The Changing Face of the Chinese Economy

China, being one of the largest and most influential economies in today’s world, is being forced to deal with the many new problems that such a prestigious place entails.  Being that they’ve long been a communist state, they are forced to walk the high-wire, balancing the needs of their communist roots with the demands of having a free market.  It’s no mystery that a free market is needed in today’s world if one wants to remain competitive, but how can the country still function with its policy of state-run industries while allowing this new market system to take shape and keep their economy growing even more?

The latest problems show a distinct issue with the way banks are being handled in the country.  A few weeks back, this became all too evident when interest rates shot up.  Banks prefer to lend amongst themselves, which is proving to be inefficient and bolstering corruption.  Banks that aren’t doing well are being kept afloat in a sort of buddy system.  Officials with interest in certain programs are keeping those programs funded, regardless of whether they are profitable or not.  The entire system has turned into an old-boys club and major sectors of the economy, particularly those involving small businesses, are being left to fester.  Thus, a top-heavy system is evolving and causing a variety of problems.  In addition, problems with inefficiency and corruption within banks have become such an issue that some have even begun to speak out against these institutions publically and, perhaps more importantly, without being censored.

So who is going to solve all of these problems and get China back on the right track to growth?  Xi Jinping, the new leader of the country, has pledged to do just that.  In addition to being a staunch believer in the Communist Party and its control over many aspects of the country’s industries, he has also made it very clear that he supports a more liberal economic structure.  These things, to many, seem in direct contradiction, so putting together programs that work for both sides of the argument will be complicated to say the least.  He does, however, have many supporters in this regard, with powerful politicians and businessmen giving their opinion that a lack of development in the free market will lead to a stagnant economy.

One of Xi’s biggest allies is the economic mastermind by the name of Liu He.  He is a man that is strongly in favor of moving ahead quickly and making dramatic changes to the economic system to keep China going forward and he wishes to do this via a stronger free market economy.

Many solutions are being put forth and debated right now.  Some of the suggestions include reducing state controls on energy and natural resources, thus creating more competition, along with letting the market determine interest rates, removing prohibitions on rural citizens becoming urban citizens, and letting private companies make small investments into state-run enterprises while still keeping them in the hands of the Communist Party.

Those against a stronger free market have their own arguments, however.  Supporters of the party believe that too much free market will compromise the party’s control over the country.  Private businesses have become more powerful in recent years and have been challenging the government on certain issues, creating a power struggle that is new to China.  Party members vote according to their outside interests instead of thinking about what will help the party (and presumably the country) first.  This is a problem that we here in the U.S. are all too familiar with in our own government.  Still Xi has been trying to support the party as well, even taking steps that have been seen as quite controversial to some.

The economic transformation is further exacerbated by other issues.  Corruption within the political system means that an expansion of the free market into state-run industries will compromise the power and wealth of politicians that have been taking advantage of these industries as side-line paychecks.  Thus, party members will resist change out of self-interest.  An entire power structure will have to be undermined in order to create a new one and those who stand to lose are not going to go quietly.  On the other side, private companies are becoming known for being just as corrupt, which gives yet another reason to resist change.

The entire thing is coming to head very soon, as this fall the Communist Party Central Committee will be coming together in a meeting that is focused squarely on the economy.  Xi and Liu are currently in the middle of creating a myriad of proposals to bring to the table, no doubt hoping to get at least a few through the voting process.  If China is going to progress, the more than 200 party members who will determine the fate of the country’s economy need to think hard on what they will do.  Otherwise, the giant country will slow down and possibly lose its bid for hegemony in East Asia.

Chinese Yuan courtesy of breitbart.com

Xi Jinping courtesy of Angelica Rivera de Pena via Wikicommons