Deng Undone

The Costs of Halting Market Reform in China

The year 2008 marked the 30th anniversary of the beginning of market reforms in China -- and perhaps the third anniversary of their ending. Since the present Chinese leadership took power, market-oriented liberalization has been minor. And as such policies have wound down, they have been supplanted by renewed state intervention: price controls, the reversal of privatization, the rollback of measures encouraging competition, and new barriers to investment.

Why would China, with a generation of successful market reform under its belt, move back toward state control? Because of politics run amok. When the administration of President Hu Jintao and Premier Wen Jiabao assumed control seven years ago, they acted like any new Chinese regime: they moved to solidify their power through economic stimulus. Only they did not stop. Soon after they took office, lending by state banks and investment by local and national state entities soared. Helped temporarily by very loose global monetary conditions, the Chinese state did well by most economic standards. And success created a constituency in political and business circles that is obsessed with growth at the expense of all else. This growth today is explicitly led by the state, fueled by investment by state-owned entities, and accompanied by powerful regulatory steps meant to ensure the state's dominance of the economy -- all measures that contrast sharply with prior reforms.

The Chinese Communist Party no longer sees the pursuit of further genuine market-oriented reform as being in its interest. The burst of growth that the economy exhibited after the initial state-directed stimulus convinced the CCP that true liberalization is now unnecessary as well as sometimes painful. Whatever the objectives of the Obama administration, it must realize that it will be difficult to change Beijing's views quickly. True broad-based market-oriented reform in China should remain a long-term goal of U.S. economic policy. But for now, the Obama administration would do better to focus its economic diplomacy on evaluating and responding to the Chinese government's strategy of aggressively promoting state-led growth. It should not presume that Beijing will return to market reform anytime soon.

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