to alter course. Vested interests make it so. Fear of unknown consequences is another deterrent. Size is another factor. Turning a nation the size of China, even a modest degree, is more like turning an ocean liner. It is always easiest to carry on, “muddle through,” and make minor adjustments than to make fundamental alterations. The Chinese call this “crossing the river by feeling the stones.”


Big, in his prescient book The Grand Failure, published 2 years before the collapse of the USSR, described the communist party-states in this penultimate and moribund stage as “post-communist authoritarianism.” In this phase, the communist leadership loses confidence, evinces a deep insecurity, and tries to reassert control. Rule becomes rule for rule’s sake. The governing rationale is stripped bare to its core: maintaining power.


It is not easy to see weaknesses in China’s party-state, as it works around the clock to project an image of stability, coherence, strength, decisiveness, and purpose.


Diffusion of power in international affairs — the US will decline relative to other rising powers, there will be no global hegemony, the world will become more multipolar, and power will reside more in networks and coalitions than individual nation-states.

Demographic patterns will shift — the whole world will experience aging populations, which will mitigate economic growth, while urbanization and migration increases worldwide.


While it did signal the need for a new comprehensive reform path, and it redefined the central government’s role in managing the macro economy, the Plenum documents really did very little to signal or specify how to get there (no indication of sequencing or prioritization). This lack of specificity is likely one of the 3 main contributing factors to the almost complete lack of follow-through in implementation following the Plenum. Another reason is that the Party’s anti-corruption campaign has paralyzed the cadre corps, who are not doing their “day jobs” by carrying out the reforms.


The year 2013 was a decisive one economically for China. This is when the economists and the leadership really began to understand that the stimulus-heavy strategy that had allowed China to largely avoid the global financial crisis was now threatening to trigger a domestically bred financial crisis. This threat came not only from the huge increase in the stock of debt that China saw after 2008 but also in the collapsing efficiency of the credit mechanism: it takes much more credit to generate a unit of GDP now than it did 5 years ago.


There is nothing automatic about newly industrializing economies successfully navigating their way through and out of the Middle Income Trap, although Japan, SK and Taiwan did so. Indeed, most do not succeed.


The government spent at least $156B to buy up shares in an attempt to stabilize stock prices and the market.


On the surface, China’s financial system appears to have all the elements of modernity: banks, credit agencies, insurance companies, payments systems, equity and bond markets, etc. But banks dominate financial intermediation, providing about 60% of loans to the private sector. Moreover, the banking system is concentrated in the Big4. Thus the government maintains the dominant position in the financial system. Economists refer to this as “financial repression,” a situation where the government artificially depresses deposit and lending rates and orders the state banks to increase or decrease loans in line with government planning priorities.

This variability has given rise to an enormous “shadow banking” industry where individuals or businesses can turn to get quick cash when needed. One reason is because the large state banks favors SOEs and SMEs or individuals have had no where else to turn for capital.


Much of the local government debt, as well as shadow banking debt, is in unrecoverable nonperforming loans (NPLs) — which will eventually have to be written off or absorbed by another round of injected funds from the Center.


China’s government has consistently primed the pump. And it has done so in large part because the Party’s own legitimacy is dependent on constant growth.


Even if it slows overall, consumption spending is now a main driver of economic growth. China has the world’s highest household savings rate of 51%, which, if spent, could power the economy indefinitely.


Another factor is the limited options for investing. Because of capital controls Chinese citizens are severely limited from investing abroad or moving their savings to foreign banks, and the government rightly fears that if these controls were further relaxed the result would be massive capital out-flight.


China has long been enamored with the SK chaebol and Japanese corporate conglomerate models of large-scale horizontally integrated firms. Indeed, the Third Plenum specifically declared that “state ownership is a central pillar of the economy,” while at the same time claiming that “markets should play a decisive role.”


They may be significant in terms of revenue, as several populate the Global Fortune 500 list, but precious few are globally competitive. One of the best-kept secrets about most of China’s biggest SOEs is their poor performance. Growth and innovation are coming from the 6.5M private enterprises and 40.6M household businesses across China.


The only way out of the trap is through innovation, which enables moving up the productivity and eoconomic value chains.


China’s government is indeed putting increasingly large sums into R&D, now 2.1% of GDP. While rising, China’s R&D spending still lags behind when compared with 2.9% in the US, 2.8% in Germany, 3.3% in Japan, 3.1% in Taiwan, and SK’s world-leading level of 4.2%.


Innovation requires much more than government investment in R&D — it fundamentally requires an educational system premised on critical thinking and freedom of exploration. This, in turn, requires a political system that is relatively open and does not permit censorship or “no go zones” in research. Students and intellectuals must be incentivized and rewarded — not persecuted or penalized — for chanllenging conventional wisdom and making mistakes.


But entrepreneurship and innovation are not necessarily the same things. The latter invents new things, the former figures out (sometimes new) ways of marketing existing things.


Ministry of Public Security forces number about 25M nationwide. It is no accident that since 2011 China’s internal security budget is actually larger than its military budget.


In these cases the protests were ruthlessly suppressed by paramilitary PAP units, and both cities remain under lockdown and de facto martial law.


Putin was instrumental in getting Hu Jintao to crack down on civil society, physically grabbing Hu by the lapel and telling him, “If you do not get a grip on these NGOs in China, as we doing in Russia, you too will have a color revolution.”


Overhauling the healthcare system is also intended to pay macro-economic dividends. One reason for the excessive high savings rate in China has been the citizenry’s financial fears about their health and how to support themselves in retirement.


More than 2M of China’s best and brightest go abroad for study and only a little more than one-third return home.


