Skip to Content

Table of Contents

Vol. 138 :China—Domestic and Foreign Policies of the Second Stage of the Xi Jinping Regime

Summary of Articles

Basic Principles of the Economic Policy of the Second Stage of the Xi Jinping Regime

By TANAKA Osamu(Senior Research Fellow of the Policy Research Institute (Special Adviser for China Research))

At the 19th National Congress of the Communist Party of China and Central Economic Work Conference in 2017, "Xi Jinping Economic Thought for a New Era’s Socialism with Chinese Characteristic" was positioned as the leading philosophy of economic policy. The Xi Jinping Economic Thought is intended to prepare China to become a superpower by the middle of the 21st century by realizing a modernized economic system that can fully satisfy the people's growing demand for a wonderful life and their diverse and sophisticated needs in response to the advent of a new economic era through high-quality development centered on five new development principles (innovation, coordination, green, openness and shared results) based on centralized, unified leadership by the Communist Party of China. In response to the advent of a new economic era, Premier Li Keqiang is also promoting the reform of macro control independently. What constitutes the foundation of the reform is range-based control, which refers to setting a reasonable range for economic parameters and conducting economic management in a way that keeps the parameters in the range. Based on this, there are also directional control, which sets which way financial assistance using budget and loan funds should flow over the short term, precision control, which guides fund flows toward targets so that benefits can be brought over the long term, and timely control, which flexibly responds to market trends while placing emphasis on dialogue with the market.

In addition to reforming macro control, Premier Li showed originality when determining the details of supply-side structural reforms, the composition of the 13th Five-Year Plan, the specifics of the reform of state-owned enterprises and selecting innovation leaders. However, the basic principle of his economic policy is considered to be "innovation from the bottom up," or innovation by the masses, and players that lead this initiative are considered to be the private-sector enterprises, namely non-publicly owned economic sector.

If China is to maintain high-quality development until 2035 and complete a modernized economic system as envisioned at the 19th party congress, it is important for it to reform macro control and target funds mainly at vulnerable sectors and issues, including private-sector enterprises, the "San Nong" issues: agriculture, rural areas and farmers, social security, and income inequality resolution, rather than dispersing funds indiscriminately. At the same time, China must improve supply quality by implementing supply-side structural reforms and promoting innovation led by private-sector enterprises. In order to promote these structural reforms and adjustments, the strong leadership of President Xi Jinping as the "core leader" is indispensable.

Keywords: economic new normal, new development principles, supply-side structural reform, Xi Jinping Economic Thought, range-based control, directional control, timely control, precision control, innovation and business start-up by the masses

Top of the page

The Financial Situation in China: Issues and Challenges

By NAITO Jiro(Professor in the Faculty of Economics, Daito Bunka University.)


In the Chinese economy, whose growth is gradually slowing down, it is necessary to promote structural reform, which is an important policy challenge, and implement measures to stimulate the economy for the immediate moment at the same time. The contents and direction of fiscal policy are of great concern. As for the fiscal position, it cannot be said at the moment that fiscal risk is extremely high when we take a comprehensive look at the budget balance situation and debt problems. However, pressure on the fiscal position is gradually growing. As China is currently shifting its fiscal policy emphasis to economic stimulus measures, such as large-scale tax reduction and expansion of public investments, there are concerns that the structural reform may stall. Although the fiscal relationship between the central and local governments has undergone several adjustments since the introduction of the tax-sharing system, there are still some unresolved issues. In particular, the mutual dependence between governments, financial institutions and companies at the local level is aggravating regional debt problems. When we consider China's fiscal policy, the lack of transparency over the fiscal position is also posing a significant risk. In this respect, the results of a survey conducted by a research group at Shanghai University of Finance and Economics are very interesting. The group pointed out that although disclosure of fiscal data is gradually improving, many problems remain. It is necessary to reform the government-market relationship, which has been a pending challenge. Getting over the situation of guo jin min tui (the state advances as the private sector retreats) by promoting the reform of state-owned enterprises is also important for maintaining fiscal sustainability. At the same time, it is essential to clarify the division of administrative work and roles, authorities, responsibilities, and resource allocations between the central and local governments and between local governments. There is no doubt that social security expenditure will increase steeply as the aging of society with a low birthrate advances rapidly in the future. In addition, as China is implementing new urbanization measures intended to achieve a balanced national development and resolve inequality, it is inevitable that the pressure on the fiscal position will grow further in the near future. It is very important to minimize future fiscal risks by promoting the structural reform while China has sufficient fiscal capacity and before the aging advances further.

