China's Political and Economical System PDF

Post-Mao Reforms During Mao’s rule, radical policies caused famine, and the Cultural Revolution led to massive casualties, with historians estimating over 20 million unnatural deaths. Despite Mao’s near-unlimited power and cult of personality, his death revealed the need for reform to maintain the...

Post-Mao Reforms During Mao’s rule, radical policies caused famine, and the Cultural Revolution led to massive casualties, with historians estimating over 20 million unnatural deaths. Despite Mao’s near-unlimited power and cult of personality, his death revealed the need for reform to maintain the Communist Party’s control. In December 1978, the Third Plenary Session of the 11th Central Committee marked a turning point. Deng Xiaoping emerged as the leader, initiating reforms to combat poverty and stagnation. His policies shifted the Party’s legitimacy from ideology to performance, emphasizing economic growth and improved living standards as reasons for its rule. However, many revolutionary leaders, while supporting reform, remained attached to communist ideology, leading to campaigns against liberalism and dissent when power seemed threatened. Reforms also brought challenges, including corruption, income inequality, inflation, and public dissatisfaction. The clash between democratic aspirations and authoritarian repression persisted. Globally, the rise of liberal democracy and the decline of communism heightened tensions, prompting China to strengthen internal vigilance and avoid unrest like Poland’s Solidarity movement. The Tiananmen Square protests, driven by widespread anger over corruption and dissatisfaction with officials, culminated in a violent crackdown. This event had profound consequences for China domestically and internationally. The crackdown and subsequent mass arrests drew nearly universal condemnation, leading to severe economic and military sanctions. China’s image as a responsible global player and potential stabilizing force was irreparably damaged. The country faced diplomatic isolation, being excluded from key international meetings, while relations with Hong Kong and Taiwan deteriorated significantly. In Hong Kong, one million residents protested, expressing distrust in Beijing’s promises of maintaining the city’s capitalist system for 50 years after 1997. In Taiwan, the prospect of reunification grew even more distant. Domestically, the Chinese people were deeply wounded, struggling with the trauma of the event and slow to forgive those involved. In response to the crisis, Deng Xiaoping emphasized the need for social stability and advocated a cautious approach, stating, “Staying calm is better than moving.” He rejected political debates or major policy shifts, viewing them as detrimental to the survival of the Party. Deng distanced China from international affairs, underscoring a principle of non- interference, encapsulated in his remark, “You do your capitalism; I’ll do my socialism.” China’s leadership also drew lessons from the concurrent collapse of Eastern European communist regimes and the violent overthrow of Romanian President Nicolae Ceaușescu. Gorbachev’s embrace of multi- party democracy and “humane socialism” was harshly criticized as a betrayal of Marxism-Leninism, with Chinese leaders resolute in maintaining the one-party system. The aftermath of Tiananmen dealt a severe blow to reformers within the Communist Party. Political and economic reforms were halted, with conservative leaders such as Jiang Zemin and Premier Li Peng steering policies towards “governance and rectification.” This conservative approach slowed economic reforms and suggested a potential retreat to comprehensive public ownership, raising concerns about the future of reform and opening up. China’s international isolation further exacerbated its challenges. Economic sanctions and restrictions on high-tech exports by Western nations caused foreign investors to withdraw, exports to decline, and tourism to shrink. The economy slowed significantly, with reduced market activity and scaled-down production. In this context, the CCP recognized that to maintain its rule, it had to return to performance legitimacy, prioritizing economic recovery and stability to regain public trust. Resuming Reform Following the Tiananmen incident, China appeared to shift back toward a planned economy, with economic reforms stagnating and the political atmosphere becoming increasingly conservative. In response, Deng Xiaoping decided to reignite the reform process, leading to his decision to embark on the Southern Tour. Deng's push reignited radical reform initiatives within the Chinese Communist Party (CCP). This ushered in decades of explosive growth. Over 40 years, China’s economy grew at an average annual rate of 9.3%, with many years exceeding 10%. This propelled China to become the world's second- largest economy. Regionally Decentralized Authoritarianism China's governance model, described as "regionally decentralized authoritarianism," combines centralized political authority with significant administrative and economic decentralization to local governments. This structure incentivizes local governments to prioritize GDP growth, fostering economic competition and innovation even before market mechanisms fully matured. Local governments function like profit-driven entities, linking economic performance to political promotions, which fueled early reform-era growth but also created structural challenges. Focus on Economic Growth Unlike many governments that balance economic, social, and environmental