Analyses of Xi’s thesis apparently revealed multiple instances of plagiarism. Dissertations in China are frequently ghostwritten.


And they were aware of the “peaceful evolution” efforts of the West. But the Political Reformers broke with the Conservatives over the issue of Gorbachev’s glasnost and perestroika. They did not necessarily agree with all of his policies, but they concluded that the Soviet party-state was in dire need of reformation. The essence of their critique of the causes of Soviet collapse had to do with the decades-long atrophy of the Party apparatus itself. In their revisionist view, the USSR actually began to decline under Stalin in the 1930s! This line of Chinese analysis concluded that the USSR had experienced an inexorable 6-decade-long decline — during which the party-state became sclerotic, ossified, top-heavy, elitist, overly bureaucratic, and corrupt, while the country’s economy had become militarized during the Cold War, and Moscow’s foreign policy had become adventurist, revisionist, chauvinistic, hegemonic, and “social imperialist.”


They did not agree with all of Gorbachev’s reforms, but they drew the principal conclusion that for a ruling communist party to stay alive it was imperative to be proactive and dynamic. Stasis was a recipe for sclerosis, atrophy, decline, and ultimate collapse.


Official Chinese documents are frequently this way, summarizing policies that have already been undertaken rathe than announcing new initiatives.


Xi exudes self-conviction and personal confidence. LKY said of Xi: “He has iron in his soul, more than Hu Jintao, who ascended the ranks without experiencing the trials and tribulations that Xi endured.”


Throughout the document it is made explicitly clear that the Party shall guide the application of law; for example, “The Party’s leadership is the most essential feature of socialism with Chinese characteristics and the most fundamental guarantee for socialist rule of law in China. The need to exercise the Party’s leadership throughout the whole process and in every respect of law-based governance of the country is a basic lesson we have learned.” The Party itself is regulated by its own set of regulations and institutions such as the CDIC.


Leninist party-state have a distinct set of characteristics that set them apart from other authoritarian systems. They are generally much more institutionalized and organized, with the Leninist party penetrating and dominating all aspects of government, military, and society. Leninist systems are like huge machines, with a vast number of intricate cogs that make them function — while many other authoritarian regimes are patriarchal and personalistic, with a single dictator, low levels of institutionalization of the party-state apparatus, and heavily reliant on a military loyal to the leader to sustain the system in power.


The Chinese communist regime spews out propaganda slogan after slogan day after day — yet cadres and citizens alike go through the transparently false motions of pretended adherence. When visiting China one quickly realizes that even Party loyalists are just going through the motions.


Money is the most important tool in China’s foreign policy toolbox, and it is being utilized to an unprecedented extent. China is now the largest trading partner for every Asian nation except the Philippines, and the lion’s share of its outbound investment remains in Asia.


“If men define situations as real, they are real in their consequences.” Thus, it is important that many around the world perceive that China will overtake — or has already overtaken — the US as the world’s leading power.


Every day about 9K people travel between the 2 countries, 300K Chinese students study in American universities, with about 20K Americans studying in China.


The “glue” that seems to keep it together is the fear of it falling apart. There really has not been a strong bond holing the 2 nations together since the end of the Cold War during the mid-1980s. Without such a strategic anchor, the relationship is left vulnerable to unremitting frictions on 2nd-tier issues. Maintaining peace, stability, and security in the Asia-Pacific region — the most dynamic region in the world — could provide shared strategic purpose, but the 2 nations’ respective security postures are more competitive than complementary.


The disillusion with China in America probably says much more about the US than it does about China. It is the latest Chapter in America’s 2-century-long quest to influence China’s evolution. Previous attempts, particularly during the Nationalist era (1911-49), ended tragically with the “Who Lost China?” Debate, scapegoating, and witch-hunting. Over the past 2 centuries one repetitive pattern has been consistent: America’s “missionary impulse” to transform China in its image has repeatedly been disappointed by not understanding the complexities on the ground in China and by China’s stubborn unwillingness to to conform to American expectations.


In essence, the “engagement” strategy pursued since Nixon across 8 consecutive administrations was premised on 3 pillars:

  1. As China economically modernized it would liberalize politically.
  2. As China’s role in the world grew it would become a “responsible stakeholder” in upholding the global liberal order created by the West and the US. America’s strategy was to embed China in this global institutional order and thereby socialize it into the underlying liberal norms of the Western-created postwar order.
  3. That China would not challenge the American-dominant security architecture and order in East-Asia, and it would thus be a “status-quo” power.

China is not the kind of country that goes about things in a “frontal manner” (that is how American do things). But we are witnessing Beijing establishing a range of alternative institutions that clearly signal China’s discomfort with the Western postwar order.


China’s sustained decades-long military modernization program, which has been fueled by 12% average annual budget increases, is altering the security environment in the Asia-Pacific region where the US has enjoyed unrivaled preeminence since 1945.


China-Europe relations have bene on something of a rollercoaster for the last 20 years. The relationship has evolved like that of a newlywed couple who were romantically entranced with each other and had unlimited aspirations for their partnership together, into a difficult phase when the intensity of interactions produced unanticipated frictions and disappointed expectations, into a period of brief estrangement, until the 2 made the decision to stay together and pragmatically build on what they shared in common.


Despite this point of friction, the relationship is not plagued by the Taiwan issue or strategic concerns in Asia, as is the case in Sino-American relations. Nor is the EU as preoccupied with China’s role in global governance as previously. All of these reasons permit the 2 sides to focus on commercial and other exchanges. Now that the 2 sides have worked through the difficulties in the middle of their marriage, they seem to have found pragmatic and more mature ways of interacting.


In terms of bilateral diplomacy, the Chinese government expends enormous time and resources cultivating and building ties with developing countries.