What is the China Model? Understanding the Country’s State-Led Economic Model

May 17, 2019
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by Abby Johnston Digital Editor, Frontline
Catherine Trautwein Tow Journalism Fellow, FRONTLINE/Columbia Journalism School Fellowship

When President Donald Trump announced tariffs on billions of dollars in Chinese goods in June 2018, he characterized it as a way to even what he called “unfair” trade between the two countries. “This situation is no longer sustainable,” Trump said in a statement on June 15.

Trump went on to specifically cite China’s “unfair practices” dealing with American intellectual property and technology. The president has also frequently spoken about his frustration with the massive U.S.-China trade deficit.

But behind the rhetoric about deficits and fairness, there’s a deeper genesis of the trade dispute: China’s state-led economic model, which some administration officials see as a threat to American capitalism.

“The root cause of China-U.S. trade friction is their fear of our path and our system,” Kong Dan, the former chairman of a Chinese state-owned bank, said earlier this year.

Trump’s Trade War — an investigation into escalating U.S.-China trade tension by FRONTLINE and NPR — explores that system, which many economists refer to as the “China model.”

“The ‘China model’ is a blend between national control and ownership of resources and economic activities dominated by private entrepreneurs,” Carnegie Asia Program senior fellow Yukon Huang told FRONTLINE and NPR.

In China, the state owns all land and leverages control of energy resources and the financial system. “The right to operate in certain areas or activities is essentially reserved for the state, but the state can delegate that responsibility to others – including the private sector,” Huang said.

The exact form of the China model and its uniqueness has been debated — experts note it may encompass multiple models or change depending on where and when in China you look. But several definitions depict a state-led economic and political system that leaves room for capitalistic elements.

Massive state-owned enterprises rule sectors such as power and banking. But today, nine-in-ten new jobs come from the private sector, Huang added. Last year, Chinese state media reported the private sector drives the majority, over 60 percent, of GDP growth.

But by supporting certain companies or industries, many experts say, China helps create national champions that dominate the domestic economy.

“So you have this kind of socialism with Chinese characteristics or socialist market economy, which is what China calls itself,” Huang said.

The beginnings of China’s economic model can be traced back to 1978, when China’s then-leader Deng Xiaoping began a series of economic reforms that would end decades of isolation under Mao Zedong. Over the next four decades, China would grow at such a rapid clip for so long that the World Bank would label its development “the fastest sustained expansion by a major economy in history.”

Under Deng’s leadership, China tried to draw in foreign investment and, slowly, increase the role of the market in what was then a state-run communist country.

While the state maintained a heavy hand in the economy over the coming decades, in 2001, China won entry into the World Trade Organization, promising significant market opening in a wide array of industries — and giving the West hope that China was on a path toward a gradual reductional of the state’s role in the economy.

In the beginning, China did make significant strides, reducing tariffs, laying off tens of millions of workers at state-owned industries and encouraging private business. Foreign analysts began to spread ideas on a China model even as their Chinese counterparts declined to embrace the label.

But particularly since Chinese President Xi Jinping came to power in 2012, the state has tightened its grip on the economy, helping many state-owned companies grow and even requiring foreign companies to have a member of the communist party on their boards. And Xi has departed from usual practice by nodding to the existence of a China model.

“Under Xi Jinping, the ‘China model’ emphasizes state control on steroids,” said Scott Kennedy, senior adviser for the Freeman Chair in China Studies and project director at the Center for Strategic and International Studies. “Previous regimes that controlled competition really emphasized much more the competition side, and now we’re seeing much more emphasis on the control side and less competition.”

“That is leading toward a lot of wasted resources, a lot more diplomatic tensions than in the past.”

Those tensions have hit a fever pitch. Earlier this week, the Chinese government announced it would tax $60 billion in U.S. goods up to 25 percent. The Trump administration responded with a plan to set tariffs on five times the amount of Chinese goods — $300 billion worth — at the same rate, according to NPR.

“In the past three years, since President Trump came to office, the word ‘China model’ has taken on a whole different significance,” said University of Michigan political science professor Yuen Yuen Ang, who defined the China model as autocracy with democratic characteristics, at least until 2012 and Xi’s presidency. “It has come to mean China as an ideological competitor of the West. It has now become threatening, intimidating, and a sort of like, it’s either the West or China.”

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