Increasing Centralisation in China: A Bane for Economic Growth

Abstract

This article contends that increasing centralisation of decision-making in China will undermine the country’s future economic growth. It highlights the declining role of private enterprises and the increasing role of state-owned enterprises (SOEs) in the economy, and the extension of Communist Party influence in both SOEs and the private sector through the Party’s Organization Department and United Front Work Department. It argues that the increasing role of the state in the economy over the past decade has stifled growth through a decline in ‘total factor productivity’ because of increasing misallocation of resources. Centralisation, with associated losses in efficiency, objectivity, agility, speed and finesse regarding allocations of risks and investment, has debilitated decentralised decision-making and reduced the incentives for undertaking risks and innovation. The article argues that increasing Party control over the SOEs and the private sector will negatively impact the corporate structure and management decisions, exacerbate the fundamental problems of corporate governance and limit or hamper innovation.

Keywords:

• Xi Jinping
• Communist Party of China
• United Front Work Department
• Organization Department
• Belt and Road Initiative
• Vision 2035

Acknowledgements

I would like to thank the Editor and the three anonymous reviewers for their valuable comments and feedback.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 For a more detailed analysis see David Shambaugh, China’s Future. Cambridge (UK) & Malden (MA), Polity Press, 2016; Sangkuk Lee, ‘An Institutional Analysis of Xi Jinping’s Centralization of Power’. Journal of Contemporary China Vol. 26. Issue 105 (2017): 325–336; Björn Alexander Düben, ‘Xi Jinping and the End of Chinese Exceptionalism’. Problems of Post Communism Vol. 7. Issue 2 (2020): 111–128; Steve Tsang and Olivia Cheung, ‘Has Xi Jinping Made China’s Political System more Resilient and Enduring?’ Third World Quarterly Vol. 43. Issue 1 (2021): 225–243.

2 Xi Jinping thought for the new era of socialism with Chinese characteristics (习近平新时代中国特色社会主 思想) was enshrined into the Party Constitution in the 19th Party Congress in October 2017.

3 For a detailed analysis see Jean-Pierre Cabestan, ‘Political Changes in China Since the 19th CCP Congress: Xi Jinping is not weaker but more contested’. East Asia Vol. 36. Issue 1 (2019): 1–21.

4 In a speech at Tsinghua University in April 2015, the then incumbent Minister of Finance Lou Jiwei stated that there was a 50 per cent chance of China sliding into the “middle income trap” in the next five to ten years. See Tony Saich, ‘What Does General Secretary Xi Jinping Dream About?’ Ash Center Occasional Papers, Ash Center, August 2017, http://www.iberchina.org/files/2017/what_does_xi_jinping_dream_about-Saich.pdf (accessed 21 June 2022).

5 Raj Verma, India and China in Africa: a Comparative Perspective of the Oil Industry. London, New York: Routledge, 2017; David M. Lampton, ‘All (High-Speed Rail) Roads Lead to China’, in Thomas Fingar and Jean C. Oi (Eds.), Fateful Decisions: Choices That Will Shape China’s Future. Stanford, CA: Stanford University Press, 2020, 287–311. BRI was enshrined in the PRC’s constitution at the 19th Party Congress in October 2017 and is the foundation for Xi’s own legitimacy.

6 Tianlei Huang and Nicolas Véron, ‘Is the private sector retreating in China? Not among its largest companies’. Peterson Institute for International Economics, March 29, 2022, https://www.piie.com/blogs/realtime-economic-issues-watch/private-sector-retreating-china-not-among-its-largest-companies (accessed 22 June 2022).

7 Margaret Pearson, Meg Rithmire, and Kellee S. Tsai, ‘Party-State Capitalism in China’. Harvard Business School, 2020, Working Paper 21-065, https://www.hbs.edu/ris/Publication%20Files/Party-State%20Capitalism%20in%20China%204.16.21_50e84643-faa0-4e84-add0-f0f0d7b4b323.pdf (accessed 20 June 2022).

