China’s Third Plenum and Us

There’s a lot of scholarly work on the Third Plenary Session of the Chinese Communist Party, so I won’t pretend to have any value to add. The pessimists have said the plenum was notable for its failure to mention the state-owned enterprises and financial sector liberalization. This means Xi Jinping is wary of treading on the corns of vested interests. The optimists have said the reformist outline of the plenum’s pronouncements show there is a consensus on more things than many had expected.

Straws in the wind.

Whether the reform outline becomes less fuzzy depends on Xi’s political skills, and this system is too opaque to get a real sense of what’s happening on that front.

It is this political-economic struggle unfolding in the coming years that India (and pretty much everyone else) should watch. At the heart of it, Xi has to take on and overcome the opposition of a number of vested interests to carry out his economic reforms. This includes the military, state-owned enterprises, the state-owned financial sector and the provincial governments. That’s quite a list: the SOEs in revenue terms are about half the GDP of China.

The difficulties India experienced with China in 2009-10 seem to have been closely linked to the succession struggle in Beijing. Will the battle for next generation reform have a similar spillover effect? The Depsang border incident may have been indicative. The Chinese army’s decision to blatantly violate the border protocols it had signed with India just weeks before Premier Li Kejiang’s state visit to India may have been a shot across the bow of Li, generally seen as a liberal reformer. The message: your reforms need a stable neighborhood, so don’t mess with us or we can bring the whole process down. (Or it may have been bad Google maps; China is too opaque to be sure.) As Xi pushes ahead with reforms, it is quite possible that the Indian border will be used by an anti-reform group to sabotage or undermine Xi’s progression.

The historical past is not encouraging. The Chinese decision to respond so vigorously to India’s forward policy in 1962 was because of Beijing’s queasiness following the Great Leap Forward and similar famine-inducing disasters that it was vulnerable to overseas pressure. If Xi is embroiled in an internecine political struggle at home over reforms, this might spill over into foreign policy. On the other hand, and what the Indian system generally hopes, Xi’s domestic concerns will require him to keep his neighborhood quiet, so China may be more accommodating through this period. Xi has signaled as much since he came to power, and the border defense cooperation agreement, recently signed, is part of this rapprochement.

India is nonetheless buying arms and setting up a new mountain strike force with China in mind. Xi may want peace, but he is not completely in charge, and a Depsang writ large is not out of the question.

There is another concern: if Xi succeeds in his second generation reforms, China’s growth trajectory will make it number one in the world in every conceivable way. India has reason to worry about that, especially if it can’t get its own act together. But that’s another story.

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