Xi Jinping's Reform Agenda and the Challenges of 'Leninist Capitalism'

Key Insight

Upon assuming power between 2012 and 2013, President Xi Jinping's leadership demonstrated a more acute understanding of China's economic challenges and a greater political will to enact change than its predecessor. Xi launched a comprehensive reform program comprising three core elements: a draconian anti-corruption drive aimed at revising the established political-economy bargain and removing entrenched figures who might resist reforms; a broad ideological campaign designed to strengthen the party's control over media, academia, and civil society; and an extensive economic reform roadmap targeting the fiscal, financial, and enterprise systems. This multi-faceted approach reflects a diagnosis of China's problems as fundamentally political-economic, positing that economic reform success is contingent on significant changes to the country's governance structure.

Xi's economic reform agenda, detailed in the November 2013 'Decision' of the Third Plenum, declared a significant shift: market forces would now play a 'decisive' role in resource allocation, an upgrade from their previous 'important' designation. This included measures to remove price controls, increase private investment, and deregulate protected markets. However, the 'Decision' simultaneously reaffirmed the state sector's 'dominant role' in the economy, creating a fundamental contradiction. If market forces are truly decisive, the state's dominant role cannot be guaranteed, as state firms might lose to private ones. Conversely, if state dominance is guaranteed, market outcomes must sometimes be suppressed. The emerging vision is of an economy where the state retains firm command, particularly through its control of key enterprises, but leverages market tools to improve efficiency, focusing on pricing reforms while largely avoiding asset transfers from state to private sectors. This strategy raises questions about its capacity to generate sufficient productivity gains for sustained high-speed growth, given the low productivity of many state-owned assets.

Progress on Xi's reform agenda has been uneven. Notable achievements include a comprehensive fiscal system restructuring initiated in 2014, energy pricing reforms aimed at reducing distortions, and incremental financial sector changes like the abolition of deposit interest rate controls and adjustments to exchange rate policy for a more free-floating Renminbi. In enterprise reform, a significant step was the 2014 abolition of onerous administrative requirements for new businesses, which led to a 23% surge in new company formations. However, major reforms for large, inefficient state-owned enterprises (SOEs) have been slow; 'mixed ownership' schemes often involve transfers of shares to other state firms rather than private ones, likely yielding smaller productivity gains than full privatization. Moreover, substantive reforms in land tenure, hukou, and urbanization systems, crucial for inclusive growth, have seen little progress. This 'Leninist capitalism,' while potentially sustaining the system in the short term, imposes a cost on innovation and creativity due to draconian restrictions on expression and organization, suggesting that a more open political system will ultimately be necessary for China's long-term dynamism as it grows older and richer.