Keywords: fiscal situation, inter-governmental fiscal relationship, fiscal sustainability
JEL Classification: H1, H6, H7, O2

Top of the page

Financial Risks for China
—Reform of State-Owned Enterprises and Deleveraging Holding the Key to a Soft Landing—

By SAITO Naoto(Chief Researcher, Economic Research Department, Daiwa Institute of Research Ltd.)


The balance of debts in China, mainly located in the non-financial corporate sector, has increased to such a high level that there are strong concerns that a financial crisis may occur or that the economy may rapidly slow down. Although it may be possible to put off the problem for the moment, the possibility cannot be ruled out that over the medium to long term, a financial crisis may occur.

Most corporate debts are those owed by state-owned enterprises, so China should promote policy measures that contribute to increases in companies' profitability and value added to products in addition to the reduction and disposal of debts.

China should refrain from hastily promoting deleveraging. If China promoted a quick reduction of debt leveraging by companies, it could inflict great damage on the economy by rapidly increasing the numbers of corporate bankruptcies and unemployed people or by causing a credit crunch. Therefore, promoting a gradual deleveraging is the only path to a soft landing.

Keywords: financial risks, shadow banking, expansion of corporate debts, non-performing loans, deleveraging, reform of state-owned enterprises
JEL Classification: A10, E44, E50, E58, G21, G28

Top of the page

China's External Relationships from the Viewpoint of Economic Policy

By SEGUCHI Kiyoyuki(Research Director, The Canon Institute for Global Studies)


Since the beginning of the 21st century, the Chinese economy has maintained remarkable development and has come to make important contributions, such as preventing the global economy from falling into financial crisis at the time of the global economic depression that followed the collapse of Lehman Brothers. On the other hand, since around 2010, nationalism has been rising in China, with the country's basic line of foreign policy shifting from harmony to aggressiveness. This change isolated China from the rest of the world, and in particular, the basic line of the United States' policy toward China is shifting from engagement to deterrence and even close to containment. In order to avoid being isolated, China aims to return to a policy line of international cooperation by advocating slogans such as "The Belt and Road Initiative" and "community of shared future for mankind," but the U.S.-China relation has continued to deteriorate. In the meantime, on the domestic policy front, China is strengthening important economic reform initiatives, including prevention of financial risks and environmental preservation, but in order to implement those initiatives, it is essential to secure macroeconomic stability. The recent U.S.-China friction is posing a significant downside risk for the Chinese economy, so the Chinese government is dealing with the friction with emphasis on pursuing cooperation with the United States in order to prevent it from escalating. However, the United States, which recognizes China as a threat on the economic and security fronts, is likely to maintain a hardline stance toward the country over the long term. Therefore, China is making efforts to strengthen its relationships with Japan and Europe. In particular, the Japan-China relation has recently improved significantly, and the Japanese economy is enjoying the benefits of the improved relationship. It is desirable for Japan to continue efforts to enhance mutual understanding, trust and cooperation with China while taking due care to maintain a good relationship with the United States and cooperate with European countries.

Keywords: China, external relationship, U.S.-China friction, "The Belt and Road Initiative"
JEL Classification: F42, F53, F62

Top of the page

Rethinking the Japan-China Relationship
―Pursuit of Cooperative Strategy Presupposing Conflict―

By ETO Naoko(Associate Senior Research Fellow, Area Studies Center, Institute of Developing Economies)


In the 2010s, the Japan-China relationship has shifted to a relation based on chronic tension following the onset of the dispute over the Senkaku/Diaoyu Islands. To understand the current Japan-China relationship, we need to consider it with a different framework from the one until the 2000s, which was characterized mainly by economic interests and political friction related to historical perceptions.

