Chapter 10
Conclusion

China’s history is littered with examples of failed attempts to create true change. Typically, the forces of conservatism massively outweighed the impulses for economic modernization. In 1949 China passed up a half-chance to put itself on the path to prosperity. Instead, under Mao, it imported the dysfunctional Soviet system lock, stock, and barrel, and on top of that fostered brutal internal conflict. That lethal cocktail set China back decades.

Since Mao’s demise, China has given birth to the China paradox, which has proved so far to be a winning formula. China’s hybrid developmental model has worked well since the forces of change, of entrepreneurialism, of innovation have enjoyed a productive equilibrium with the ruling CCP, which, while not abandoning its autocratic instincts, has displayed remarkable pragmatism in leading the economic reforms. Incompatible forces unexpectedly became mutually supportive and aligned. Hence, the China paradox.

In launching the economic reforms, Deng Xiaoping was sailing into uncharted waters. It was about learning through doing, an ad hoc experimentation and a search for what might work. It was a seat-of-the pants exercise that ultimately delivered beyond all expectations. The reforms unleashed creativity and energy throughout Chinese society. The pent-up energy of the Chinese people could find expression after being kept for so long under lock and key.

Deng’s bold pragmatism was critical in drawing a line under the Mao era and sending the signal to society that there were very few limits on what could be considered. But that should not lead us to conclude that Deng did not have a vision. Through the twists and turns, he never deviated from his core vision of a prosperous China that continued to be ruled autocratically by the CCP. What he did not have was a clear path to that goal.

The fundamental goal of the CCP is to stay in power. When we acknowledge that simple but core fact, then China is less puzzling. Things fall into place. People ask why a ruling autocratic communist party would provide the business class room to grow. The answer is that wealth creation underpins the longevity of CCP rule. What seems a paradox is perfectly logical.

The reforms were chaotic, with a stop-and-go pattern of rapid progress followed by clampdowns or readjustments to reign in what was seen as “market anarchy” and also to put a lid the rising democratic expectations of civil society. As the old straitjacket of central planning was dismantled, power was devolved to the local level, where, despite China’s unitary legal system, almost federal style variations were permitted. As the government fretted over how to resolve the problem of the SOEs, the private sector of industry emerged and proved vital in creating wealth and jobs. This bought time for the government to sort out the heavy legacy of the Mao years. Civil society started to stir, spurred on by the internet and social media. Environmentalists prodded the government, which belatedly began to admit the air pollution crisis. Religion flourished, filling the gap left by the retreat of Marxism. Private commerce returned and the street cries of small traders again rang out in the alleys of Beijing.

The positive balance of forces within the China paradox was at times disrupted. In 1989, in response to a perceived challenge to its rule, the CCP has no compunction about turning its guns on its citizens. Officials who abhorred the free-wheeling new order quickly sought to roll back the reforms. But the cat was out of the bag. The Chinese had grasped their newfound economic freedom. Deng, doggedly sticking to his thesis that growing prosperity was the key to the CCP’s survival, fought back to restore momentum to the reform process.

Many younger Chinese are today not aware of the vibrancy, fresh air, and relative openness of the first decades of the reforms. It was a heady time of experimentation and breakthroughs. I worked with reformist officials who pushed through new regulations permitting foreigners to own their whole investment and not have to form a JV. Firms that had been forced to hide under the smokescreen of being a TVE had their private status recognized under law. The CCP began to welcome private businessmen into their ranks. Senior CCP leaders abandoned some of the opacity that surrounded one-party rule. Zhao Ziyang (CCP head, 1987–89) held press conferences in which he talked without notes for two hours. Zhu Rongji (premier, 1998–2003) boldly forced SOEs to modernize and risked his political life by pushing for accession to the WTO. The government played a vital role in China’s emerging business models, which we have documented.

The China paradox emerged as a hybrid model with a mixture of spontaneous economic activity and bureaucratic guidance. The model was humming with positive energy while underpinned by the government as the backstop to prevent any meltdown.

Until a few years ago, China’s rise seemed all but inevitable. The CCP faced challenges but always seemed to muddle through and come out as an unlikely hero. It had managed the mixed-economy effectively, achieved smooth political succession and allowed civil society some space to grow. Today, the verdict has swung from adulation to serious concerns.

