Trade war and China's reform

This year is the 40th anniversary of the start of China's reform. Forty years on China’ reform has basically followed Deng Xiaoping's doctrine which is to integrate the power of the one-party state with market efficiency.

Economic decentralization is the key to China's strategy. Basically through the grant of high level economic autonomy Chinese local governments (province, municipality, and county) have been effectively turned into economic entities” while their political and administrative functions are kept intact.

By taking advantage of their political power and state ownership, Chinese local governments of all levels can stimulate the local economy by deploying economic resources at less than market value in a massive scale.

For instance, local governments can acquire land from rural and urban residents with limited compensation and sell such land to developers at significantly inflated prices and again collect huge tax revenue through real estate projects and property transactions. This so called "land finance" that has created about half of the revenue for Chinese local governments over decades has played a pivotal role in the building of modern infrastructures, the attraction of foreign investment, and the setting-up of basic social security networks in China.

However this Chinese model has deep flaws: The market function is deeply distorted and the economy is effectively divided between provincial borders. The Chinese manufacturing industries being developed tend to have problems ranging from overcapacity, a dependance on foreign technology, concentration on low value added processing and high levels of pollution.

Politically China's reform is actually a process of reshuffling the control over the assets once state owned such as land, mines, and factories. As governments play a key role in this process, those privileged (insiders who have or are close to power) inevitably gain unfair advantages in the redistribution.

China's reforms achieved an unprecedented economic expansion in the first 30 years but has slowed down in the last 10 years as hidden problems have increasingly surfaced.

Polarization has become one of the most acute problems due to  unfairness and corruption in the reshuffle of the control over state assets and redistribution of wealth. As an indication China's Gini coefficient has reached  0.47, one of the highest among major nations in the world.

Pushing ahead with economic expansion at whatever cost, in anticipation that it would generate opportunities for the poor, has been the main response of the government to the situation. But increasingly this position becomes ineffective and unsustainable.

China's labour supply peaked in 2012. In addition, the government has to lift minimum wage to appease the poor and increase business payment on social security and environment protection. These steps inevitably raise production costs. Chinese manufactured products are also suffering from weakening demand and a rise of protectionism worldwide.

The downturn of the manufacturing and export drive sees capital seeking a safe heaven in the Chinese housing sector. But skyrocketing house prices as a result further intensify polarisation of the society, weakens the middle class and makes the debt level of Chinese local governments, private businesses and households a major threat to the Chinese financial sector.

It was against such a background President Xi Jinping took office in later 2012. Among Xi's policies formulated to meet the challenges following three are the most influential.