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“What’s wrong with China and how do we fix it?”:  The Story of the 2016 National People’s Congress

“What’s wrong with China and how do we fix it?”: The Story of the 2016 National People’s Congress

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By Anh Duy Nguyen

Since 1982, the Chinese Constitution has designated the National People’s Congress (NPC) as the most powerful organ of the State. The NPC is composed of a staggering 3,000 delegates representing different provinces, municipalities, and autonomous ethnic groups in China. It functions as the legislative body of the State and is convened once every year to discuss various national issues. The NPC’s focus is primarily economic as it debates on key policies and how best to run the country over the next few years.

This year’s Congress is particularly important. In the past 30 years, the Chinese economy has grown an average of 10%, lifting 500 million people out of poverty. China’s prodigious growth, however, has shown signs of slowing down since 2013, as the nation struggled to meet the growth targets set by its Congress. Several reasons account for China’s slowing economy. As a larger economy today than it was 30 years ago, economic growth has become more difficult to achieve for China. This trend, known as the law of larger numbers, has been observed before in Japan and Brazil. Both countries grew rapidly in the 1980s and 1990s, but have scarcely grown at all in the past 20 years.

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According to Harvard University’s Lant Prichett and Larry Summers, China’s new embrace of the free market and liberal democracy could also contribute to slower growth. A transitions toward democratic liberalism and a free market economy from a more authoritarian government is typically associated with an increasingly stagnant economy. One of the worst cases happened after Russia established its first democratic government under President Boris Yeltsin. While his economic reforms yielded important changes and laid the foundation for Russia’s economic freedom in the following decades, by 1998 the economy had collapsed due to low oil prices, a currency crisis, and rising state borrowing.

China’s increased debt poses an additional burden to the economy. Debt currently claims 250% of China’s GDP. This is a 100% rise since 2008. China’s borrowing activities were necessary as it enabled the country to move through the 2008 global recession unscathed. However, they also shackle China today with a heavy repayment plan. Moreover, most of China’s credit has flown into the real estate market, which could face a property devaluation in the future. Even though this would be primarily due to cyclical changes, it could deal real damage to the Chinese economy going forward. It was the real estate sector after all that facilitated the US, and later the global, economy recession in 2008. Therefore, it would not be unfounded for Chinese policy makers to worry about the country’s housing economy.

During a meeting at the 2016 Congress, China’s Premier, Li Keqiang, provided a new plan for China’s economy. The plan coincided with the “new normal” advocated by President Xi Jinping, who favored structural reforms of the economy over faster GDP growth.  Li emphasized this point by freezing the inflation target at 3.5% and promised liberalization of interest rates. These plans can grant the energy sector as well as financial institutions greater autonomy. Moreover, Li also committed to greater private participation in state-owned enterprises. This move toward greater liberalization of the market could be extremely beneficial to China’s growth. A parallel example could again be found in Russia. Though suffering from an economic collapse in 1998, economic reforms pushed by the Yeltsin administration enabled Russia to move toward greater privatization. Life quality increased, and the Russian foreign trade grew from a 3-4% GDP to 44% by 2012.

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Yet, as the Russian case points out, despite the vast improvements brought by Yeltsin’s reforms, economic inequality also grew rapidly. Capitalist elites who controlled much of Russia’s wealth led to a collective disapproval  by Russians against Yeltsin’s privatization efforts. According to a report from Peking University, China’s wealth disparity is already among the worst in the world, with 25% of Chinese households owning less than 1% of the country’s wealth. Li’s emphasis on liberalization might improve the Chinese economy, but it also has the potential to erode its citizens’ trust in the government and its financial system.

Central to the 2016 NPC’s discussion was the target economic growth Li proposed, which is around 7.5%. This target reflects Li’s emphasis on stability rather than growth. For many in China, this does not seem far-fetched, since China was able to reach a 7.7% rate in 2012, though this was the lowest since 1999. Yet, the Chinese economy has changed since, and with the current economic problems China is facing, JP Morgan Chase & Co. argues that this target is “incredible” and a sustainable pace should be lower. According to Bloomsberg Intelligence economists Tom Orlik and Fielding Chen however, the Chinese government shows confidence and readiness to make policies to support their goal, and believes that any financial risks are managable. After all, China survived both the 2008 recession as well as the 2015 Yuan depreciation with little damages to its overall financial stability.

Many are concerned, however, that Li’s rhetoric has little substance. Li barely discussed certain important issues, such as the introduction of property tax. His plan also included impractical projects, like a high-speed rail link between China and Taiwan, to be completed by 2030. Andrew Collier, former president of Bank of China USA accused Li of using “all the buzzwords for growth but discussing none of the realities”. These worries reflect an intriguing reality about China’s NPC. Though the Congress has consolidated greater power as the country increasingly emphasized the rule of law, it remains for the most part a rubber stamp for the Communist Party. Furthermore, since the Congress convenes only once per year, real influence is yielded by the 150-member standing committee, who meet once every few months. Li’s reformist sentiments, though, do not stray too far from Xi’s own vision, and could simply be a form of political theatric aimed to increase his political power. The NPC’s relatively weak role in comparison to the Party and the standing committee also means that many of Li’s plans would propbably not come to fruition.

Whether or not Li’s plans are possible, the 2016 National People’s Congress represents an important shift in China’s outlook. Since Deng Xiaoping’s economic reform in the late 1970s and 1980s, China has successfully outcompeted its rivals to become the world’s second largest economy in the world. The movement towards liberalization and liberal democracy also has important implications for human rights. As China is forced to relax its arms over the economic sector, there is hope that it will also relax its constraints over the the rights of its citizens, although this prospect seems unlikely.

It is difficult to predict what long term changes this year’s NPC may bring. Progress could easily be dashed by uncontrollable circumstances. However, the Congress is still an important way for the world to witness the struggles and negotiations that characterize Chinese politics today.

 

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