While the China paradox proved successful in kick-starting the economy, there has been a heavy cost to this model, resulting in China actually turning out to be an underperformer. Unbridled development has left China with a serious hangover. Unprecedented wealth creation is a mixed blessing since it opened the door to corruption on a grand scale that amounts to nationwide kleptocracy. While hundreds of millions of Chinese have indeed been pulled out of (or have pulled themselves out of) poverty, much of the wealth has gone missing, siphoned off into the families of top leaders, salted away in real estate in London or New York.

The problems stem from Deng’s laissez-faire tactics encapsulated in his slogan “development is a firm principle,” allowing things to rip, so that change could take hold. The CCP looks less and less like the architect of a new order that can stand the test of time. It missed the opportunity to learn from other societies’ experience while reveling in the economic takeoff. Growing air pollution back then was seen as a badge of honor, a sign that China had somehow mastered the principles of “development.” Things having been permitted to rip, it has proven hard to rein them in. Regulations on environmental protection, industrial consolidation, illegal local taxes, and a host of other aspects are systematically obstructed by local interests. The CCP, which had seemed to have learned the ropes of importing foreign concepts such as the stock market, has more recently looked incompetent and out of its depth, shaking our faith in its economic governance.

If China’s recent track record looks rather tattered around the edges, the future is even more challenging.

We have looked at key factors that could continue to drive China forward and others that might derail that progress. China’s excellent newly built transportation infrastructure sets it apart from nations such as India. China’s educational system still suffers from the Confucian and communist legacies but functions well nonetheless. Coupled with the impact of students returning from overseas, China is able to make good use of its nation’s brain power. Scientific research and industrial R&D benefit from government support.

China is busy addressing its environmental crisis, seeking to “turn a bad thing into a good thing” by not only leading the world in adopting renewable energy sources, but also becoming a leading supplier of the wind turbines and solar panels needed for this. China will likely become a leading producer and user of electric vehicles.

China’s financial condition is a bone of contention and remains murky and hard to fathom. Although its financial risk is manageable as it stands, the deeper concern is the deterioration of the vital economic signs. But in China the buck ultimately stops with the government. While the government still has the financial resources to navigate these risks, collapse does not look to be in the cards.

Based on the above factors, one might imagine that China’s success story will progress unimpeded. Not at the crazy pace of past decades while China caught up, but still growing steadily and in ways that are more sustainable.

But the risks all track back to the CCP, which in theory holds all the levers that might avert economic disaster. So the critical uncertainty in China is the nation’s governance—that is, the ruling CCP. Our once-cautious confidence in the CCP as an institution we hoped had adapted and morphed from Stalinist cadres into technocratic custodians of the China paradox, has been seriously dented by economic fumbling and bungling, by the factional infighting in the CCP, and by a clampdown on dissent stronger and more systematic than we have seen in decades. We have been forced to rethink China’s prospects.

Having reaped the benefits of the reforms, the CCP is revealing its longer-term vision on how it plans to rule. Its goal is to restore more of its central authority and play a stronger coordinating role in the economy. This does not mean a revival of the discredited central planning, but it implies a move from an improvised system, like jazz, in recent decades, to one more like classical music, with a conductor, in the future. Of course, the CCP is the sole conductor.

Early hopes that Xi Jinping would usher in a period of revived reform have been dashed. A cold wind blows through civil society. Not a return to Mao’s “red terror,” but certainly many steps backward. Civil rights lawyers are imprisoned. Those who call for true respect for the state constitution are treated as enemies. China is rapidly balkanizing its internet, blocking certain services, and in so doing isolating its scientists and academics from international discourse.

On the economic front, things too are bleak. Xi has concentrated power in his hands and in so doing sidelined his premier, who by tradition should be in charge of the economy. Authority has been transferred from government institutions to organs of the CCP. The CCP is ramping up its interference in the management of old-style SOEs. The CCP vision is for the SOE sector to absolutely dominate the economy under the close control of the CCP. This is essential to the CCPs raison d’etre since it can claim it presides over a new, more successful iteration of “socialism,” and not a version of capitalism.

We are at a watershed in China’s development. Having stumbled so badly during the Mao period, Deng and his successor reformers appeared to have learned many lessons and exhibited less hubris and more practical common sense than the CCP had in the past. Whether it was in insisting on a truly collective CCP leadership, in tolerating a burgeoning private economy, or in permitting the entry of global firms that could easily outshine local SOEs, the reformers showed wisdom and pragmatism. It did the trick and the China paradox created the illusion that China had somehow broken the code for making “socialism” work, where Lenin, Stalin, and Mao had failed. It seemed that China had created what has been described as the “perfect dictatorship.”1 That success may be more short-lived than anticipated.

