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China: Is its 'socialist market economy' era over?

William Yang in Taipei
March 29, 2023

Three decades after China enshrined the goal of a "socialist market economy" in its constitution, the era of "reform and opening up" appears to have ended, say experts.

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Chinese President Xi Jinping at The Great Hall of People
President Xi is overseeing a broad reorganization of governing bodiesImage: Lintao Zhang/Getty Images

Thirty years ago, on March 29, 1993, China formally amended its constitution and adopted the "socialist market economy" as the country's economic system.   

The move marked a significant step in the nation's decades-long economic "reform and opening-up" process, which began in 1978 following years of political, social and economic upheaval caused by the Great Leap Forward and the Cultural Revolution.

It laid the foundation for the "development of the socialist rule of law," and by incorporating the concept into the constitution, shaped the direction of China's economic development, according to the People's Daily, the newspaper of the Chinese Communist Party's Central Committee.

"China's first real major economic reform began in the rural areas in the 1980s, when state-run factories were converted into private ones and some local officials began their own small factories," said Dexter Roberts, a senior fellow at the Atlantic Council's Indo-Pacific Security Initiative.

Accelerating reforms

According to Jane Golley, an economist at the Australian National University (ANU), this first wave of economic opening-up boosted rural incomes and facilitated some migration of China's vast rural population.

The agricultural reforms and the establishment of special economic zones also helped, she added. 

The reform and opening-up process accelerated after Deng Xiaoping, China's paramount leader at the time, embarked on his famous "southern tour" in early 1992, when he visited key coastal cities and delivered speeches highlighting the need to remain steadfast on the reform path.

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Following the tour, the focus of economic reform shifted from rural to urban areas.

Roberts from the Atlantic Council told DW that one important feature of China's urban economic reform was that the Communist Party gave entrepreneurs and enterprises more autonomy to make decisions.

"Entrepreneurs took things into their own hands and they began to decide what they wanted to produce or what they wanted to sell," he said.

Privatization and entry into WTO

In the subsequent years, China carried out a series of industrial reforms, including the prominent program of "Grasp the Large and Let Go of the Small," in which the government tried to maintain control over some of the largest state-owned enterprises (SOE) while giving up control over smaller SOEs.

Jiang Zemin, China's president from 1993 to 2003, oversaw rapid economic growth, and also changed the constitution to let private entrepreneurs and enterprises play a more important role in the economy, Roberts said.

"Jiang allowed private entrepreneurs to become party members, which was a huge deal," he noted.

In 2001, China joined the World Trade Organization, another pivotal moment that further opened the Asian nation up to the global economy. "It was a very long process that involved significant commitment [from China] to play the game more in line with the global economic order," Golley from ANU said.

Andrew Collier, managing director at Orient Capital Research, said that joining the WTO accelerated Chinese growth and turned the country into a global industrial powerhouse.

During the first decade of this century, China relied on exports, infrastructure investment and the property market to maintain a high-level economic growth.

In 2010, China officially overtook Japan to become the world's second-largest economy, based on nominal GDP.

However, problems began to surface as external demand dropped, debt started to pile up and corruption became rampant.

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Is Xi damaging China's growth model?

And Xi Jinping, China's leader since late 2012, has been reasserting the CCP's control over the economy, weakening the hand of private businesspeople and tech entrepreneurs, whom he views as becoming too powerful and contributing to widening wealth inequality.

Roberts said Xi's move risks "damaging China's growth model for the last few decades."

"His goal is to have an economy that still has a strong private sector but one that's far more controlled," he told DW. "I think that's a bridge too far. He can't have both of those things at the same time."

Collier said Xi appears to have recognized the need for China to transform its investment-driven economic model to a consumer-driven model.

But his political decisions, which include doubling down on the state sector, will hurt Beijing's ability to restructure its economy, he underlined.

"Xi is not interested in defunding the state sector in order to give consumers a larger share of the economy," he pointed out.

"The crackdown on the platform economy is an indication of that. It's a very successful sector and there may have been some market-dominance issues. But instead of addressing them in a regulatory matter, what China did is a wholesale cutback of the industry because it's viewed as a threat to the Party."

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Economic growth 'beset by debt'

Over the last three years, the economy has been battered by the coronavirus pandemic and the government's strict zero-COVID strategy to counter the health emergency.

The government has set a modest target for economic growth this year of around 5% after it cooled to only 3% last year, one of the weakest showings in nearly half a century.

"A lot of China's growth is beset by debt and inefficient state investment," Collier said. "The debt load is now becoming quite a burden and the inefficiency has increased. I'm very concerned about China's ability to sustain medium-term growth or growth at all potentially."

Economic activity, however, picked up in the first two months of this year, helped by increased consumption and infrastructure investment.

But exports are expected to remain weak amid a global downturn and the crisis-hit property sector is only slowly beginning to turn the corner.

Meanwhile, Xi is overseeing a broad reorganization of governing bodies that is set to give the ruling party direct control and supervision over financial affairs — by creating the Central Financial Commission.

To strengthen the ideological and political role of the party in China's overall financial system, a separate Central Financial Work Commission will also be established.

Apart from strengthening the party's control over the economy, Collier said there was no advantage with these reforms, as it was "not going to be positive for growth going forward."

At the twice-a-decade party congress last year, Xi installed his loyalists to top positions in the CCP. He appointed his close ally Li Qiang as the new premier this month. Roberts said he doesn't expect anyone in the senior leadership to stand up to Xi and act independently.

"It's a huge problem having a lineup of leadership whose careers are so beholden to Xi," he told DW. "I don't expect Li Qiang to be independent and I wouldn't expect him to stand up and challenge Xi Jinping."

Edited by: Srinivas Mazumdaru

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