8 Analysts and economists have repeatedly expressed serious doubts regarding the veracity of economic data especially economic growth rates provided by the Chinese government. According to a 2019 Brookings report, China has inflated GDP figures for 2008–2016 by 1.7 per cent, and in 2016, investment was lower by seven per cent relative to official figures. See Wi Chen, Xilu Chen, Chang-Tai Hsieh and Zheng Song, ‘A Forensic Examination of China’s National Accounts’. Brookings, March 7, 2020, https://www.brookings.edu/bpea-articles/a-forensic-examination-of-chinas-national-accounts/ (accessed 15 June 2021).

9 TFP refers to an increase in production/output efficiency even if all the factors of production (FoP) are fixed. For instance, if a five per cent increase in capital, labour and other FoP leads to a ten per cent increase in economic growth, then the five per cent additional growth is attributed to TFP. Economic growth can also be increased by increasing labour productivity by increasing capital to labour ratio and human resource development. However, both are not sustainable sources. For a detailed analysis see Fang Cai, Understanding China’s Economy: The Turning Point and Transformational Path of a Big Country. Singapore: Springer, 1st edition, 2021; Shaojie Zhou and Angang Hu, China: Surpassing the ‘Middle Income Trap’. Singapore: Springer, 2021.

10 Cabestan, op. cit.

11 Nicholas Lardy, The State Strikes Back: The End of Economic Reform in China? Washington, DC: Peterson Institute for International Economics, 2019.

12 ‘Global 500’. Fortune, 2022, https://fortune.com/global500/ (accessed 10 June 2022).

13 Lardy, op. cit.

14 Ji Siqi, ‘China’s Private Sector Struggling with ‘Common Prosperity’, Covid-19 and Financing; SOEs Thrive’. South China Morning Post, March 1, 2022, https://www.scmp.com/economy/china-economy/article/3168805/chinas-private-sector-struggling-common-prosperity-covid-19 (accessed 20 May 2022).

15 For a more detailed analysis of the regulatory changes in different sectors see Barry Naughton, ‘What’s Behind China’s Regulatory Storm’. The Wall Street Journal, December 12, 2021, https://www.wsj.com/articles/what-is-behind-china-regulatory-storm-11638372662 (accessed 5 March 2022).

16 Tom Hancock, ‘China Crackdowns Shrink Private Sector’s Slice of Big Business’. Bloomberg, March 30, 2022, https://www.bloomberg.com/news/articles/2022-03-29/china-crackdowns-shrink-private-sector-s-slice-of-big-business#xj4y7vzkg (accessed 4 April 2022).

17 Lardy, op. cit.; Barry Naughton, ‘Grand Steerage,’ in Thomas Fingar and Jean C. Oi (Eds.), Fateful Decisions: Choices That Will Shape China’s Future. Stanford, CA: Stanford University Press, 2020, 51–81; ‘People’s Republic of China: Selected Issues’, IMF, Country Report No. 21/12, January 2021, https://www.imf.org/-/media/Files/Publications/CR/2021/English/1CHNEA2021002.ashx (accessed 20 June 2022).

18 Daniel H. Rosen, ‘China’s Economic Reckoning: The Price of Failed Reforms’. Foreign Affairs Vol. 100. Issue 4 (2021): 4, 20–24, 26–29.

19 During 1980–2012, China was able to grow rapidly because of three factors. The first was the increase in TFP, the second was the higher level of education and increasing capital to labour ratio, and the third was the increase in labour productivity due to the reallocation of labour to more efficient sectors. China’s ‘demographic dividend’ ended in 2010 and the movement of labour from the state to the private sector and from the rural to the urban sectors has slowed down with little room for additional reallocation. For a detailed analysis of the trajectory of growth of TFP and its association with economic reform in China see Cai, op. cit.; Shaohua Zhang, Tzu-Pu Chang, Li-Chuan Liao, ‘A Dual Challenge in China’s Sustainable Total Factor Productivity Growth’. Sustainability Vol. 12. Issue 13: 5342.

20 For a detailed discussion see Ibid.

21 Ibid.

22 ‘China's Economic Outlook in Six Charts’. IMF, August 9, 2019, https://www.imf.org/en/News/Articles/2019/08/09/na080919-chinas-economic-outlook-in-six-charts (accessed 10 June 2022).

