The Key to Sustained Success

China unveiled ambitious domestic reform goals during the recent third plenum of the Communist Party’s 18th Central Committee. These goals align with its continuous opening up to the rest of the world economy. 

The third plenum reform blueprint is well-designed, and implementation is likely to be relatively quick and sincere. That is not a question. The question is whether reform can generate economic growth quickly enough to outrun a tsunami of economic liabilities that is growing every day.

Let’s be honest: there was no “Beijing Consensus”, no “China Model.” China grew over the past 35 years by absorbing its huge pool of under-utilized labor and its hard work; by serving foreign demand; by adopting the technologies and innovations that were in use overseas; and by building real estate and infrastructure, meanwhile putting financial debt and environmental cleanup costs on the shoulders of the next generation. Keeping this going for three decades despite the social pressures of growth was a truly great accomplishment, of course, but there was nothing novel in the development model.

The third plenum decisions and many other actions taken this year make clear that General Secretary Xi Jinping knows this very well, and is taking political risks necessary to try to change this model.

Having overbuilt energy-intensive, basic heavy industry using the household savings of Chinese families over 30 years, China’s growth today must come from new activities – especially the development of the services industries.

As Professor Wu Jinglian pointed out brilliantly at last year’s Caixin Summit, this does not only mean the development of standalone service industries such as health care and entertainment – although those are important – it also means creating the incentives to add trillions of yuan in high-value services to the existing industrial sector, so that they do not simply produce, but rather innovate and produce what consumers truly want, adding services such as environmental control engineering, financial due diligence, modern insurance, research, marketing and many others to their daily routine.

So, in exactly the same way that it was essential to open to global prices, value chains and competition in order to make Chinese manufacturing world-class between 1978 and 2001 – culminating in WTO accession – China will have to open itself up to world markets in services if it wants to become efficient and world-class in these next-generation sectors. Which it must do, if it is to grow economically.

Every Chinese firm going abroad today – even in traditional industries such as steel or apparel – is up against foreign competition that enjoys these world-class services to help them be competitive. Chinese firms that do not have them will fail. They will either have to get them in an opened-up home market, or they will get them abroad. This is not a choice.

I have three conclusions from this. First, to quote professor Wu again, this time from his comments yesterday, even when the phrases in the plenum documents do not change, the meaning and interpretation of these phrases can change. My reading of the third plenum decision is that this is very much the case, and that the implementation plans and “official explanations” made public since the plenum make clear that opening up to global prices and competition in services is fully built-in to the reform blueprint.

Second, I am often asked in Washington and New York what I think about allowing Chinese firms to invest in sectors like high-tech services in the U.S., and about inviting China to participate in the Trans-Pacific Partnership (TPP) and other next-generation trade agreements that cover services. My answer is that if China fulfills the objectives set out in the third plenum decision then we should absolutely welcome and encourage such participation and investment.

So China’s goal of deeper opening to international investment flows and service markets is entirely compatible with all international negotiations currently underway and contemplated, including a bilateral investment treaty with the United States and even the TPP – provided that China is demonstrating good progress toward the third plenum goals.

Finally, not only is this strategy of once again reforming domestically and opening up internationally the right thing for China and the rest of the world macro economically, and the right thing for good firms that are ready to compete internationally, but it is also the surest way to help reduce the growing military and security mistrust that is threatening 40 years of goodwill between China and the advanced market economies. I look forward to following China’s efforts to achieve these goals and applauding your success.