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China Economics and Trade Short Form

The Legacy of China’s Economic Transformation

Through the lens of government revenues and expenditures, China is the most decentralized country in the world[1]. With 31 provinces, 334 prefecture units, 2,851 county-level administrative units, and more than 41,000 township level units[2], these subnational governments have significant autonomy in governing the world’s largest population. In fact, local government accounts for almost 70-80% of all government spending in China, double that of other OECD countries[3].While China might appear to have a top-down, hierarchical command-and-control government, fragmentation of authority is actually at the heart of China’s political system[4].

It has not always been this way. Decades of political reform that began in the 1970s have led to waves of centralization and de-centralization of government control. Understanding this dynamic is crucial to make sense of China’s future – in particular, its ability to carry out the economic reforms it promised to make when it joined the World Trade Organization (WTO) in 2001. China’s economy is the lynchpin on which social stability hinges, and Xi Jinping plans to drive future growth not through the free-market reforms which made it into the economic juggernaut it is today, but through re-imposing central control on key parts of the economy.

The fragmentation of China’s contemporary political and economic system began in 1978, when Deng Xiaoping inaugurated a period of “reform and opening up”. Agriculture was de-collectivized, large state-owned enterprises (SOEs) were privatized, and government interference in economic forces like employment and inflation were relaxed[5]. The result was double-digit growth and the lifting of roughly 800 million people out of poverty[6]. As China pushed to join the WTO, the central government began to slash tariffs, strengthen intellectual property rights, and welcome in foreign companies. However, regional governments, who retained substantial control over their local economies, did not always share Beijing’s enthusiasm for this paradigm shift.

China’s decision to join the WTO and the ensuing threat of foreign competition produced a range of regional reactions, some in lockstep in Beijing while others resisted, fearing that competition would slow their efforts to maintain ambitious growth. For example, the prefecture of Yanbian in northeast China began to consolidate its cement industry in 2003. Rather than allowing market forces decide which firms should stay in business, the local government handpicked the winners and took away business licenses and machinery from firms they felt were inefficient[7]. This type of regional subversion against the market liberalization that China had promised the world reflected a wider divergence between the interests of Beijing and its ability to influence the sprawling network of subnational entities to follow their lead.

This regional subversion, however, was also responsible for China’s infrastructure boom. In 1994, the central government centralized tax collection and effectively starved regional governments of their revenue. In order to meet their growth targets, local governments turned to a new source of revenue – land. They began leasing millions of acres of land to real estate developers which was turned into highways, subways, high-rise apartments, and associated urban infrastructure[8]. The result was a doubling of the length of China’s highways between 2007 to 2017 – enough to go around the world three times – as well as ha ving 8 of the world’s 12 longest metro-rail systems.

The global economic crisis of 2008 turned the tide in Beijing’s interest to fulfill the hopes of its accession to the WTO. To China’s leaders, the crisis exposed America’s model of free-market capitalism to be fundamentally weak[9]. The solution, they argued, was a re-centralization of economic power and an anti-corruption drive to rid the nation of crony capitalism. Since Xi Jinping came to power, SOEs have become significantly stronger and larger, taking on leading roles in China’s Belt and Road Initiative to build infrastructure around the world and ultimately export their form of state capitalism[10]. This has corresponded with a retreat of the private sector through a crackdown on financial technology firms like Alibaba and Tencent as well as a recalibration of center-local revenue sharing to reduce debt accumulation[11].

Xi’s anti-corruption drive, the longest and widest in the CCP’s history, can also be understood through the lens of reigning in the autonomy of subnational governments. One of the primary mechanisms of central influence through the fragmented system is by the CCP and the state appointing a nested hierarchy of cadre leaders. These are bureaucrats placed at all levels and are supposed to be trained in the party’s ideology and carry out the will of the central government[12]. So far, Xi’s campaign has ensnared 1.5 million officials, both high level and low level, who will ultimately be replaced with those who will more closely hew the line of the central government, and Xi himself[13].

Under Xi’s reign, China is returning to an era that it is most familiar with – command and control. To deliver economic reforms and continued growth, China will grapple with its structure of fragmented authoritarianism through centralized crackdowns in an attempt to execute a uniform agenda and vision. Will it work? History has shown that decentralization has led to China’s most explosive growth, but perhaps Xi will continue to defy all odds.


[1] Michael Davidson, “Creating Subnational Climate Institutions in China,” Harvard Project on Climate Agreements, December 2019, https://www.belfercenter.org/sites/default/files/files/publication/davidson-china-paper%20designed-version-3.pdf.

[2] Andrew Mertha, “Lecture – Disaggregating the State”, Module 8 – Center-Local Relations. Johns Hopkins University, Blackboard.  

[3] Michael Davidson, “Creating Subnational Climate Institutions in China,” Harvard Project on Climate Agreements, December 2019, https://www.belfercenter.org/sites/default/files/files/publication/davidson-china-paper%20designed-version-3.pdf.

[4] Kenneth Lieberthal and Michael Oksenberg, “Policy Making in China: Leaders, Structures, and Processes. Princeton University Press”, pg. 137, Princeton University Press, 1988.

[5] Jacques Delisle and Avery Goldstein, “China’s Economic Reform and Opening at Forty: Past Accomplishments and Emerging Challenges,” The Brookings Institution, April 2019, https://www.brookings.edu/wp-content/uploads/2019/04/9780815737254_ch1.pdf.

[6] Maria Ana Lugo, Martin Raiser, and Ruslan Yemtsov, “What’s next for poverty reduction policies in China?”, The Brookings Institution, September 24th, 2021, https://www.brookings.edu/blog/future-development/2021/09/24/whats-next-for-poverty-reduction-policies-in-china/.

[7] Yeling Tan, “How the WTO Changed China: The Mixed Legacy of Economic Engagement,” Foreign Affairs, March/April 2021, https://www.foreignaffairs.com/articles/china/2021-02-16/how-wto-changed-china.

[8] Yuen Yuen Ang, “The Robber Barons of Beijing: Can China Survive Its Gilded Age?” Foreign Affairs, July/August, 2021, https://www.foreignaffairs.com/articles/asia/2021-06-22/robber-barons-beijing.

[9] Rana Mitter and Elsbeth Johnson, “What the West Gets Wrong About China,” Harvard Business Review, May-June 2021, https://hbr.org/2021/05/what-the-west-gets-wrong-about-china.

[10] Yeling Tan, “How the WTO Changed China: The Mixed Legacy of Economic Engagement,” Foreign Affairs, March/April 2021, https://www.foreignaffairs.com/articles/china/2021-02-16/how-wto-changed-china.

[11] The Economist, “Xi Jinping’s crackdown on Chinese tech firms will continue,” November 8th, 2021, https://www.economist.com/the-world-ahead/2021/11/08/xi-jinpings-crackdown-on-chinese-tech-firms-will-continue.

[12] Maria Edin, “State Capacity and Local Agent Control in China: CCP Cadre Management from a Township Perspective,” The China Quarterly, March 2003, No. 173 (Mar., 2003), pp. 35-52.

[13] Yuen Yuen Ang, “The Robber Barons of Beijing: Can China Survive Its Gilded Age?” Foreign Affairs, July/August, 2021, https://www.foreignaffairs.com/articles/asia/2021-06-22/robber-barons-beijing.

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