23 Diego A. Cerdeiro and Cian Ruane, ‘China’s Declining Business Dynamism’, in People’s Republic of China: Selected Issues, IMF, Country Report No. 2022/022, 4 February 2022, https://www.imf.org/en/Publications/CR/Issues/2022/01/26/Peoples-Republic-of-China-Selected-Issues-512253 (accessed 10 April 2022).

24 See, for example, Kainan Huang, Baodong Cheng, Moyu Chen, Yu Sheng, ‘Assessing Impact of the COVID-19 Pandemic on China’s TFP Growth: Evidence from Region-level Data in 2020’. Economic Analysis and Policy, Vol. 75 (2022): 362–377, https://doi.org/10.1016/j.eap.2022.05.016.

25 Cai, op. cit.

26 ‘Vice Premier Liu He says China Will Firmly Encourage and Support Private Economy’. CGTN, November 22, 2019, https://news.cgtn.com/news/2019-11-22/Liu-He-says-China-will-firmly-encourage-and-support-private-economy-LPklCKGElW/index.html (accessed 30 August 2022).

27 Verma, op. cit.; Han Yu, Ciji Song and Zengji Song, ‘Impact of State Ownership as Political Capital on the Technological Innovation of Private Sector Enterprises: Evidence from China’. Asian Journal of Technology Innovation Vol. 30. Issue 1 (2022): 158–177.

28 Lardy, op. cit.

29 IMF, People’s Republic of China, 2021.

30 David Lipton, ‘Rebalancing China: International Lessons in Corporate Debt’. IMF, Shenzhen, June 11, 2016, https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp061016 (accessed 20 June 2022).

31 Andrew G. Walder, ‘China’s National Trajectory’, in Thomas Fingar and Jean C. Oi (Eds.), Fateful Decisions: Choices That Will Shape China’s Future. Stanford, CA: Stanford University Press, 2020, pp. 335–357.

32 See Cerdeiro and Ruane, op. cit.; People’s Republic of China, IMF, 2021.

33 Thomas Fingar and Jean C. Oi, ‘China’s Challenges: Now It Gets Much Harder’. The Washington Quarterly Vol. 43. Issue 1 (2020): 69.

34 Torsten Weller, ‘Analysis: China’s 14th Five Year Plan’. China-Britain Business Focus, December 3, 2020, https://focus.cbbc.org/analysis-chinas-14th-five-year-plan/#.YB0l1mNfgdW (accessed 10 June 2022).

35 Agatha Kratz and Janka Oertel, ‘Home Advantage: How China’s Protected Market Threatens Europe’s Economic Power’. Policy Brief, European Council on Foreign Relations, 15 April 2021, https://ecfr.eu/publication/home-advantage-how-chinas-protected-market-threatens-europes-economic-power/ (accessed 29 August 2022).

36 Cerdeiro and Ruane, op. cit.

37 Siqi, op. cit; Tianlei Huang and Nicholas R. Lardy, ‘Is the Sky Really Falling for Private Firms in China?’ Peterson Institute for International Economics, October 14, 2021, https://www.piie.com/blogs/china-economic-watch/sky-really-falling-private-firms-china (accessed 4 April 2022).

38 Hong Yu, ‘Reform of State-owned Enterprises in China: The Chinese Communist Party Strikes Back’, Asian Studies Review Vol. 43. Issue 2 (2019): 332–351; Wendy Leutert, ‘Challenges ahead in China’s Reform of State-owned Enterprises’. Asia Policy Vol. 21. Issue 1 (2016): 83–99.

39 Lardy, op. cit.

40 IMF, ‘People’s Republic of China: Selected Issues’. Country Report No. 2022/022, February 4, 2022, https://www.imf.org/en/Publications/CR/Issues/2022/01/26/Peoples-Republic-of-China-Selected-Issues-512253 (accessed 10 April 2022).

41 Lardy, op. cit.; Amir Guluzade, ‘The Role of China's State-owned Companies Explained’. World Economic Forum, May 7, 2019, https://www.weforum.org/agenda/2019/05/why-chinas-state-owned-companies-still-have-a-key-role-to-play/ (accessed 10 June 2022).

42 Walder, op. cit.; Yuen Yuen Ang, ‘The Robber Barons of Beijing: Can China Survive Its Gilded Age?’ Foreign Affairs Vol. 100. Issue 4 (2021): 30–39.

