China’s watershed moment

China’s watershed moment

The 19th Party Congress has re-identified the ‘principal contradiction’ facing society. There will be consequences

Xi Jinping, Communist Party Congress, China Communist Party, 19th National Congress of the Communist Party of China, china economy, china growth, 1981 Communist party congress, 
Chinese President Xi Jinping (AP)

To appreciate the importance of the recently concluded 19th Chinese Communist Party Congress, one needs to go back to  the 1981 meeting. After years of economic suffering in the aftermath of the Cultural Revolution, the 1981 Party Congress  under Deng Xiaoping’s leadership re-identified the “principal contradiction” facing Chinese society as the tension “between the ever-growing material and cultural needs of the people and backward social productivity” instead of the “class struggle” between the proletariat and the bourgeoisie as defined by Mao Zedong. Given the overwhelming dominance of the Communist party, the extant definition of the principal contradiction forms the organising basis of reforms and policies at all levels of government in China. The 1981 recognition that the structure of the economy needed to be changed to deliver high economic growth drove the dramatic transformation of the economy that sustained a stunning 10 per cent average growth rate over the next three decades.

But the high growth also brought with it extensive collateral damage that has ranged from heightened financial vulnerability to severe environmental damage. As early as 2007, Premier Wen Jiabao warned that the Chinese economy was quickly becoming “unstable, unbalanced, uncoordinated, and unsustainable”. The state (mainly the Central government) embarked on reforms and policies to “rebalance” the economy but the more concrete efforts were implemented only after 2010 following the massive fiscal stimulus to revive the economy badly hit by the global financial crisis. The Central government targeted a slower pace of GDP growth, reduced the reliance of the economy on exports, heavy industry, and mining, and shifting to services as the main job creator. In recent years, it tried to cut back excess capacity in traditional manufacturing industries and temper credit growth and asset price inflation.

However, progress in all these fronts has been much slower than desired. The economy’s debt burden has increased at an astounding annual pace of 10-15 percentage points; shadow banking has grown at an explosive pace in recent years; the efficiency of investment and bank credit has declined sharply; and efforts to rein in the housing market have been disappointing. In addition, environmental damage, rising inequality, and inadequate public service and social safety nets remain major challenges.

One reason why this has happened is because economic management in China is deceptively decentralised and at the provincial and local government levels there is little commitment to the rebalancing effort. Even a cursory glance at infrastructure spending or credit growth data will suggest that delivering high rather than quality growth remains the objective at the lower levels of government. Except for this year, even the annual growth targets at the provincial levels have been consistently higher than that at the Central government level. This lack of commitment, many have argued, arises because the party at the local level has continued to reward those who deliver higher quantum rather than better quality of growth and employment, consistent with the ingrained objective to resolve the “principal contradiction” as enshrined in the 1981 constitution.


After 36 years, the 19th Party Congress re-identified the principal contradiction now as the tension between “unbalanced and inadequate development” and the “people’s ever-growing needs for a better life”. This re-identification finally aligns the objectives of the party with that of the state at all levels of government. It also changes how the party sees China: No longer as a low-income economy challenged by the need to generate millions of jobs to maintain social stability, but as a rising middle-income country aspiring for a better quality of life.

If the previous three decades are any guide, this alignment of objectives could have just as dramatic an impact as the 1981 restatement did. Consequently, the reforms that the Central government has been trying to push for are likely to become more effective at all levels of government than before. It wouldn’t be surprising if the pace of growth slows over the next few years; speculative housing activity is contained (Xi Jinping’s statement that “houses are built to be lived in, not for speculation” could well become as potent as Deng Xiaoping’s exhortation that it doesn’t matter whether a cat is white or black, as long as it catches mice); and excess capacity is reduced at a much faster pace.

Will this be good for the world? Most likely. A stable and sustainable growth path for China is clearly beneficial for global financial and economic stability. A “rebalanced” Chinese economy that consumes and imports more (as excess capacity in polluting industries and traditional manufacturing is cut at a faster pace) will naturally support both global growth and reflation.

Will all this happen quickly and smoothly? Most likely not. It took more than a decade after the 1981 Party Congress for China to implement meaningful reforms (for instance, the devaluation of 1994 and the 1998 Zhu Rongji SOE restructuring that paved the way for China’s entry into the WTO in 2001). The hurdles this time are equally daunting and there is still lack of clarity on the direction and details of reforms. For example, it is unclear how the reaffirmation of the continued dominance of state-owned enterprises in the economy sits with the push for greater “mixed ownership”. International experience suggests that hopes of taming asset-price inflation without a disruptive price adjustment have rarely materialised.

But despite these many challenges and doubts, history will likely remember the 19th Party Congress as a watershed moment for China as big as the one in 1981.