CHINA NEEDS TO OVERCOME ITS "SOFTWARE" / THE FINANCIAL TIMES COMMENT & ANALYSIS

China needs to overcome its ‘software’ deficit

Peter Mandelson

January 15, 2014

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The longer we have to reflect on it, the more last November’s Third Plenum of the Chinese Communist party emerges as a watershed. It seems increasingly clear that Xi Jinping, the new party chief, is managing to corral support behind a substantial leap forward from the reforms begun 30 years ago by Deng Xaoping. As state and market continue to jostle for pre-eminence in the leadership’s carefully balanced rhetoric, it would appear that when Mr Xi signals left, he means to turn right.

The plenum was characterised by an interesting metaphor. A senior official told China Daily that while three decades of rapid development had dramatically closed the “hardware” gap between China and the developed world – particularly in the coastal areas in the south – it still had a “software” deficit. While the west focuses on ideas like ‘opening up’ as describing what we want from China, the software metaphor tells us a lot about China’s weaknesses and what it needs from the rest of the world.

The “software” of China’s political economy will still be built around centralised control. But its rapid growth has overlaid – and undermined – this control with expansionist regional government and growing networks of private economic power. China’s software is also badly degraded by “bugs” such as endemic corruption and gross misallocation of resources. Set against Beijing’s inherent desire to control and direct, this growing functionality gap is a source of frustration. China feels like it is running Windows 95 in an Android world.

This frustration, in turn, has been characteristically channelled into intensive hoovering up of information and frenetic efforts to improve the skills of officials. At the same time, systems of social control are being modernised – there will be no more repressive labour camps. But these instincts are not confined to the political machine. They are familiar in the external investment strategies of Chinese business whose management realised years ago that, to grow and become truly competitive, they needed a rapid infusion of developed economy intelligence.

There are three areas where the need to upgrade China’s software should be seen as particularly important. The first is in the state-owned enterprises. The new political leadership says it is setting out to rebalance the public and private sectors and establish “equal footing” for private and state-owned companies before the law.

Whether this fully produces the “decisive results” demanded by 2020, there is now no doubt that Mr Xi is determined to drive professionalisation of SOE management and raise their exposure to greater market disciplines.

The second important area is the state’s role as a market regulator. The more the party’s crude command-and-control mechanisms are replaced by a more sophisticated software of governance, the more outcomes will be shaped through market frameworks. This is most important in using the power of a market economy to allocate resources and rationalise costs.

This means more open markets for energy and natural resources, both of which have long been badly distorted by subsidy or skewed incentives in China. But it also applies to credit and the banking system, which has the same problem and needs regulatory and supervisory sophistication to manage the transition to a more liberalised capital account and more market-based money market. These are some of the questions the new Shanghai Free Trade Zone experiment should help answer.

But it is also important in areas where more objective regulatory discipline will help the party politically – like the health and safety rules that provide minimum guarantees for Chinese consumers, and the environmental governance systems that will start to get a grip of the country’s massively degraded physical environment and its human impact.

The third area where the software metaphor captures something important about the way the party is thinking is the role of local government. While Mr Xi is busy consolidating his central authority, there is also a recognition that there has to be a more effective, more transparent and incorruptible exercise of power at the local level. Without this, the building of public resentment will in time produce a backlash that will threaten the party’s rule.

For many years to come, China will sit astride the two horses of state and market, and it will not always make for a comfortable ride. What is happening will at times seem confusing and contradictory, as the need to rewire and relegitimise the state as the instrument of the party’s power will coexist with the acquisition of western corporate methods and the deepening of market forces. We will see “reform” and “opening up” but not for its own sake. The priority is equipping the state and the party with the upgraded software to manage a huge and changing country and economy through the next phase of its capitalist-oriented development.


The writer, formerly director of communications for Labour and business secretary, is chairman of Global Counsel