It is, however, far from certain that the status quo can survive the challenges of a society that now enjoys greater personal freedom and wealth, and is increasingly aware of how the rule of law protects property rights in other countries. The current system will surely be stressed by the continued deceleration in economic growth rates, and that stress level will rise further when China experiences its first recession to occur when most of its people are working in the private sector and are homeowners. While I do not believe that a recession is on the horizon, it is inevitable over the long run.
As Acemoglu and Johnson point out, “When property rights institutions fail to constrain those who control the state, it is not possible to circumvent the ensuing problems by writing alternative contracts to prevent future expropriation, because the state, with its monopoly of legitimate violence, is the ultimate arbiter of contracts.”
This problem is already visible in rural China, where local officials often violate the property rights of farmers, leading to frequent protests and periodic violence. Changing China’s legal system and institutions to prevent this problem from becoming more widespread, and to support continued economic growth, is the Party’s chief challenge in the coming decades.
Will China Get The Rule Of Law?
There are, at this moment, no signs that the Party is preparing to establish the rule of law. The Party appears to want to continue to use the legal system to exercise its political control over the population, rather than to move toward a system that is designed primarily to protect the rights of individuals by limiting the government’s power.
We do need to acknowledge, however, that back in the mid-1980s, when I first worked in China, it was not apparent that the Party was prepared to significantly relax its control over people’s daily lives. But, a decade later, the Party stopped telling its citizens where to live and what to farm. In the mid-1990s, we did not expect the Party to dramatically shrink the state sector and pave the way for private firms to become the engine of growth. Private home ownership was not on the horizon. Today, most urban Chinese work for private companies and own their homes.
During the past two decades, the Party has surprised in many ways. It has taken a path that is unique among authoritarian regimes: relaxing day-to-day control over people’s lives and commercial activities while strengthening the Party’s control over the political and legal systems. This is a key reason why the Chinese Communist Party has outlived other authoritarian regimes. Constant, pragmatic reform of economic policy is also why GDP growth averaged 10% for two decades before cooling to an average of 8.5% over the last four years.
Establishing the rule of law would require the Party to take another unique and dramatic step: to cede to its citizens some of the Party’s control over the political and legal systems. Failure to take this step is not a short-term risk for investors, but I believe it will be key to China’s economic prospects over the next 10 to 20 years.
Andy Rothman is an investment strategist at Matthews International Capital Management LLC. He is principally responsible for developing research focused on China’s ongoing economic and political developments while also complementing the broader investment team with in-depth analysis on Asia. In addition, Andy plays a key role in communicating to clients and the media the firm’s perspectives and latest insights into China and the greater Asia region.