The Economic Impact of the Power Grab in China

Mao Zedong was the last dictator that China had seen. Even though the Chinese government is known for being autocratic in nature, there was still a rule which prevented a person from being head of state for more than two terms. This rule was created after Mao Zedong’s policies had created a mega famine and led to millions of deaths in the nation. The idea behind this rule was to ensure that no ruler is able to obtain a cult-like status.

The two-term rule has been scrapped recently along with many other rules which placed checks on the power exercised by the Chinese head of state. As a result, Xi Jinping can continue to rule indefinitely in the absence of a formidable opponent. This power grab by Xi Jinping has made China his personal fiefdom. There are obvious political implications to this power grab. However, China is also the second largest economy in the world which has extensive trade relations with almost every nation. As a result, the economic impact of this change is likely to be felt by economies all over the world.

In this article, we will have a closer look at the economic effects of this power grab in China.

• Free Markets: Economic experts firmly believe that China needs to follow the path of economic liberalization. This means that they need to move away from a state-controlled economy and towards a market-driven one. In the absence of these reforms, China is likely to pile on debt for pursuing wasteful projects that may seem important to the state but have little market value. If China wants to avoid a period of sustained negative growth it needs to move towards a free market system.

  At the present moment, China is a gigantic bureaucracy. The fast growth that China has been able to accomplish has been made possible by establishing extensive state control over all resources. The result has been that the bureaucrats that have been in charge of these resources have ended up building personal dynasties. These dynasties rely on patronage from the ruling party and Xi Jinping himself. Hence, if Xi continues as the head of the state, this system would continue to be in place. This may be good for the bureaucrats but it may prove to be disastrous for the Chinese economy.

• Political Positioning: Xi Jinping has positioned himself as somebody who is against the political elites and their control over national resources. He also repeatedly expresses his interest in moving the Chinese economy towards being more market driven. However, there are very few actions that Xi has done which substantiate his claims. For the most part, Xi has been obsessed with government control over the economy. For instance, he has made it a personal mission to reduce the air pollution in China which had risen to dangerous levels. However, instead of creating incentives for the private sector to find innovative ways and means to solve this problem, Xi has been advocating strict government control.

  Analysts who understand the state of affairs in China say that Xi only uses the guise of a market-driven economy to create a favorable image amongst the people. However, if his track record is checked, he has almost never ceded any control. In fact, his latest policies are making sure that no alternate power centers exist in China. The bottom line is that the Chinese people and the global media need to ignore what Xi Jinping says. They need to pay more attention to what he does. It seems like the people are finally waking up to this realization.

• Contradictory Targets: Another problem with the policies being proposed by Xi Jinping is that these policies are not consistent. Some of the goals mentioned are contradictory. Hence, they cannot all be achieved at the same time. For instance, Xi Jinping is of the opinion that the Chinese economy should grow by at least 6.5% per annum. However, to obtain such high rates of growth investments need to be made. Since China is very conservative about the extent of foreign investment that they allow in their nation, a lion’s share of this investment will have to be provided by the government. This will lead China towards more external debt. The problem is that China also has a goal to reduce its external debt aggressively. It is obvious that both these tasks cannot be accomplished simultaneously. Also, since the Chinese premier is more inclined towards GDP growth, it is likely that he will allow the debt to accumulate for some time.

• Foreign Investments: Political stability is one of the biggest concerns for foreign investors. Xi Jinping has demonstrated that constitution and the rule of law do not mean much in China. He has also demonstrated that he has the power to change the rules at will. This will intimidate foreign investors who will fear the return of their investments. This power grab is likely to lead to an outflow of foreign capital from the Chinese economy. Once, again this will make it difficult for them to meet their GDP growth target.

To sum it up, Xi Jinping’s power grab will make China more autocratic. Since market reforms will not be implemented, the economy of China is likely to suffer.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.