As the CCP experimented with this hybrid system, it was prepared to try many formulas, to explore ways to further liberate the productive forces and drive technological and business innovation. It showed a true inquisitiveness about how things work in other societies. It exercised restraint in how it handled political control, with, of course, certain egregious exceptions, such as the crushing of the democracy movement in 1979 or the Tiananmen Square Massacre in 1989. In the early phases of the reforms, its leaders were in the main tentative, cautious, and mindful of not disrupting the economic forces they had liberated.

Unfortunately, the now super-confident and bullying CCP threatens the continuing functioning of the China paradox, undermining the balance between economic liberalization and political autocracy, which relies on the CCP wielding a light hand.

Unfortunately, the CCP is less adaptable or evolved than we had imagined. Few doubted its resolve to maintain its tight grip on China. But what we witnessed is a progress from the early chaotic and exploratory period of post-Mao China toward a truer expression of the innate violent and bullying instincts of the CCP. Since the last decade and in particular since Xi took over, it is as if the CCP feels massively confident and less constrained. Xi is not only consolidating his own personal power, but also ensuring that the CCP is preeminent across society, including in the SOEs. He turns the screws on civil society and on a country that has slowly been finding its voice.

On the international front, China struts around threatening its neighbors and stealthily building its military might, ranging from aircraft carriers to future hypersonic missiles launched from outer space. A virulent strain of Chinese nationalism courses through the veins of ordinary Chinese.

On an individual basis, many CCP members, be they at a leadership level or just ordinary citizens, display admirable decency in their views. The issue is that once gathered together, the CCP is collectively bound by its traditional brutal ethos. Just swapping a Mao suit for a Western one made of Italian cloth does not change the core values.

Though the model underlying the China paradox during the past four decades did have its weaknesses, it fit China’s political legacy and permitted an orderly and gradual dismantling of the old economic model. The CCP welcomed foreign technology and business ideas while holding the lid on the Chinese pressure cooker of a society. Beyond that there was always a ray of hope that China would also evolve politically, that somehow there would be a gradual convergence between universal human values and the Chinese model. The contrary seems to be happening. China has played a strong game of poker, leaving the world guessing as to where it was going. Now the highly confident CCP flexes its muscles.

The balancing act that has served China so well is looking fragile. Social fissures continue to open up, such as tensions with Muslim Uighurs and the Tibetans, a civil society that has found its voice despite internet controls, factionalism in the CCP, burgeoning religion, not to mention the widening gap between rich and poor. What if, for instance, there was an outbreak of rebellion that was exploited by a charismatic, messianic figure. In fact, the well-oiled Chinese security apparatus should be able to handle most eventualities. But the required clampdown would undermine economic progress.

Events outside the China mainland could also trigger such a clampdown. It could be heightened dissent in Hong Kong or a push toward fuller independence in Taiwan. It could be a standoff in the South China Sea. The CCP will not stand by and permit what it deems to be attacks on China’s sovereignty. Military action, or just the threat of it, would disrupt trade and air and sea transportation, sending tremors through the Chinese economy. Just as with the domestic economy, the CCP’s survival trumps the economy and could throw China into a tailspin.

Growing CCP interference in the economy and the focus on creating “national champions” and barriers for foreign firms do not bode well for the future. Given the pace of change, one can never declare victory in the acquisition or development of technology. Today, you may achieve self-sufficiency, but tomorrow you may find yourself left behind. Integration into the global economy is the best way forward. The Great Fire Wall of China erected by the CCP to block ideas deemed to be poisonous hampers intellectual exchange, including in science and technology. Again, the CCP’s political survival trumps economic development and gnaws away at the equilibrium with the China paradox.

How should we rate the chances that the CCP could manage to transform itself? Today, it is a secretive, opaque institution that outranks the government and the national constitution. Organizationally, it adheres to Leninist principles while its behavior on the ground often resembles that of the Mafia. Designed for an insurrectionary program that won power nearly 70 years ago, the CCP seems an anomaly in a modern industrialized society. In view of the historical lessons etched in its psyche from the collapse of the Soviet Union, the CCP refuses to take even a baby step towards its own reform.

Barring an unlikely change of heart by the CCP, we should expect to see increasing friction between China’s flawed governance and the needs of the modern economy, with the result that China will continue to underperform and be held back from its true potential. The notion that China will, in the near future, become the next superpower is wide of the mark.2 History also tells us to expect unanticipated events that could derail the Chinese economy and might even force the current CCP leaders to move aside.

