China’s Economic Transformation: From Deng’s Vision to Xi’s Divergence

China’s economic miracle was not possible without the advice from Japan and Singapore, which led to the country’s current economic struggles. Deng Xiaoping, who was the second poorest country among 140 countries after Mao Zedong’s death in 1976, sought reform and opening up to foreign countries. He met with business leaders in Japan and appointed Saburo Okita as his first foreign economic advisor.

Over the years, 22,000 Singaporean advisors visited China. Instead of a command economy dominated by state-owned enterprises (SOEs), the government adopted a Japan-style industrial policy, directing resources to modern industry and leveraging private firms’ efficiency. To avoid pitfalls associated with economies favoring a single “national champion,” private companies must engage in healthy competition. In 2018, SOEs accounted for only 12% of urban employment, exports, and business investment, with even profitable SOEs generating less growth than private companies.

China’s President Xi Jinping is resurrecting the dominance of State-Owned Enterprises (SOEs) in the country, with 83% of bank loans going to SOEs by 2016. This policy shift is a result of concerns from the Chinese Communist Party (CCP) about private companies becoming separate loci of power. Xi has also forced private companies to accept interference from CCP branches in their management decisions, resulting in declining efficiency.

Furthermore, foreign companies are crucial for growth, as they transfer technology and drive exports. Singapore proposed a strategic solution to Beijing, bringing foreign companies to China to produce and export products. By 2000, foreign multinationals produced half of China’s exports, particularly high-tech items. This process transferred knowledge to new private companies, which supplied 80% of the content of these exports.

Xi believes China would be more secure if it was less dependent on foreign technology and firms. However, his ‘Made in China 2025’ program, launched in 2015, has fallen short, as tax breaks for companies issuing numerous patents have led to a shift from high-quality patents to lower-quality ones, reducing innovation.

Finally, foreign firms have faced procurement discrimination and intellectual property theft before Xi’s rise, which has escalated to include arrests of foreign personnel on espionage charges and demands for involvement from CCP branches in business decisions. As sales in China decrease, companies are less willing to tolerate such impositions, leading to a drop in foreign direct investment into China from all countries in the first eight months of 2023.

China’s economic growth is hindered by a shrinking labor force and a decline in private investment. Total factor productivity (TFP) is crucial for economic growth, accounting for 40% of GDP per worker. Under Xi Jinping, TFP growth has dropped by two-thirds, causing a halving of per capita GDP growth from 9% in the decade before Xi took office to 4% or less in the coming five years.

Beijing has attempted to boost growth by building a surplus of “apartments for no one” financed by excessive debt, resulting in financial turmoil and demonstrations. The impact of weaker growth on political stability remains uncertain, and Xi may be deceiving himself about the causes of China’s economic headwinds.

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