China's experiment with capitalism is under the microscope 40 years after former leader Deng Xiaoping launched his reforms and opened the economy up to foreign investment.
China has benefited hugely in economic terms, especially since it entered the World Trade Organization in 2001. From about $1 trillion that year, the Chinese economy has since morphed into a $12.8 trillion behemoth. Measured by purchasing power, China is the largest economy in the world.
More importantly, the average Chinese person's income has grown over eightfold in that time, lifting an unprecedented number of people out of poverty, both in China and beyond.
For all that, China has recently lost its zeal for market-friendly reform. Since the global financial crisis, the world's second-largest economy has largely been pursuing its own standards rather than converging with international norms.
Credit agency Fitch said in a December review of China’s sovereign rating that even after 40 years of rapid growth, its governance standards still lag behind those of its peers -- based on a range of standard international surveys including the World Bank's governance indicators.
This year, reform has clearly taken a back seat to defence of the economy from the impact of the US-China trade war.
In areas such as reform of trade, state-owned enterprises (SOEs), fiscal affairs and labour, China is backsliding, according to joint research by the think tank Asia Society Policy Institute and research firm Rhodium Group.
It wasn’t meant to be this way.
In 2013 it looked like President Xi Jinping was set to accelerate reform at the Third Plenum. He talked about a greater role for markets, an environment of fair competition and the retreat of the state from the economy. There was an echo of his predecessor Zhu Rongji’s conviction that fostering more competition was the key to China’s long-term economic success.
But five years later, his speech in the Great Hall of the People on December 18 to mark the start of market liberalisation, Xi launched no new reforms.
Foreign firms are still disproportionally targeted in merger reviews. The State Administration for Market Regulation inspected 22% of 179 foreign-involved mergers but only 4% of 557 domestic ones in the second quarter, the Asia Society points out.
Reining in the overweening market clout of SOEs was a cornerstone of Xi’s reform plans at the 2013 Third Plenum, but the execution has lacked teeth given Beijing’s reluctance to relinquish control to private players.
The private sector is shrinking for the first time in two decades, the Asia Society said.
“Foreign firms need to be allowed to compete with Chinese firms on a level playing field. And for that matter, Chinese private firms should be allowed to compete with state firms in the same way,” Henry Paulson, chairman of the Paulson Institute and a former US treasury secretary, said at a forum in Singapore last month.
China’s internet giants including Baidu, Alibaba, Tencent and JD.com, are amassing colossal power over Chinese consumers and beating out their overseas peers, as seen when ride-hailing app Didi Chuxing bought out Uber in China. There seems little evidence that China's anti-monopoly watchdogs are taking salutary action.
Jack Ma, the co-founder of Alibaba was recently named a Communist Party member by the state-backed People's Daily newspaper. The multi-billionaire is one of 100 people that the state is honouring as part of its 40-year anniversary celebrations.
Marxists avow that capitalism is riven with contradictions, so it seems is Deng's socialism with Chinese characteristics.
After all, as Article 1 of the country's constitution states: "The People's Republic of China is a socialist state under the people's democratic dictatorship led by the working class and based on the alliance of workers and peasants."
Sitting above the Board of Directors, party organisations are embedded into Chinese management structures and officially represent the party co-founded by Mao Zedong. All companies with any state ownership must have them, but they are also common among Chinese private enterprises.
Even more unnervingly, the Chinese government wants foreign-owned businesses in China to have them too.
One bright spot is cross-border investment. Beijing has carried out previously announced measures to liberalise foreign direct investment (FDI) under pressure from Western governments, approving high-profile wholly foreign-owned projects in sectors such as cars and finance.
Germany’s BMW took advantage of this reform to buy out its joint venture partner in October, and other foreign manufacturers will likely follow in its slipstream. In finance, China granted Germany’s Allianz the first-ever approval to establish a foreign insurance holding company while France’s Axa has said that it plans to buy out its joint venture partner.
Cross-border investment ticked up to 7% of GDP in 2018, according to the Asia Society.
That said, portfolio capital inflows rather than FDI have made much of the running.
It's perhaps ironic also that in recent years the bulk of Chinese reform has been in capitalism's neo-liberal heartland: financial markets.
Beijing’s opening of bond and equity markets to foreign investors and the likely inclusion of domestic bonds in closely tracked emerging market bond indices has boosted capital inflows.
To be sure, investment as a share of GDP remains stubbornly below 2013’s level at 8.25%. Stock markets still track political signals rather than economic fundamentals and initial public offerings continue to be carefully orchestrated, with limits on the gains debutante valuations can make.
Clumsy efforts this year to keep innovative companies at home, such as the bungled China depositary receipts for smartphone maker Xiaomi and Xi's surprise announcement of a Shanghai technology board (even to the exchange), have so far proved ineffective.
Looking ahead to 2019, foreign investment bankers cite a lack of expertise at the China Securities Regulatory Commission as an obstacle to progress. Recruitment of top-flight individuals was clearly damaged by the arrest of former vice chairman, Yao Gang, in the wake of the 2015 stock market crash.
China is also unlikely to remove capital controls anytime soon. A drop in the renminbi's value and expanding interest-rate spreads between China and the US are replicating the conditions that triggered large-scale capital outflows in 2015 and 2016, which means the gate will remain firmly closed.
As China's economic growth inevitably slows, the state should be making the country more attractive to outside investors.
There are signs in China's venture capital world that investors are baulking at some valuations of tech startups and are scared off by heavy-handed regulation as witnessed in the education and gaming sectors this year. If this gathers pace then China's push towards innovation independence will suffer.
When Deng unleashed China’s capitalist revolution back in 1978 he spoke about crossing the river by feeling the stones. There was nothing said about wading back to the side it started.