goals, China's local governments prioritize economic growth above all, often relegating public welfare to a secondary role. This model positions local governments as both policy implementers and active promoters of economic development, driving rapid growth but raising questions about long-term sustainability and balance. As societal demands expanded beyond GDP growth, the system struggled to address inequalities, environmental concerns, and public welfare needs. Excessive intervention and resource misallocation hindered education, healthcare, and social security, worsening domestic demand shortfalls and public dissatisfaction. Corruption and societal tensions have grown more visible as economic growth slows. Soft Budget Constraints A critical flaw in this system is the "soft budget constraint," where local governments rely on external funding from the central government or banks to cover deficits. This fosters debt accumulation, inefficiency, and resource misallocation, contributing to financial risks and real estate bubbles. Operating without strict budget limits or bankruptcy mechanisms, local governments overinvest, exacerbating economic vulnerabilities. Institutional Challenges Behind China's Economic Problems If there are no hard budget constraints, local governments will continuously rely on borrowing to stimulate the economy. This results in massive local debt and creates significant financial risks. Additionally, as previously mentioned, China's regionally decentralized authoritarianism leads to a lack of basic social welfare. Substantial resources are allocated to urban areas and large state-owned enterprises (SOEs), exacerbating income inequality. A significant portion of the low-income population remains without access to basic social benefits. When basic living standards cannot be met, it causes severe domestic demand shortfalls, further dragging down the economy. The issue of insufficient domestic demand will be explored later. Furthermore, corruption within the Communist Party has been particularly severe during the process of economic development. As early as the 1980s, when reforms had just begun, widespread corruption led to massive public dissatisfaction and alarmed senior leadership. The Contradictions of Performance Legitimacy Since the reform and opening-up period initiated by Deng Xiaoping, the CCP has faced inherent contradictions in its legitimacy: On one hand, it has been unwilling to abandon Maoist political structures. On the other hand, it has introduced market mechanisms to achieve rapid economic growth. This duality has created a system of "performance legitimacy" built on economic growth while simultaneously fostering political corruption, social injustice, and structural issues as economic growth slows. With the decline of ideological legitimacy (communist ideals), China lacks a universally accepted mainstream value system. Moreover, the CCP has avoided moving toward procedural legitimacy (constitutional governance, democracy, and rule of law), relying excessively on performance legitimacy, simplified to GDP growth. When economic growth slows and public demands for greater rights and fairness intensify, the instability of performance legitimacy becomes apparent. The CCP’s Dilemma and Response Faced with these challenges, the CCP has two options: 1. Shift Toward Procedural Legitimacy: This would involve comprehensive reforms to eliminate the systemic foundations of corruption, grant full rights to citizens, and revise evaluation criteria beyond GDP growth to emphasize social welfare and better wages. While this could promote social justice, it would awaken public awareness of rights and challenge the CCP’s ideological legitimacy.  2. Return to Maoist Ideals: Reinforce ideological legitimacy to compensate for faltering performance legitimacy. This approach shifts the focus back to ideological narratives when economic performance weakens. It is evident that the CCP has chosen the second path. Under Xi Jinping’s leadership, the new government has renewed emphasis on communist ideals while strengthening nationalist education. This nationalist sentiment has fostered hostility toward the West and Japan. Expanding Control and Restricting Freedoms Relying solely on ideological legitimacy is insufficient. The central government has reverted to pre-reform methods to address problems caused by reform, adopting increasingly authoritarian measures to eliminate the negative consequences of decentralization. This includes restricting officials’ discretionary powers, which had facilitated both proactive governance and corruption. The CCP has also curtailed freedoms gained through reform, including those of private enterprises. As private capital grows, it naturally seeks to protect its rights, demanding legal reforms and reduced government oversight. While wealth accumulates, dissatisfaction with the government also increases, as citizens seek more political reforms to safeguard their rights. These demands inevitably challenge the CCP’s authority. In response, Xi Jinping, a "princeling" (a member of the CCP’s second generation of leadership), has tightened central control, suppressed social forces, restricted free speech, and brought media freedom to its lowest point since the reform era. Those who publicly criticize the Party or Xi personally are imprisoned. This reliance on the state's coercive machinery to maintain control is not merely Xi's personal choice but rooted in systemic and practical considerations. For the CCP leadership, turning back toward authoritarianism has become an unavoidable response