U.S. Treasury Secretary Timothy Geithner said the Chinese economic model must “change fundamentally,” in answer to a question at the John Hopkins School of Advanced International Studies (SAIS) on the Chinese economy on Jan. 12.
Geithner made the remark in answer to a question by a member of the audience, having just read prepared remarks on the main focus of the United States in its economic relationship with China. During his speech he outlined a number of the concerns the U.S. has with the Chinese economy, including in competing in the Chinese market.
These included the fact that the “commanding heights” of the Chinese economy are in the hands of the Party-state. The cozy relationship many companies have with the state allows them to hide behind trade barriers and take advantage of a wide range of preferences and subsidies that give them an (arguably unfair) edge over U.S. and other foreign firms.
These preferences include access to low-cost finance, land, energy, and access to government contracts—where exchange of lucre often serves to lubricate the deals.
Theft of intellectual property remains widespread, and costs U.S. and other foreign firms billions of dollars a year.
Alongside this is the campaign of what has been termed “indigenous innovation,” which includes massive financial transfusions into state-owned and other enterprises that support Chinese technology over foreign technology, including in the enormous government procurement market in China.
All these practices, now routine, “violate China’s international commitments,” Geithner said. “They have to change fundamentally.”
Geithner said he has a friendly relationship with his Chinese counterpart Wang Qishan, but that Mr. Wang himself often faces a lot of opposition in China. That being as it may, “I really think that over time, China has no choice,” Geithner said.
Geithner believes that Mr. Wang understands the U.S. wishes for the Chinese economy, and also wants the Chinese leadership to move away from controlling capital and the markets—a change that Geithner believes is inevitable.
But the Secretary did not outline how the U.S. would hold China accountable to the assurances it makes along these lines.
China has moved to address some of the longstanding concerns, though several of them remain inherent to the way the Communist Party is structured to run the country.
Measures to reduce the role of the state and reduce the administrative controls on how capital is allocated “have a long way to go,” Geithner said. “You can’t grow if you rely on the state to decide who gets capital. There’s no successful example of that.”
“It has to happen,” Geithner says, “there is no alternative path.” He also pithily sketched the intimate relationship between political power and economic power: “All economics is politics.”
The fundamental changes in the Chinese economy and how it interacts with the world, which Geithner says are essential to correct imbalances, are often associated with what is called “political reform” in China. But prospects for political reform are not promising, according to Party leaders themselves.
A series of high-profile editorials published in October and November last year in People’s Daily, the official newspaper of the Chinese Communist Party Central Committee, stated explicitly that any reform in China would be under the proviso that it “unswervingly adher[ed] to Party leadership.” The editorials were seen as a finishing blow to the brief hopes that had been inspired by Wen Jiabao, who had told CNN and other Western media about the need for reform of the Party's model last year.
Any changes would have to “uphold the correct political orientation… along the road of socialism with Chinese characteristics,” the editorial said.