China’s economic ascent was once welcomed in the west. Since the financial crisis, however, China is increasingly viewed as pursuing a domestic policy of government domination and an international policy driven by beggar-thy-neighbour mercantilism. There is evidence to support these fears but they do not add up to a conscious decision to embark on a more aggressive model. And if the west misinterprets Chinese changes, it will only make matters worse. It is true that China’s economy is moving in a statist direction. Recovery from the crisis was helped with a large stimulus. Local spending added to this, leading to local government-backed debts of close to $1,000bn. Changes in industrial policy can cause concern too: state plans to boost technological development up to 2020 have raised worries among western companies that government support will give Chinese groups an unfair advantage. China has also yet to join the World Trade Organisation’s government procurement agreement, which guarantees equal access for foreign and domestic companies.
China’s international policy rings even louder alarms. Its unwillingness to allow the renminbi to appreciate is well known, as is the purchase of oil fields, mines and physical and financial assets around the world by state-backed companies. China invested $59bn abroad in 2010. Taken together, these moves look like a dramatic change in policy. Yet they are better viewed as the result of a government making difficult choices under growing political constraints, rather than the product of a coherent, newly aggressive strategy. The current domestic investment drive, like that after the Asian financial crisis in 1997, is more cyclical than permanent. Its new industrial policies, like many previous ones, are likely to have little effect on investment patterns: the industrial sector is dominated by private companies, with state enterprises accounting for less than 30 per cent of value added. Internationally, China’s insistence on a stable renminbi is part of a wider policy designed to ensure strong employment and social stability, rather than an attempt to obtain unwarranted gains from trading partners. Some of these moves are explained by strong special interest groups emerging in certain areas of policy and shaping the way the state acts. The resources drive abroad is a case in point. For example, “equity oil” – meaning the ownership of oil sources – is seen by many as vital to guarantee a steady supply. In truth, it is unclear why this policy has much advantage over oil bought on the international market, so state support may simply be a way of responding to pressure to back its three largest oil companies. Such developments are mostly pragmatic responses to specific pressures. There is, however, an emerging ideological shift among certain sections of Chinese society, particularly within the government and among people with a left-leaning ideology. They assert that China is indeed creating a new economic and social model, and one superior to the market-based approach prevailing in the west. The global financial crisis, in particular, is seen a turning point for the state-centred model to regain ground. Those people are clearly wrong. On the one hand, China’s economic ascent cannot be properly explained without market-oriented reforms. On the other, government-initiated investment is aggravating China’s imbalance problems by promoting capital-intensive projects and suppressing labour income – making more distant the government’s goal, set in its 12th five-year plan, to increase household income. Nonetheless, the rise of this sentiment has created anxiety among US policymakers. To reduce this, the Chinese leadership must recognise that greater statism neither brings long-term benefits to China nor will be easily tolerated by the west. For its part, America should be aware that although China’s government is strong, not every move it makes is the result of an orchestrated plan. Statism is embraced by some, but many more think the market path is the right one to follow. Washington’s policy of constructive engagement has brought positive changes to China. It should now seek to update, not abandon it – to deal with a China that is more complex rather than more aggressive.
The writer is professor and director of the China Center for Economic Research at Peking University