China’s economic growth was once thought as a remarkable phenomenon during the late 20th and the early 21st century. However, as more facts come to light, the hard truth can no longer be hidden. In March 2024, the Wall Street Journal published an article titled “What’s Wrong With China’s Economy, in Eight Charts”, in which eight severe problems are identified: tumbling real estate markets, plummeting consumer confidence, falling consumer prices, rising public debt, shrinking labor force, outflowing foreign investment, escalating trade barriers, and de-accelerating economic growth.
What are the structural factors that lie behind China’s current economic troubles? Dr. Chenggang Xu, senior research scholar at Stanford Center on China’s Economy and Institutions, recently addressed this critical question based on his new book “Institutional Genes: The Origins of China’s Institutions and Totalitarianism” at a speech event in Taiwan Think Tank.
Dr. Xu first pointed out a common misunderstanding of Western scholars in China studies. That is they are tempted to see the Chinese Communist Party (CCP) as a purely Chinese organization. In fact, the CCP was in its very essence conceived from the Soviet Communist Party (SCP). Both the CCP and the SCP tried to reform their totalitarian systems in order to lengthen their authoritarian rules. The SCP failed in its attempt due to the lack of incentive mechanisms. By contrast, the CCP successfully established a competitive mechanism in which different regions pursue their respective targets in economic growth. That incentive design, along with the infusion of huge foreign capital, helped save the CCP temporarily from repeating the collapse of the Soviet communist regime in 1991. However, this twist of turn in history is merely a short-term aberration, not a long-lasting normal, Dr. Xu stressed.
Why will the Chinese communist regime ultimately fall into the same fate as the Soviet Union? Dr. Xu’s theory postulates that institutional genes determine the nature of economic reform and the limit of economic development. Ever since the very onset of the so-called “reform and openness”, the CCP has been highly alert to the “danger” of “peaceful transition” or “color revolution”. Deng Xiaoping, the chief architect of China’s economic transition, spelled out the “Four Cardinal Principles” to uphold socialism, dictatorship, CCP leadership, and Marxism-Leninism. Deng’s determination to preserve the CCP regime at all costs were clearly demonstrated in his brutal oppression on the Tiananmen Square in 1989, as well as his scathing remarks made during the tour to Southern China in 1992.
Dr. Xu further laid out the academic foundation upon which his theory is built. What stands out as the most seminal bedrock is Professor János Kornai’s theory of “soft budget constraint”, which explains why China’s SOE (state-owned enterprises)-based economy won’t work since failed SOEs can always count on the State to bail them out of bankruptcy. Recent academic works provide empirical evidence to strengthen the arguments. Zhuravskaya et al. (2024)’s work on the evolutionary path of Russia’s economic development in the nineteenth and twentieth century provides comparative insight on the possible future path of China’s economy. Dr. Harry Xiaoying Wu’s research also sheds light on the true nature of China’s commanding economy.
Dr. Xu wrapped up his speech with an emphatic statement: CCP’s totalitarian regime dictated by its institutional genes will definitely result in economic recession and violent expansion. The collapse of the CCP regime is foreseeable, albeit not yet achievable until the transformation of civic value and the emergence of social consensus. Even if that kind of collapse materializes, Dr. Xu warns, it does not necessarily lead to constitutional democracy in China. The case of the post-Soviet Russia proves that constitutional democracy is not a foregone conclusion, especially given the shortage of compatible institutional genes. At the same time, we have to caution against the CCP’s desperate U-turn to Chinese nationalism to deflect social grievances.
The so-called “hegemonic rivalry” or “superpower conflict” between America and China, as Dr. Xu emphasized, is nothing but misleading phrases. Just as America stands for the land of the free and the home of the brave, China stands for something much larger than communism. America is blessed to be endowed with the institutional genes of freedom and democracy. What America should fight against is neither China nor the Chinese people, but the CCP and the institutional genes codified with Marxism-Leninism.
The article is based on Dr. Chenggang Xu’s speech “China’s Institutional Genes and the Contemporary Political & Economic Issues” in Taiwan Think Tank on December 23, 2024. Dr. Xu’s book “Institutional Genes: The Origins of China’s Institutions and Totalitarianism” was published in Chinese version, and will soon be published in English version by National Taiwan University Press.