The improvement in the Japan-China relationship since 2017 is attributable to three shared challenges: (1) controlling security tension; (2) rebuilding pluralistic relationships based on economic cooperation; and (3) exploring shareable orders for the international community. On the other hand, in response to the deterioration of the U.S.-China relationship, Japan has adopted a policy toward China that seeks a balance with the foreign strategies of the United States and Asian countries to play the role of a moderator. Therefore, the current Japan-China relationship requires a more pluralistic understanding.

Keywords: economic cooperation, historical recognition, Senkaku/Diaoyu Islands, Belt and Road, Free and Open Indo-Pacific (FOIP)
JEL Classification: F5

Top of the page

Politics under Xi Jinping— Centralization and its Implications—

By KOJIMA Kazuko(Professor, Faculty of Law, Keio University)


This article discusses the “centralization” implemented by the Xi Jinping administration and its meanings. What the Xi Jinping administration envisages to realize by this “centralization” is that a disciplined Party will centralize the government, military, and industry from the center to the periphery, thereby establishing a “fair and sound market economy.” The Xi Jinping administration believes that if China continues to diversify and liberalize its economy while maintaining a trend in which connections and honor take precedence over the rule of law, corruption will be fostered and the country will be thrown into disorder by the slackening of governance. The administration is trying to achieve centralization by strengthening the authority of its leaders, strengthening discipline, conducting thorough supervision through the use of “inspection (shunshi)” and controlling and exposing people through the rule of law. However, excessive “centralization” provokes opposition not only from liberal intellectuals, but also from the Party leadership. There is a high possibility that the “centralization” will be watered down by the bureaucracy, who are pretending to obey but secretly betraying. In addition, if the design and operation of credit scoring systems result in human rights violations, the international community will be forced to intensify its criticism.

Keywords: Xi Jinping, Centralization, Inspection
JEL Classification:

Top of the page

China’s Unfinished Ownership Reform
―Privatization and a Fair and Competitive Environment Remain to be Achieved―

By C. H. Kwan(Senior Fellow, Nomura Institute of Capital Markets Research)


The major objective of ownership reform in China is to enable different types of enterprises to realize their capabilities to the maximum by creating a fair and competitive environment and strengthening the corporate governance of state-owned enterprises. To that end, it is necessary to shift the center of gravity of the economy from state-owned enterprises to private enterprises by privatizing the former and promoting the growth of the latter, as well as to separate the government from business through restraining the involvement of the government in the management of state-owned enterprises. However, China has been retreating rather than making progress on both of these initiatives in recent years.

Under the Xi Jinping administration, instead of privatization, mixed-ownership reform is being promoted in the form of injecting private capital into state-owned enterprises. However, in most cases, control by state-owned capital has been maintained, so that corporate governance, and by extension, the efficiency of the enterprises concerned, is unlikely to improve.

Since China adopted the reform and opening-up policy in the late 1970s, private enterprises that started from scratch have ridden the tide of transition to a market economy and grown to surpass state-owned enterprises in terms of revenue and employment. However, the business performance of private enterprises has turned sluggish recently, thanks to the changing economic environment.

Fundamental reform of state-owned enterprises requires privatization. However, if it is politically difficult to achieve, as the second-best option, China should create a fair and competitive environment by minimizing the government’s interventions in business activities. Doing so is also necessary to promote the development of private enterprises.

Keywords: China, reform of state-owned enterprises, mixed-ownership reform, private enterprises, competitive neutrality
JEL Classification: P31

Top of the page

Typology of Chinese Market Economy and Trade Rules
A Case of Competitive Neutrality of State-Owned Enterprises

By WATANABE Mariko(Professor, Faculty of Economics, Gakushuin University)


How to engage China is more important than ever as global society is forging international rules. However, it is not straightforward to understand the characteristics of China’s market economy, given the wide diversity across industries, regions and firms. In order to present a practical view on Chinese economies, this paper first categorizes the types of market economies in China. Then, it examines cases that present challenges on trade rules. Specifically, in a mixed market such as the steel industry, the existence of state-owned enterprises distorts competitive neutrality through subsidies: The use of such subsidies should be disciplined.

Keywords: State-owned enterprises, competitive neutrality, subsidies
JEL Classification: G34 L61 L68 L88 P52

Top of the page


Top of Page