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As Xi Ousts Finance Minister, China Still Trapped

Walter Russell Mead

China’s reformist finance minister, Lou Jiwei, has been dismissed from his post amid a surprise reshuffle in Beijing. The Wall Street Journal has the story:

On Monday, with nearly two more years to go before his term ends, the 65-year-old Mr. Lou was unexpectedly removed from his position and replaced by a relatively low-profile bureaucrat. […]

Of the personnel changes announced Monday by the Standing Committee of the National People’s Congress, China’s legislature, Mr. Lou’s departure was the big surprise, raising the question of whether reform-minded officials are being sidelined. […]

Behind Mr. Lou’s removal, the party officials say, is a series of tough measures he spearheaded, especially attempts to rein in local-government borrowing, which have had the effect of squeezing short-term growth. His no-nonsense style and well-known bluntness, which earned him the nickname “Cannon Lou” in official circles, also didn’t do him any favor when senior leaders were mulling over his position, according to the officials.

Lou Jiwei’s dismissal reflects a problem that China has been wrestling with for years: Its faltering economy needs massive and deep change to shift away from the export-led growth model of the past generation. But those reforms threaten powerful economic and political interests that grew up around the old policies and the old model. Local governments, banks, officials and many others have big stakes in the status quo, and change will threaten millions of workers with unemployment and insecurity. Dauntingly, while the reforms needed are wrenching, they have to be performed with great care—the Chinese economy is full of bubbles that, if they burst quickly, could cause widespread financial and even social havoc.

Xi has a worse set of choices than his predecessors. The cost of both alternatives—reforming the economy or propping up the status quo—is getting higher and higher, while the complexity and difficulty of the task of reform keeps growing as well.

The fall of reform-oriented Lou Jiwei suggests that Xi is opting to downplay the risky business of reform and to prop up the status quo for a while longer. China still has the money to do this (though its massive foreign reserves are shrinking), and it must seem to Beijing that the long-term costs of stasis are more acceptable than the sharp shocks that might come with more bouts of reform. Xi has unparalleled access to information about the state of China’s economy and the political forces at work in the country, and his calculations may well be correct. But China is close to a tipping point at which the option of reform and restructuring could disappear—the country could become locked into a failing growth model and economic structure for the long term. This is how countries fall into the dreaded “Middle Income Trap” in which an era of rapid growth ends with pervasive stagnation.

China may be on course to become a kind of low-end Japan: much poorer on a per capita basis than the island nation, but facing the same kind of long term stagnation and low growth. That would have profound implications for both Asian and world politics; what some see as China’s inexorable rise to superpower status might be slowed, but economic and political frustration inside China might grow.

While nobody can predict the future of the Chinese economy, or accurately forecast the consequences for world politics, every time the authorities in Beijing blink when faced with the choice between reform and stability, the odds on long term stagnation grow. They grew again with the news about Lou Jiwei.

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