43 Ang, op. cit.

44 Hong Yu, ‘Reform of State-owned Enterprises in China: The Chinese Communist Party Strikes Back’. Asian Studies Review Vol. 43. Issue 2 (2019): 332–351.

45 Walder, op. cit.

46 Zhengxu Wang and Jinghan Zeng, ‘Xi Jinping: The Game Changer of Chinese Elite Politics?’ Contemporary Politics Vol. 22. Issue 4 (2016): 469–486, doi:10.1080/13569775.2016.1175098.

47 For a detailed analysis see Wang and Zhen, op. cit.; Wendy Leutert, ‘Firm Control: Governing the State-owned Economy Under Xi Jinping’. China Perspectives Issue 1–2 (2018): 27–36.

48 Wang and Zhen, op. cit.

49 Leutert, op. cit.

50 Jude Blanchette, ‘Xi’s Gamble: The Race to Consolidate Power and Stave Off Disaster’. Foreign Affairs, Vol. 100. Issue 4 (2021): Thomas Fingar and Jean C. Oi, ‘Introduction’, in Thomas Fingar and Jean C. Oi, (Eds.), Fateful Decisions: Choices That Will Shape China’s Future. Stanford, CA: Stanford University Press, 2020, pp. 1–29.

51 For a detailed discussion on the role of the Organization Department see Wendy Leutert and Samantha A. Vortherms, ‘Personnel Power: Governing State-Owned Enterprises’. Business and Politics Vol. 23. Issue 3: 419–437; Daniel Koss, ‘Party Building as Institutional Bricolage: Asserting Authority at the Business Frontier’. China Quarterly Vol. 248. Supplement 1 (2021): 222–243; Xiaojun Yan and Jie Huang, ‘Navigating Unknown Waters: The Chinese Communist Party’s New Presence in the Private Sector’. The China Review Vol. 17. Issue 2 (2017): 37–63.

52 Drew Thompson, ‘Xi Jinping’s Reform and Rejuvenation of the United Fromt Work Department’, in Arthur S. Ding and Jagannath P. Panda (Eds.), Chinese Politics and Foreign Policy under Xi Jinping: The Future Political Trajectory. Routledge: Oxon: New York, pp. 47–62. For a detailed discussion see Ray Wang and Gerry Groot, ‘Who Represents? Xi Jinping’s Grand United Front Work, Legitimation, Participation and Consultative Democracy’. Journal of Contemporary China Vol. 27. Issue 112 (2018): 569–583; Takashi Suzuki, ‘China’s United Front Work in the Xi Jinping Era–institutional Developments and Activities’, Journal of Contemporary East Asian Studies Vol. 8, Issue 1 (2019): 83–98.

53 Scott Livingston, The Chinese Communist Party Targets the Private Sector, Center for Strategic and International Studies, 8 October 2020, https://www.csis.org/analysis/chinese-communist-party-targets-private-sector (accessed 10 June 2022).

54 Ibid.

55 Xianchu Zhang, ‘Integration of CCP Leadership with Corporate Governance Leading Role or Dismemberment?’ China Perspectives Issue 1 (2019): 55, https://journals.openedition.org/chinaperspectives/8770#ftn3 (accessed 2 September 2022).

56 Shirley Zhao, ‘China Steps Up Communist Party Control in State-Owned Firms’. Bloomberg, January 8, 2020, https://www.bloomberg.com/news/articles/2020-01-08/china-steps-up-communist-Party-control-in-state-owned-firms (accessed 17 June 2022). These are formal announcements of practices which were introduced in the past.

57 Orange Wang and Zhou Xin, ‘China Cements Communist Party’s Role at Top of its SOEs, Should ‘Execute the Will of the Party’’. South China Morning Post, January 8, 2020, https://www.scmp.com/economy/china-economy/article/3045053/china-cements-communist-Partys-role-top-its-soes-should (accessed 15 June 2022).

58 Pearson, Rithmire and Tsai, op. cit.

59 Jude Blanchette, ‘Against Atrophy: Party Organisations in Private Firms’. Made in China Journal, April 18, 2019, https://madeinchinajournal.com/2019/04/18/against-atrophy-Party-organisations-in-private-firms/ (accessed 12 June 2022).

