At the 19th National Congress of the Communist Party of China & Central Economic Work Conference in 2017, President Xi Jinping Economic thought for a New Era’s Socialism with Chinese Characteristic was positioned as the leading philosophy of economic policy.

The President Xi Jinping Economic thought is intended to prepare China to become a superpower by the middle of the 21st century by realising a modernised economic system that can fully satisfy the people’s growing demand for a wonderful life and their diverse and sophisticated needs in response to the advent of a new economic era through high-quality development centred on five new development principles (innovation, coordination, green, openness and shared results) based on centralised, unified leadership by the Communist Party of China.

In response to the advent of a new economic era, Premier Li Keqiang is also promoting the reform of macro control independently. What constitutes the foundation of the reform is range-based control, which refers to setting a reasonable range for economic parameters and conducting economic management in a way that keeps the parameters in the range.

Based on this, there are also directional control, which sets which way financial assistance using budget and loan funds should flow over the short term, precision control, which guides fund flows toward targets so that benefits can be brought over the long term, and timely control, which flexibly responds to market trends while placing emphasis on dialogue with the market.

In addition to reforming macro control, Premier Li showed originality when determining the details of supply-side structural reforms, the composition of the 13th Five-Year Plan, the specifics of the reform of state-owned enterprises and selecting innovation leaders.

However, the basic principle of his economic policy is considered to be ‘innovation from the bottom up,’ or innovation by the masses, and players that lead this initiative are considered to be the private-sector enterprises, namely non-publicly owned economic sector.

If China is to maintain high-quality development until 2035 and complete a modernised economic system as envisioned at the 19th party congress, it is important for it to reform macro control and target funds mainly at vulnerable sectors and issues, including private-sector enterprises, the ‘San Nong’ issues: agriculture, rural areas and farmers, social security, and income inequality resolution, rather than dispersing funds indiscriminately.

At the same time, China must improve supply quality by implementing supply-side structural reforms and promoting innovation led by private-sector enterprises. In order to promote these structural reforms and adjustments, the strong leadership of President Xi Jinping as the ‘core leader’ is indispensable.

Since the beginning of the 21st century, the Chinese economy has maintained remarkable development and has come to make important contributions, such as preventing the global economy from falling into financial crisis at the time of the global economic depression that followed the collapse of Lehman Brothers.

On the other hand, since around 2010, nationalism has been rising in China, with the country’s basic line of foreign policy shifting from harmony to aggressiveness. This change isolated China from the rest of the world, and in particular, the basic line of the United States’ policy toward China is shifting from engagement to deterrence and even close to containment.

In order to avoid being isolated, China aims to return to a policy line of international cooperation by advocating slogans such as ‘The Belt & Road Initiative’ and ‘community of shared future for mankind,’ but the U.S.- China relation has continued to deteriorate. In the meantime, on the domestic policy front, China is strengthening important economic reform initiatives, including prevention of financial risks and environmental preservation, but in order to implement those initiatives, it is essential to secure macroeconomic stability.

The recent U.S.- China friction is posing a significant downside risk for the Chinese economy, so the Chinese government is dealing with the friction with emphasis on pursuing cooperation with the United States in order to prevent it from escalating.

However, the United States, which recognises China as a threat on the economic and security fronts, is likely to maintain a hard line stance toward the country over the long term. Therefore, China is making efforts to strengthen its relationships with Japan and Europe.

In particular, the Japan-China relation has recently improved significantly, and the Japanese economy is enjoying the benefits of the improved relationship. It is desirable for Japan to continue efforts to enhance mutual understanding, trust and cooperation with China while taking due care to maintain a good relationship with the United States and cooperate with European countries.

In the 2010s, the Japan-China relationship has shifted to a relation based on chronic tension following the onset of the dispute over the Senkaku/Diaoyu Islands. To understand the current Japan-China relationship, we need to consider it with a different framework from the one until the 2000s, which was characterised mainly by economic interests and political friction related to historical perceptions.

The improvement in the Japan-China relationship since 2017 is attributable to three shared challenges: (1) controlling security tension; (2) rebuilding pluralistic relationships based on economic cooperation; and (3) exploring shareable orders for the international community. On the other hand, in response to the deterioration of the U.S.-China relationship, Japan has adopted a policy toward China that seeks a balance with the foreign strategies of the United States and Asian countries to play the role of a moderator.

Therefore, the current Japan-China relationship requires a more pluralistic understanding.

What the Xi Jinping administration envisages to realise by this ‘centralisation’ is that a disciplined Party will centralise the government, military, and industry from the centre to the periphery, thereby establishing a ‘fair and sound market economy.’

The Xi Jinping administration believes that if China continues to diversify and liberalise its economy while maintaining a trend in which connections and honour take precedence over the rule of law, corruption will be fostered and the country will be thrown into disorder by the slackening of governance.

The administration is trying to achieve centralisation by strengthening the authority of its leaders, strengthening discipline, conducting thorough supervision through the use of ‘inspection (shunshi)’ and controlling and exposing people through the rule of law. However, excessive ‘centralisation’ provokes opposition not only from liberal intellectuals, but also from the Party leadership.

There is a high possibility that the ‘centralisation’ will be watered down by the bureaucracy, who are pretending to obey but secretly betraying. In addition, if the design and operation of credit scoring systems result in human rights violations, the international community will be forced to intensify its criticism.

The major objective of ownership reform in China is to enable different types of enterprises to realise their capabilities to the maximum by creating a fair and competitive environment and strengthening the corporate governance of state-owned enterprises.

To that end, it is necessary to shift the centre of gravity of the economy from state-owned enterprises to private enterprises by privatising the former and promoting the growth of the latter, as well as to separate the government from business through restraining the involvement of the government in the management of state-owned enterprises. However, China has been retreating rather than making progress on both of these initiatives in recent years.

Under the Xi Jinping administration, instead of privatisation, mixed-ownership reform is being promoted in the form of injecting private capital into state-owned enterprises. However, in most cases, control by state-owned capital has been maintained, so that corporate governance, and by extension, the efficiency of the enterprises concerned, is unlikely to improve.

Since China adopted the reform and opening-up policy in the late 1970s, private enterprises that started from scratch have ridden the tide of transition to a market economy and grown to surpass state-owned enterprises in terms of revenue and employment. However, the business performance of private enterprises has turned sluggish recently, thanks to the changing economic environment.

Fundamental reform of state-owned enterprises requires privatisation. However, if it is politically difficult to achieve, as the second-best option, China should create a fair and competitive environment by minimising the government’s interventions in business activities. Doing so is also necessary to promote the development of private enterprises.

Editor’s Note: The article reflects the author’s opinion only, and not necessarily the views of editorial opinion of Belt & Road News.