So, the CCP is at, or close to, a crossroads. A figure or group of people within the CCP may summon the courage and foresight to gradually and carefully shape a new political order that will not become a roadblock to future economic progress and give China the ability to extricate itself from the current trajectory. The CCP might even change its name to reflect the new economic reality. However, the CCP is more likely to try to sustain the status quo. Indeed, a new set of leaders might well choose to further roll back the reforms.

If the trends we have identified in China’s governance continue without political reform, we can still have moderate confidence that China will muddle through for another 10 to 15 years. That confidence is derived from China’s entrepreneurial energy, which can be sustained despite the CCP.

Looking out beyond that 10-to-15-year time frame, the risks become greatly magnified. The CCP is already hunkering down rather than stepping out boldly. The CCP that functioned effectively during the peak of the reforms would become the fundamental obstacle to China’s development and come under severe pressure. As it stands, it seems that the CCP would rather double-down and live with that risk than take preemptive action.

So how will the issues with China’s governance play out in the business world at a more microlevel? On the positive side, the Chinese government will continue to play its valuable role as sponsor of “national champions” in key sectors. It will continue to force the pace of technological “catch up” and to foster innovation, providing deep pockets for long-term investment.

But on the negative side, the CCP, in response to decades of centrifugal, decentralizing forces during the reforms, is seeking to claw back its all-encompassing authority. For large old-style SOEs, this will mean that their already weak corporate governance will increasingly be held hostage by the plans of bureaucrats. Some government measures may be rational and needed, but others exhibit the lingering legacy of the planned economy, creating an atmosphere that hampers legitimate risk-taking.

When it comes to new-style SOEs such as Lenovo and Haier the story is refreshingly different. Strong CEOs, who had built their firms from humble beginnings or rescued them from oblivion, have achieved a high degree of autonomy, which should be unassailable. They have a good chance of keeping the predatory CCP in the background. With their blend of personal and government ownership, they look and act more like private firms. Given their management skills, which compare favorably with those of their global peers, they will continue to compete strongly on the world stage.

Chinese POEs came out of the shadows and helped prop up the economy while the government worked out what to do with the SOEs. Although some with a strategic role, such as in high-tech, will find themselves increasingly a de facto part of China, Inc., there is a raft of others that have established a strong culture of independence. They will of course look over their shoulders, watchful of CCP intentions and playing a visible game of token participation in the political process. But they can stand on their own feet. State banks are now willing to finance them. They show the ability to integrate and turn around foreign firms they have acquired. All this bodes well for the future.

As we look at what China will become, we should be cautious not to overestimate the ability of the CCP and the vestiges of the old order to strangle or debilitate the free-market element of the Chinese economy. The CCP’s effort to strengthen its hold is precisely because it senses its waning relevance. The CCP is bluffing when it says that without it China has no future. We should have confidence that the new economy has taken root and is underpinned by the new middle class and the buying power of the consumer.

The strong performance and sustainability of the private sector, as well as of the new-style SOEs, will counterbalance the ponderous and wealth-draining state sector. Longer term, we shall likely see the new economy grow at the expense of the old one.

Though the old economy has been reshaped and given a corporate veneer, it remains a series of fiefdoms of the CCP, often functioning in cozy duopolies and loaded up with debt that the government will never let them default on. As it becomes clearer that the issues of the old economy were not fully dealt with during the reforms, the CCP may have to consider according the new economy a more central role.

The first time around, in the earlier reforms, the CCP grudgingly allowed the new economy to carry the load. This time around, a positive scenario would be that it has to accept a rebalancing of the equilibrium whereby it takes more of a back seat. This would imply that the CCP is willing to reform itself, signaling that China is finding a way to peacefully evolve. It would represent an enlightened re-igniting of the reform process whereby the hybrid model is fine-tuned and overhauled to fit new conditions. Unfortunately, such positive change looks remote.

If the economy were to deteriorate dramatically, the CCP might be forced rethink its current iteration of the developmental model or face pressure to hand off to a new set of leaders or, worse, a meltdown toward a failed state. Unfortunately, the odds are that the CCP would default to an even harder line, putting at risk the fruits of the reforms and leading to a downward spiral of the economy.

We should hope, of course, that the trends prove us wrong and that the China paradox has longevity and is not unravelling. But the evidence points in the other direction. There is still time for these trends to be reversed. China is not on the brink of collapse but is certainly in a more precarious condition than could have been imagined only a few years ago. Fortunately, the trends are perfectly visible to the Chinese themselves, with whom we share a deep commitment to avoiding China’s failure, an event that would be catastrophic for both China and the world.