Asian cultures may appear conservative and resistant to change but it would be unwise to underestimate the power of consensus. Once both Japan and China decide on a direction of travel, they tend to reach their destination.
Prime Minister Shinzo Abe must overcome significant vested interests if he is to succeed in hitting the bullseye with the third of his three arrows. Monetary and fiscal policy have broadly speaking found their targets and are responsible for the surge in the Nikkei index over the past year. The third arrow, structural reform, will be more challenging but the history of Japan over the past 150 years suggests that the country has a remarkable capacity for re-invention.
Japan only moves when it must but when change is imposed it acts with despatch. The catalyst for change during the previous transformations came from America. This time it has been the shock of Fukushima which has shaken the country from its slow drift into irrelevance.
China’s capacity for re-invention has been no less impressive during the post-Mao era. Describing how China should lift itself from the wreckage of the Cultural Revolution, Premier Deng Xiaoping famously said that “it doesn’t matter if a cat is black or white so long as it catches mice”. His pragmatic approach in 1978 set the Middle Kingdom on a path which has more than justified Napoleon’s fears when he said “Let China sleep, for when she wakes she will shake the world”.
Later, in the early 1990s, China realised that it must open itself further to the world and it set off on a new direction that resulted in its acceptance into the World Trade Organisation. The blueprints for both these changes were presented to the world after closed sessions a year or so into new administrations. The so-called Third Plenum, the latest of which ended ten days or so ago, has become the key platform for detailing a new leadership’s ten year plan.
At first sight President Xi Jinping’s contribution to this series looked underwhelming but the bland language of the initial communique at the end of the Plenum was deceptive. As further details have emerged, it has become apparent that the changes underway in China today are as potentially transformational as Deng’s.
The growth of the past 30 years in China is nowhere clearer than in the city of Shenzhen, just over the border from Hong Kong. Just a village when it became China’s first special economic zone in 1979, Shenzhen is today a city of more than 10 million. It is one of China’s busiest container ports. It has a stunning skyline of highrise buildings and is home to some of China’s most successful high-tech companies, including internet giant Tencent which, when I visited last week, had a screen showing the location of all 145 million Chinese using its games and instant messaging services at that precise moment. Its leafy boulevards are a vision of what China may become when it breaks through to its post-industrial era.
This is where Xi Jinping’s reforms are heading. It will be a long and arduous march to get there but the scale and breadth of the changes that are proposed suggest that China’s new leadership is serious about making the social, financial and economic reforms needed to meet the high aspirations of its people and hold onto power at the same time.
The reform with the greatest symbolic significance is the end of the disastrous one-child policy. This will in time have a meaningful economic impact but in the short term it demonstrates the partial retreat of the State from its smothering interference in the lives of its people. The reforms to the Hukou registration system are no less important in this regard. More than half the population of Shenzhen is probably made up of migrant workers, essentially non-people under the current system which withholds rights to education, welfare and other basic services from people living away from their designated home.
Other key reforms include a step towards private ownership of land, success measures for local government officials beyond simple GDP growth, and a levelling of the playing field between powerful and woefully inefficient state owned enterprises and the private companies which have the potential to build on China’s success to date but are discriminated against by interest rate manipulation which favours government-owned businesses.
Perhaps the most important single announcement is the establishment of a central reform group to be headed by Xi Jinping himself. This may smack of the cult of personality that led to the excesses of the Mao era but it points to a single-minded seriousness about pushing through the reform programme.
Western investors like to focus on China’s problems. The evidence of the past couple of weeks is that it is once again getting ready to overcome them.