to the problems emerging from reform and opening up. Investment, Domestic Demand, and Exports: The Three Growth Engines China’s growth relies heavily on investment, domestic demand, and exports. Government-led investments in infrastructure and real estate face diminishing returns, with real estate bubbles and rising local government debt threatening sustainability. Weak domestic demand, compounded by income inequality, has further shifted reliance onto exports. However, export growth is constrained by overcapacity and global trade tensions. Overcapacity and the Belt and Road Initiative (BRI) China's overcapacity in industries like steel, cement, and aluminum has led to low-cost exports, which depress global prices and spark trade disputes. More recently, overcapacity extends to sectors like electric vehicles and solar panels. To address these challenges, the BRI was launched in 2013 to export excess capacity and sustain domestic employment through infrastructure projects abroad. The initiative includes investments in roads, railways, ports, and energy pipelines across Eurasia and Southeast Asia, promoting "Made in China" capabilities globally. Challenges in Manufacturing and Infrastructure China’s massive manufacturing capacity, while essential during its infrastructure boom, now faces rising labor costs and slowing domestic demand. Unlike developed nations that relocated surplus capacity after industrialization, China retains manufacturing to preserve employment. Through the BRI, it seeks to mitigate overcapacity while maintaining economic stability. Infrastructure as a Competitive Advantage China has leveraged its infrastructure-building capabilities under the BRI to compete internationally, offering flexible terms and rapid construction timelines. For instance, in the Jakarta-Bandung high-speed rail project, China outbid Japan despite higher costs, providing advantages like risk- sharing and faster delivery. While Chinese firms excel in delivering large- scale projects, the success of BRI depends on China’s ability to sustain funding and the economic growth of recipient countries. Projects like high-speed rail abroad face uncertainties in profitability if host nations fail to achieve long-term development. Capital Outflows and the Economic Logic of the BRI As domestic investment returns decline, Chinese companies are expanding overseas to reduce competition, access larger markets, and acquire advanced technologies. The BRI aligns with this strategy by supporting capital outflows and RMB internationalization, offering new investment opportunities abroad. Under the BRI, Chinese companies, backed by domestic financing and credit support, invest in infrastructure, energy, and manufacturing in participating countries. This enables firms like Huawei to expand their global presence through large-scale projects. State-led economic diplomacy and market-driven capital outflows work together to drive China’s global capital deployment. Challenges Facing the Belt and Road Initiative (BRI) on the Global Stage The BRI faces international challenges, particularly opposition from Western nations like the U.S., which promotes competing initiatives such as “Build Back Better World” (B3W) and the EU’s “Global Gateway.” However, these efforts have lagged in implementation, whereas China’s BRI projects demonstrate faster execution and delivery. Competition in Southeast Asia and Africa In Africa, China’s investments in infrastructure and job creation contrast sharply with Western aid, which often flows back to Western consultants and companies. Since 2000, Chinese investment in Africa has grown significantly, with Chinese firms employing up to 95% local staff, fostering goodwill in the region. Similarly, in Southeast Asia, China’s economic support surpasses U.S. efforts. For example, China pledged $1.5 billion for ASEAN’s post-pandemic recovery, compared to the U.S.’s $150 million. While the U.S. emphasizes defense and arms sales, ASEAN nations prioritize economic development, a need China meets through trade and infrastructure projects. BRI as a Provider of Global Public Goods Beyond economic and infrastructure investment, the BRI can also be seen as an attempt by China to provide global public goods. These goods, characterized by their cross-border externalities and importance to development and poverty alleviation, require international collaboration for their provision. In the absence of a true "world government," global public goods largely depend on contributions from superpowers, international organizations, or coalitions of states. China, deeply integrated into the global economy, is highly vulnerable to shocks such as climate change, pandemics, trade protectionism, and financial crises, making the availability of global public goods critical. Through its economic development and international governance efforts, China has contributed to the provision of such goods within its capacity. For instance, China’s economic growth has long been an engine for global development, driving economic momentum in neighboring countries. Moreover, China has supported the stability of economic and financial systems, provided international aid and disaster relief, and fostered technological innovation, thereby enhancing the global supply of public goods. The BRI plays a key role in this context by improving infrastructure and trade conditions in participating countries, transforming bottlenecks in regional transportation into seamless international trade routes. This facilitates upgraded economic cooperation and long-term stable growth across regions.