60 Zhang, op. cit.

61 ‘Chinese Communist Party Wants Bigger Role in Private Sector’. Bloomberg, September 16, 2020, https://www.bloombergquint.com/china/chinese-communist-Party-wants-stronger-role-in-private-sector (accessed 10 June 2022).

62 Yan and Huang, op. cit, p. 38, fn 7.

63 Pearson, Rithmire and Tsai, op. cit.

64 Koss, op. cit.

65 Most of these companies are very small in size and are unable to meet the minimum requirement of three Party members to constitute a Party cell.

66 By 2003, the CPC was virtually absent from the private sector.

67 Xinhua, ‘The General Office of the Central Committee of the Communist Party of China issued the “Opinions on Strengthening the United Front Work of the Private Economy in the New Era”’. September 15, 2020, http://www.xinhuanet.com/politics/zywj/2020-09/15/c_1126497384.htm (accessed 13 June 2022).

68 Quoted in Scott Livingston, ‘The Chinese Communist Party Targets the Private Sector’, Center for Strategic and International Studies, October 8, 2020, https://www.csis.org/analysis/chinese-communist-Party-targets-private-sector (accessed 2 September 2022).

69 Pearson, Rithmire and Tsai, op. cit.

70 Reuters, ‘Fretting about data security, China's government expands its use of ‘golden shares’, December 16, 2021, https://www.reuters.com/markets/deals/exclusive-fretting-about-data-security-chinas-government-expands-its-use-golden-2021-12-15/ (accessed 3 September 2022).

71 Ibid.

72 Gunter Schubert and Thomas Heberer, ‘State-business relations under Xi Jinping: Steering the private sector and private entrepreneurs’, in Arthur S. Ding and Jagannath P. Panda (Eds.), Chinese Politics and Foreign Policy under Xi Jinping: The Future Political Trajectory. Oxon: New York: Routledge, 2020, p. 112.

73 Pearson, Rithmire and Tsai, op. cit.

74 Lingling Wei, ‘China’s Xi Ramps Up Control of Private Sector. “We Have No Choice but to Follow the Party”’. Wall Street Journal, December 10, 2020, https://www.wsj.com/articles/china-xi-clampdown-private-sector-communist-Party-11607612531 (accessed 13 June 2022).

75 Jane Zhang and Minghe Hu, ‘Chinese Tech Tycoons’ Retreat Spurs Speculation about True Motives Amid Controversies and Big Tech Crackdown’. South China Morning Post, September 8, 2021, https://www.scmp.com/tech/big-tech/article/3148027/chinese-tech-tycoons-retreat-fans-speculation-about-true-motives-amid?module=hard_link&pgtype=article (accessed 20 June 2022).

76 David Shambaugh, ‘Contemplating China’s Future’. Journal of Chinese Political Science Vol. 23. Issue 1 (2017): 1–7; David Shambaugh, ‘Contemplating China's Future’. The Washington Quarterly Vol. 39. Issue 3 (201): 121–130.

77 Shambaugh, ‘Contemplating China’s Future’, op. cit.

78 Yu Liu, ‘Lessons of New Democracies for China’. Journal of Chinese Political Science Vol. 23. Issue 1 (2017): 105–120.

Additional information

Notes on contributors

Raj Verma

Dr Raj Verma is Associate Professor of International Relations and Foreign Policy at the College of International Relations, Huaqiao University, Xiamen campus. He is also the Head of Research at Intellisia Institute, a think-tank in Guangzhou and Adjunct Professor at the Far Eastern University, Manila. He has an MPhil and PhD in International Relations from London School of Economics and Political Science. He has worked in think-tanks in the UK, India, and China, and also worked as an economist and consultant with a focus on emerging markets in Asia, especially India and China. Dr Verma’s research is focused on India’s and China’s foreign and security policy, India and China’s political economy, Sino–Indian–US-Russia relations, international politics of Asia-Pacific and International Relations theory. His research has been published in journals such as The Pacific Review, Critical Asian Studies, Global Policy, International Journal, Asia Europe Journal, Australian Journal of International Affairs, International Politics, Asian Perspective, India Review and others. He is the author of ‘India and China in Africa: A Comparative perspective of the oil industry,’ Routledge, 2017.