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China’s Economic Reform Reboot
By Tristan Kenderdine

This short book captures an historical junction in contemporary China’s economic governance that has taken the world a surprisingly long time to digest. Although the book dispels the hyperbole, its opening paragraph chimes the cliché that threatens to drag the global economy down, the near-endless parroting of “China’s inexorable rise.” This praise must come to an end. Lardy’s is one of the first voices in what must surely become a choir of more sophisticated analyses of China’s economy as it matures.


Lardy elegantly floats to the top of the China economic analysis souffle, offering a vantage point from which many have attempted to speak, but few have succeeded with credibility. From the start, he straddles the real danger facing the global economy: China’s continued success is dangerous; China’s failure would be a disaster. Against the hyperbole, though, Lardy takes huge economies and complex economic relationships and makes them as simple as joining together large pieces in a global jigsaw puzzle. He comes across as a reassuring political economy professor talking about the global economy: don’t panic, someone sees the whole picture and is not scared.


Lardy’s work covers several key junctures in the contemporary Chinese economy. He identifies a new pole of global economic gravity, arguing that China’s asset prices and exchange rate policy can both now infect exposed economies, the way that previously only the United States could. He runs the reader through seven Chinese economic rebalancing scenarios. The only part of the scenarios that is not variable is that China is in the midst of an economic rebalancing. However, the greatest meta-narrative in this study is the testing of the economic convergence narrative. This convergence myth has fueled international economic animal spirits for decades. Overlooking the potential for non-convergence, though, is a key reason a China slowdown under current institutional structures is so dangerous. China in the world will be different from Japan in the world, and not many are prepared for what an idiosyncratic China really means.


Lardy also walks the reader through the series of failed reforms in the state-owned enterprise sector. For those who have followed that process, there is nowhere left to lay blame. The government has tried several different ways, but all forms of SOE reform have flopped, and outsiders, insiders, the markets and the government are all looking at an intractable problem that is bigger than any government in the world, even the Chinese Communist Party. There are simply not enough incentives to change, and meaningful reform that leads to genuine competition, where domestic Chinese firms can fail to the benefit of foreign firms operating in China, appears to be light years away. In contrast, having Deutsche Telekom running the United States’ second-largest telecommunications network 70 years after Germany and the US were at war is a triumph of economic convergence and a shared belief in competition. It is unlikely that a firm from Japan, Russia, France, Germany or the US could hold and operate critical Chinese infrastructure anytime this century.


The Peterson Institute, the publisher of Lardy’s book, does excellent work and it is great to see them publishing book-length works. But perhaps this study would have been much stronger as simply the book’s opening section as a stand-alone policy paper. The remaining sections of the book fill in the blank spaces, but feel as if they are just that. China’s convergence potential and the narrative surrounding it should really be a standalone study, and it is not deeply enough covered in this short work. Likewise, the state-owned enterprise section feels like treading water. Lardy knows the ground, and demonstrates a clear understanding and commitment to policy sources. All the right elements are there for a strong intellectual and analytical push forward, but instead, we do not really move at all.


Lardy’s work is grounded, though, in strong metrics, measurable outcomes and a strong analytical ability to question conventional wisdom or loose thinking in the policy and economic sphere outside the neoclassical economics framework. There is, though, as with every economic agent, a purpose and a bias. That the objective findings of the book are a call for China to engage in more market liberalization policies is unsurprising. The policy prescriptions for a “path back to market-oriented reforms” are, however, a little naïve and uninspired. The State Strikes Back is a title that sums up the gravity shift as China’s economic governance moves into the 2020s with a new economic power dynamic and a new role in the global economy, and yet Lardy’s policy prescriptions sound like formulaic World Bank-speak from 2010.


Ultimately, the title belies the book’s content. Lardy has identified the end of the reform era, but is still struggling to describe the post-reform era. The book sums up the end of a period of economic history, but it is not yet a window into the economic future of China. Lardy, though, is alive to the economic realities of contemporary Chinese economic governance, where many in the global convergence world have been asleep at the wheel.


This book could be seen as the last economic book written during China’s growth era, and perhaps the first book to take seriously a global economy with China at either low growth, or even no growth. A collective suspension of disbelief at the highest levels of China watching has meant that a massive impending shift in the size, growth rate and productivity levels of the global economy has largely flown under the radar. The glad-handing is over. The real work begins now for the global economy’s accommodation of China, and for Asia-Pacific economic integration. For any aspect of the world economy affected by China’s falling economic growth rate, the proxy effects are sobering. For those directly tied to the Chinese industrial economy, or for anyone with exposure to the financial system behind China’s growth legacy, dangerous straits lie ahead. Lardy’s thinking and insight can help to navigate these new global economic dangers.


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