Reform is only choice for new leaders to fuel economy

ASIA BRIEFING:China is heading into a period of reform but its newly appointed leader, Xi Jinping, will have to rein in the powerful state-owned enterprises and give private enterprise a chance. That's according to James McGregor, whose latest book, No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism, examines the remarkable influence on the domestic economy of the 117 central-controlled state-owned enterprises.

It is a form of authoritarian capitalism that is driving wealth out of the country, says McGregor.

Statistics from the Hurun report, which compiles an annual rich list, showed more than 16 per cent of China’s rich have already emigrated or applied to emigrate, and 44 per cent are planning to do so. One-third of Chinese tycoons own assets abroad.

“When wealthy people start getting out, it’s a bad indicator. They don’t feel safe, they don’t feel confident. Entrepreneurs need a nod and a wink,” says McGregor, whose previous book, One Billion Customers: Lessons From the Front Lines of Doing Business in China, describes the vagaries of doing business in China over the past two decades.

It’s tough for Chinese small and medium businesses to compete, he says. The state enterprises have easy access to cheap credit because no one wants to refuse credit to a company backed by a senior local cadre, and they tend to suck up all the available capital.

“Look at Deng Xiaoping in the late 1980s. Who did he turn to to pull China out of the morass? The entrepreneurs. The past 15 years have been good for state industry, building up infrastructure. But now it’s time for the party to pivot in the same fashion Deng Xiaoping did in 1978/79. The party needs to head in another direction. We need to go back to a new version of Deng Xiaoping,” says McGregor, who during his time in China has run the Dow Jones company and lobbied for China’s entry to the WTO.

“For the past 10 years, the state-owned enterprises have reported more to the party than they have to the government. In that way, they’ve been like the military. They are a powerful force within the party and that means the party can make change happen,” said McGregor.

On the prospects for reform, McGregor’s views haven’t changed since the party congress.

“The system is what it is. But I’m hopeful. I think they have no choice but to reform to keep the economy going, as it is a booming economy that keeps the party in power,” says McGregor.

“Xi Jinping may have a real chance to run the party. Of the seven Politburo members, five retire after five years. None of them are big, outstanding personalities. The strongest figure among them, Wang Qishan, has been aimed at corruption.”

Li Keqiang, who will take over management of the economy from the current premier, Wen Jiabao, remains an unknown quantity.

“But then if we knew what these guys were like, they wouldn’t be there. It’s very secretive,” says McGregor.

In No Ancient Wisdom, No Followers, McGregor writes of how party leaders openly admit this one-of-a-kind Chinese hybrid “is in dire need of re-engineering and refuelling”.

“China’s 12th five-year plan, launched in 2011, and China 2030, a 450-page study released in February by the World Bank and the Development Research Center of the State Council, essentially calls for retooling the engine, drive train, passenger seating and navigation system of this Chinese hybrid,” he writes.

One of the leaders involved in the China 2030 report, and the five-year plan, is Li Keqiang, and this is a positive sign, he says.

“The reason I am optimistic is that, if they keep going down the same road, things will slow down. If Xi Jinping is a true leader, we may see China move ahead very quickly.

“This man is a member of the aristocracy: he is no mere political mortal. He was named five years ago, and he wasn’t sitting around watching DVDs in that time. He’s been lining up people and ideas. He will not want to be known as the man who destroyed the Chinese economic miracle,” says McGregor.