Chinese President Xi Jinping raised eyebrows, and more than a little skepticism, when he recently announced that his new slogan would be “supply-side structural reform” — or what we in the West call Reaganomics.
If China really wants to embrace Reagan’s economic model, along with its prosperity, Xi will have to learn one of Reagan’s key principles: “Government is not the solution to our problem; government is the problem.”
That means:
- Stop micromanaging the economy.
China is run by its Communist Party, and like all communists, they think the government must micromanage all facets of the economy.
As Bloomberg News writes, “Like Mao, Xi has established a broad view of his authority. He’s thrown his office behind everything from censoring the Internet, to promoting national soccer skills to ordering artists to hew closely to Marxist ideology. Even amid China’s recent tumult, he’s continued to widen his portfolio.”
And one of those areas of wider involvement is the stock market. The government encouraged its citizens to pour money into the market, helping to create a massive bubble that popped last August.
The Chinese government intervened by buying stocks, and even trying to stop people from selling their stocks. But the government’s efforts only exacerbated the panic.
CNN Money opined, “China’s Communist Party has taken extraordinary measures in an attempt to do what no one in the world has ever been able to do: stop market volatility.”
You will recall that the U.S. stock market took a nose dive during Reagan’s tenure: Oct. 16, 1987, Black Monday. After a near 10% decline the previous week, the Dow dropped 22% on Black Monday. It rallied and fell several times during the week, finally closing down 13%. But the Reagan government did nothing, nor should it have.
- Let competition thrive.
Xi also needs to learn the supply-side principle that private-sector investment, not government pump-priming, is the key to economic growth. And you achieve that goal by lowering corporate tax rates, reducing regulations and letting competition thrive.
But as companies that try to compete in China well know, the government likes to tip the scale toward favored businesses. Plus, the legal system is often biased against U.S. and many other foreign companies.
The Wall Street Journal reports, “In China, where it isn’t uncommon for companies to become targets of media campaigns and state investigations, the standard reaction of companies has been to issue an apology followed by a marketing blitz and acts to restore good will.”
That’s because fighting the government can cause even more problems, and yet some companies are fighting back.
Yum Brands, Inc., runs KFC and Pizza Hut in China. The company went on the offensive in 2012 after several Chinese-based companies began spreading what Yum said were false rumors that severely damaged the company’s sales.
Foreign companies just don’t do that in China, and yet Yum won its case. A court recently ordered the Chinese companies that spread the false rumors to pay Yum 600,000 yuan.
Another food company, Illinois-based meat supplier OSI Group, was also apparently targeted. Two new hires in 2014 turned out to be working for a government-connected broadcaster.
The media plants claimed the company was selling expired meat — a claim that would, and did, benefit those companies with closer government relationships. But instead of the usual apology, professed humility and perhaps a few, um, “tokens” of the company’s regrets, OSI is fighting the charges.
It lost its first round in the courts in February, which wouldn’t surprise anyone in China’s legal system, but OSI is pressing on.
- End the government corruption. OSI has reason to be optimistic in its fight against the charges: Xi started an anti-corruption drive a few years ago that has hauled in thousands of people, including some top party officials.
That’s a start, but China’s record of corruption is so bad that rooting it out and changing the culture will take years of concerted effort.
But Xi needs to understand that a country built on Communist Party control, phony statistics, cronyism and graft will never be able to fully transition to a supply-side model, which relies on individuals and companies seeking opportunities, assessing risks and investing their own assets in a level playing field.
It will take much more than a supply-slide slogan if Xi really wants to recreate the Reagan economic miracle.