Two views: China's policy debates

In 2012, at least a dozen of China’s top leaders, including President Hu Jintao and Premier Wen Jiabao, are likely to retire, making way for the next generation of political leadership. The time is right to assess some of the different views on the vision for future development of the Chinese economy. For US companies, especially now, ignoring those different views could be a costly mistake.

While China is a market prized above all, more and more US companies are perplexed by its increasingly unpredictable business environment. In particular, understanding and predicting China’s policy shifts and resulting changes in the commercial, regulatory, legal, and business landscapes can pose significant challenges to US companies seeking to develop a China strategy that will be properly aligned and reconciled with those changes.

But how can we achieve that understanding? Some say the answer lies in revisiting our assumptions about China’s government. While still clearly a one-party system, China’s government is no longer a monolithic entity charting a linear course of economic development. Specifically, while China’s political leadership may agree in principle on the need to reform various parts of the economy, there isn’t always agreement on the process, timing, and degree of change needed to realize that vision of reform.

Are US companies, then, at the mercy of unpredictable policy twists and turns in China? There’s certainly guesswork involved, but some companies are better at it than others. These companies are beginning to understand the different views within China’s leadership. By better understanding the different views, one can gain insights into China’s leadership and their decision-making processes. Of course, dividing China neatly into two categories is as much an oversimplification as dividing America into red states and blue states. But doing so is a way of beginning to understand the policy differences within the Chinese political leadership.

More important, in the absence of a clear direction regarding exactly how the Chinese will reshape their economy, global businesses should know the differences and the commonalities in the points of view of Chinese leadership and develop strategies that can quickly adapt to this dynamic environment. While most of the differences discussed in the following chart are subtle and may appear to be even minor, they can have significant impact on businesses operating in China.

Within China’s one-party system, various entities are staking different positions on the important issues that will shape China’s socioeconomic future. The labels “seeking comprehensive reform” and “promoting the tried and tested” do not indicate that China’s political leadership is divided into clear-cut factions with distinct ideologies. Rather, the labels make for a convenient way of understanding two broad views around which diverse opinions, and not various individuals, have loosely coalesced.
  Seeking comprehensive reform Promoting the tried and tested
Guiding principles
  • Promote scientific development to maintain social stability. Focus on addressing geographic and economic inequalities, encouraging environmental sustainability, and gradually promoting democratic reform. This will ultimately lead to the creation of a harmonious society.
  • Support continued economic growth in order to preserve social stability. Continue with existing governance structures, and emphasize the value of experience while cautiously embracing meritocracy within the political ranks.
Industrial and trade policy
  • Spur the economic development of inland regions and second- and third-tier cities—for example, through infrastructure investments—to address social inequities.
  • Balance inland development with continued progress of tier one and coastal cities that have led China’s economic transformation.
  • Promote labor reforms to enhance worker rights, improve working conditions, and address income inequalities.
  • Manage the pace of labor reforms with an understanding of its impact on China’s global competitiveness (e.g., compared with such locations as Vietnam), wage-driven inflation, and employment generation that is seen as key to maintaining social stability.
  • Encourage domestic consolidation to create companies with the scale and strength to compete with global firms.
  • Support consolidation in key sectors while promoting the growth of small and/or private enterprise to foster entrepreneurial agility and innovation that will serve China well in the long term.
  • Aggressively implement environmental policies designed to reduce pollution. This includes providing greater market access to foreign companies in exchange for advanced technology.
  • Encourage participation by domestic companies in the cleantech industry. Harness the advantages offered by local companies to manage the costs associated with higher levels of environmental efficiency.
Monetary policy
  • Consider renminbi revaluation to mitigate the risk of domestic inflation and reduce the import bill.
  • Resist renminbi revaluation because of concerns about its impact on export competitiveness as well as the appearance of bowing to foreign pressure.
How they will boost domestic demand
  • Encourage government spending on social programs, including healthcare and education.
  • Balance spending on new priorities with existing ones. Establish clear standards—for example, related to the quality of healthcare—before determining levels of government spend.
  • Boost domestic demand and private consumption to move away from heavy reliance on export-led growth.
  • Sustain momentum for export-led growth that has delivered prosperity over the previous two decades. Value savings because of their impact on lowering the cost of capital and encouraging investment.

“The political landscape in China today cannot be defined by any ideology or the policies of a strong leader like Chairman Mao or Deng Xiaoping. The leadership is becoming increasingly diversified, and the leaders’ views are also becoming more transparent. There is some public debate going on.”

Cheng Li, Director of Research, John L. Thornton China Center of the Brookings Institution and author of China’s Leaders

“There is tension over how you build the society. Do you continue to focus on the wealthy areas to generate higher efficiencies, or do you do it in the rural and inland areas to avoid the instability that comes from greater and greater income disparity? The answer is, you do both in some combination, but they are arguing over the specifics on how to do it.”

Robert Lawrence Kuhn, advisor to the Chinese government and author of How China’s Leaders Think